Should i Sell rental property?

[Jake Langley]

I am considering selling my sfh rental. Currently I am getting a 17% cash on cash return on my $35k investment. $500/ month net rent after expenses. A great deal, but there is 100k equity wrapped up in the property that I could use to invest and increase my cash flow to 1k/ month. Should I sell the property and take the cash, I’ve only held it for 2 years. Any suggestions out there?

[Steve K.]

@Jake Langley

Jake, this is a problem not often spoken of in these forums. True, you are making 17% cash on cash on your initial $35k investement ($6k annual net/$35k). 

However, you then say that over the past 2 years, the SFH has appreciated by an additional $65k (either due to your remodeling or general market appreciation or both).

If you hold on to this investment, you really are passing up the opportunity to extract $100k (omitting transaction costs and income tax due for simplicity). There's an economic concept called "opportunity cost". You should now think of this like you have made a $100k down payment to acquire this property. Now, what's your return?

$6k/year net rent / $100k equity = 6% return.

So, you used to make 17% cash on cash (because you had very little cash in the deal and had more leverage), now you have more equity in the deal and it's reducing your returns.

If you refinanced and could extract the $65k extra (assuming your original $35k down would be enough equity for proper LTV), could you get back to 17% IRR?

Would you keep this property if you burdened it with $65k more loan (and higher monthly payment?)

Then, take the extracted $65k cash and go buy another rental? Perhaps with BRRRRR strategy?