Should I sell my only rental home to get the capital to invest?

Question

I’ve been binge listening to the podcast for about a month, almost have heard all episodes by now but I am still figuring out how to start my journey.  Sorry if this question has been asked, I looked all over the forums and blogs before posting!

I have one rental home currently, it cash flows $360/month and is a house in great shape.  It was the first home I bought at 23 years old. I eventually bought a second home to move into and began renting my first home.

Fast forward 6 years from purchasing the first home, and my real estate agent agrees with my market analysis, I can sell the house for an $80k profit.  I do not have to pay capital gains if I sell within the next 2 years.

My goal is to own 10 rentals in order to make a passive income to allow for a more comfortable life style/earlier retirement.  Unless I want to liquidate my retirement or TSP I do not have the capital to invest in another home.  My question is, do I sell this home to gain capital in order to invest into “cheaper” rentals and attempt to BRRRR?  Or do I enjoy my slow cash flow on this home and slowly keep saving to invest in my next property?

Thanks for any insight, I’ve weighed the pros and cons of each side and feel they are equal so an outside opinion would be great!

Whitney Hutten · Answer

@Audra Luther I think the suggestion to sell is probably sound.  You are not going to get wealthy off of $360/mth.  However, let's look at this decision from hard "numbers" view.

What is the rent to value ratio?  This gives us an idea on what to expect if you were to buy more homes in that neighborhood.  In other markets you could get 1% or better (which leads to ...)

What is your cash on cash return? This is your net cashflow divided by the equity you have in the home.  I personally like 12%+.

What is your cap rate?  Net operating income divided by purchase price.  This tells us the return on the home without leverage.  I personally like to see 8%+ only because I could put my money in a mutual fund or buy a note and make better money.

What is the return on equity in your home?  Cashflow divided by equity in the home.  If this drops below 8%, personally I'd definitely sell.

What is the opportunity cost of taking that money to do something else with it?  This is where the rubber meets the road.  If you are making $360 on $80K of equity, it is reasonable to take that $80K (assuming it is net on sale) and purchase 4 turnkeys that cashflow $250+ each and make $1000.  OR take that $80K and start buying BRRRRs and make 20, 30, 40% cash on cash returns and make that $80K stretch very far.

PM me if this doesn't make sense!

Lauren Perry · Answer

@Audra Luther I just did this exact thing last month. My single rental was performing reasonably well here at home, and had gained quite a bit in value. That’s great for equity but not so great when the rest of the market is too high to afford a second one.

So I sold it. Took the proceeds and reinvested in another market with affordable inventory that also cash flows well. I used a 1031 exchange to avoid capital gains and was able to purchase 5 BRRRR properties with those funds. I used my 1031 for a down payment, and funded the balance with a hard money loan.

Happy to share more details if you’d like to hear how it worked.

Good luck!

Forest Skufca · Answer

@Audra Luther You are in a really great situation! Already cash flowing and the opportunity to sell and grow your portfolio/monthly income is just a awesome place to be. A lot of investors would love to be in your position!

A couple of questions for you. Are you open to investing out of state? If so, what markets? And, have you considered turnkey properties? The reason I ask is that selling the home and using a 1031 exchange as suggested above would allow you to either buy a couple of properites in all cash (depending on the total amount of liquid capital), OR you can diversify across several properties at 20% down to achieve $300-500/month in cash flow per property. So, if you can turn one property into 4 or 5 all cash flowing at $300+ you've now tripled (or greater) your monthly rental income.

I know there's some hesitation with using a turnkey provider, however, the key is to do your homework to select a great company that checks all of the boxes and operates in the markets you want to be in. When you do that then you get security in your investment because the properties have often been rehabbed to address potentially large capital expenses, you have the right to be picky and choose an investment that meets your goals, you achieve passive income as they should manage the property, and a great company will stand behind their "numbers" and guarantee the rent and maintenance for 1-2 years. You can also choose to go with a provider who only works in class b neighborhoods as those properties tend to have higher rent and better tenants.

Again, you have the advantage here and you have the opportunity to be picky and take your time! There are great deals and strategies for markets all across the country. It really comes down to your goals and what you wish to achieve from your investments.

Let me know if you have any questions! I'd be happy to help in any way I can!

Audra Luther · Answer

@Whitney Hutten

This was great Whitney! Thank you for all your input! I just wasn’t sure how to make the numbers make sense.  I think that $360 is great cash flow for the property but I’d like 4 houses that have that cash flow!

I’m going to go get a pen and paper and take a closer look at this, our market is so high here in Oregon it would be hard to find cheaper homes in my area to rent out, but I am definitely looking into it.

Mike Nuss · Answer

@Audra Luther I'd be very careful to sell a property in a nice market in Oregon and buying in a "cashflow" market. 80K won't allow you to get much scale, which is what you need in order to be successful and have consistent cash flow in those types of market. It sounds like you're experiencing real cash flow in Oregon (a market you know well).....paper cash flow (proforma #'s) can be exciting when looking in other markets, but remember real life is much different than paper cash flow. Asset class matters a ton and my fear is that 80K and desire for more cash flow will result in buying a risky asset class, which can go south in a hurry. Cash flow zealots seem to ignore "liquidity" of those assets. When the only buyer of your asset is another out of state buyer, they'll run #'s the same way you do. What's the rent? Then back into a 1% rule valuation. Problem is, those cash flow markets do not see appreciation in rents, which mean you won't see appreciating in value, so one bad tenant experience can wipe out all of your cash flow, then when you go to sell, you end up with an overall loss. Where as in Eugene, your buyer is most likely an owner occupant, which is an emotional buyer so many more factors come into play which makes the asset much more liquid. Liquidity and tenant class (risk) are much more important than a few hundred more in cash flow.

Jim Goebel · Answer

@Audra Luther

$80k would be a decent start in a lot of markets, but without a track record I'd be very careful about the deals you get into, given your stated goal is to out-perform that existing house.  That means you need to make sure you have enough cash after each deal to continue the BRRRR process.  Should be fine, if you keep an eye on it - depending on the market.

Warren Smith · Answer

I agree with Tyler's response: its definitely a way forward.  Have you talked to your lender about a HELOC?  If you have equity in both properties you currently own, you may get a line of credit on your properties such that you can invest with that money short term and refi, as it seems you look to be doing with BRRRR. ( it will be a % of your equity, but at least then you can keep your property). You can become your own hard money lender (in some markets) or at minimum have the % the HML may wish you invest for your next project.  If the numbers work, they work.  If you already have a cash flowing property, why get rid of it? It can be an asset in your portfolio that gains more value and opens you to more HELOC $$ in the future.

Tyler Bobo · Answer

If your cash flow is $360 and you think you have 80k in equity (hopefully after closing costs?) then I'd say probably sell.  If you miss your window and haven't lived there 2 of the last 5 years (like if you choose to sell several years down the road) consider a 1031 exchange and you may be able to get out of the capital gains as well.

Omid A. · Answer

If you don't currently have a nest egg to invest with, I'd say selling is a pretty good idea. A good way to look at it is the return that your equity is generating for you. $360 per month equals $4320 per year, you have $80k equity sitting there to make you $4320 per year, that's a 5.4% return on your equity. If you can deploy the 80k to get a higher return then I would say sell it. Personally, I'd use the funds and look for a deal I can use the BRRRR strategy on and rinse and repeat as you come across solid deals.

On the other hand, you have an asset in a great location with upside potential with respect to appreciation long-term (rental appreciation and property value appreciation). I definitely wouldn't sell it if the alternative was to deploy the money out of state in a location that doesn't have upside appreciation potential.

Audra Luther · Answer

@Forest Skufca I am interested in out of state markets, not sure which ones! I would like a more affordable market than Oregon, but one that is increasing value!

I have not considered turn key properties yet as i haven’t researched them enough to understand how to make them work for me! I’m interested in them, but would probably feel more comfortable in buying run down foreclosures and BRRRing as that seems to make more sense to me!

Should I sell my only rental home to get the capital to invest?

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