Should I Hold or Sell?

Question

I have fallen on a really good deal on a 3 family .  If I keep it, I could generate 1800-2000 a month by renting however if I rehab and flip it, I could make around 175k. What should I do? I keep going back and forth on what is the best option.  Dealing with 3 sets of tenants sounds like a pain but I know I could make more money in long run.  If I flip , I would just continue to put it into other properties to make money.  This will be my 4th flip if so.

Scott E. · Answer

Simple math here.

If your true cash flow is $1800-2000 per month on this deal (lets call it $1800 to be conservative) then that is $21,600 per year in net cash flow.

You say you could make around $175k if you sell. So let's determine your cash on cash return on that money if you don't sell.

$21,600 / $175,000 = 12.34%

Of course there are many other variables at play in every deal, but this asset is giving you over a 12% return on your money (not including tax benefits, principal pay down, and appreciation). That's pretty solid in my book.

Jesse Whitmore · Answer

Think about your goals and what would suit them best. If your goal is to have income generating properties, easy answer. If your goals could use the lump sum to get you to where you want to go, easy answer. Even if you want income generating properties, selling could give you the liquidity to get multiple properties or a bigger property that gets you more than the house would generate. I would weigh the options against your goals rather than independent of them and you will have a better feeling for your decision.

Tom Wagner · Answer

Let's play out a hypothetical. If you buy a $800k 3-family and put in $100k, then sell for $1.1mm you'll walk away with approximately $1,050,000 after paying 5-6% in commissions and have a gain of $150,000. Uncle Sam will then swoop in and take another 20%, leaving you with $120,000 after taxes.

However, if you instead refinance the property the equation will look something like this:

Initially: 25% down on $800k + $100k cash = $300k initial investment and $600,000 loan balance

After refinancing: refinance at 75% LTV based on a $1.1mm value, new loan of $825,000. Pay off the original $600k mortgage and pocket the difference of $225,000 -- leaving you with $75,000 tied up in the property.

Here's the kicker: you now own the property and will collect the ~$20,000 in cash flow per year indefinitely. PLUS, if it appreciates at 2%/year it will gain ~$20,000 in value. AND, your tenants will be paying down your mortgage on your behalf, and your principal paydown will total ~$20,000 per year. You'll have fluctuations year to year but over the long term you'll be gaining $50,000+ in equity / cash flow every year indefinitely.

Personally, I would hold onto that property for dear life and refinance opportunistically to continue pulling out equity.

Jon Kelly · Answer

@Amanda Rose Take the emotions out of it and let the numbers tell you what to do.

Run the 3-unit through the BP calculator. What's the COC return? Does that or the monthly cashflow meet your standards?

Compare these results to other deals you would target. Which one is better?

If dealing with tenants is your biggest concern then consider hiring a property manager.

Should I Hold or Sell?

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