Sell rental that generates 4.5% in Minneapolis to buy better...

New to Real Estate · Minneapolis, MN · Member since 2020 · 11 posts · 7 votes

Will the cost of agent fees, listing, closing cost etc make it a pointless excercise.

It’s a fully paid 270k condo that generates 1750$/month and has a 500$ association fee.
great neighborhood around losing park in Minneapolis. Could probably make the rent 1850.

Should I sell and buy a better rental property which generates better i returns? Any thoughts or tips appreciated.

2 Reply

36 views

Most Popular Reply

LeAnn RileyBusiness Member

Real Estate Broker · Minneapolis, MN · Member since 2015 · 116 posts · 67 votes

That's the point of leverage and using Other People's Money. This is why real estate investing is so magnificent. The use of borrowed funds to increase purchasing power. Leverage changes the rate of investor return on equity. Selling will be a better utilization to grow your portfolio, regardless of fees. The issue in Covid-19 today...is the mortgage lending is tightening. So it depends on your personal situation as far as borrowing power to maximize your proceeds into duplexes or more.

I'd be happy to discuss in detail with a strategy session. I'm local and investor specific Realtor.

3 Reply

See this reply in the discussion

24 Replies

Jump to latestLatest

Sort by

Ted L.
Investor · Schenectady, NY · Member since 2015 · 107 posts · 111 votes
6y
Yes. You should be able to do much better.
2 Reply
Kenneth GarrettPro Member
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
6y
@Puja Shah
Those numbers are high. Association dues (HOA) usually kills a potential good cash flowing property. I think you could buy a SFH and rent it and make a much better return. You might be able to buy two or a duplex, triplex, 4 unit for that money.
1 Reply
Tim SwierczekPro Member
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Puja Shah Yes, with that equity you should be able to purchase 2 premium duplexes or up to 4 low C/high D class duplexes. This will generate more cash flow that you receive now but also benefit you more in appreciation, depreciation, and amortization.
1 Reply
LeAnn RileyBusiness Member
Real Estate Broker · Minneapolis, MN · Member since 2015 · 116 posts · 67 votes
6y
That's the point of leverage and using Other People's Money. This is why real estate investing is so magnificent. The use of borrowed funds to increase purchasing power. Leverage changes the rate of investor return on equity. Selling will be a better utilization to grow your portfolio, regardless of fees. The issue in Covid-19 today...is the mortgage lending is tightening. So it depends on your personal situation as far as borrowing power to maximize your proceeds into duplexes or more.
I'd be happy to discuss in detail with a strategy session. I'm local and investor specific Realtor.
3 Reply
Daniel Anshus
Realtor · Bloomington MN (bloomington, mn) · Member since 2016 · 451 posts · 263 votes
6y
@Puja Shah If you are looking to maximize your cash flow you should definitely look to sell it. You can get a lot better returns with multifamily or single family properties. If you do not live in it I would suggest looking into a 1031 exchange to help defer capital gains taxes. If you would like a more detailed answer and a contact for a 1031 exchange intermediary feel free to message me as I am a licensed realtor and investor in the Twin Cities.
0 Reply
Derrick StClair
Investor · Los Angeles, CA · Member since 2020 · 14 posts · 13 votes
6y
Puja,

If your goal is to build more long wealth from real estate then yes you should consider selling or cash out refinancing and buying another property to expand.

If your goal is to simply put as much cash in your pocket TODAY then it's hard to say and it would require much further analysis. Keep in mind a lot of people are simply suggesting you can get a better investment property; but what most of them are looking at is just the cash flow vs purchase price when there's a LOT more to consider with real estate.

Such As:

- Higher rent to purchase price (aka GRM or the Bigger Pockets 1% rule) typically means more risk

- Risk from underdeveloped, lower class, not in high demand neighborhoods

- less home appreciation affecting overall IRR returns

- and more..

Also - look into 1031 exchanges instead of selling and buying something new if this is the route you choose.
2 Reply
Mark H. Porter
Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
6y
$270G = $1.35M in new purchases. Freddie/Fannie has 30-year small loans from $1M-$7.5M and may be less than 4%. This is a great opportunity for you.
3 Reply
Mark Allen Kenny
Investor · New York City, NY · Member since 2016 · 155 posts · 105 votes
6y
I agree. One of the beautiful things about real estate is the opportunity to use leverage. I would consider using that equity on a multifamily property and getting a mortgage.
2 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Puja Shah, Yes leverage is a wonderful animal but... You don't have to do that to improve your ROI substantially. Get rid of that HOA. That buy itself is killing your return. Sell, do a 1031 exchange so taxes don't eat up your equity and buy two smaller SFs for cash or a little bit of leverage or even better yet buy one with cash and one with leverage. I call this defensive investing. Because it lets you keep a property out of harms way with no leverage but also lets you take advantage of leverage on the other property.
The 1031 Investor5140 Reviews
Website View Page
2 Reply
Bruce Runn
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
6y
@Puja Shah
Even in prime MPLS locations, I can make a duplex/triplex work very well. I can't make a SFH or condo ever work on a ROI. If your goal is to make returns, you have a lot of better avenues to pursue. You need to find an experienced realtor who understands multi family financials to show you how to deploy better w/o getting into a situation where someone wants you to do something because it benefits them.
1 Reply
Noah Chappell
Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
6y
@Puja Shah A great way to think about it is return on equity, which for MPLS is very low right now at 4.5-5.5% as you've said. In this market you should be able to make a 15% cash on cash.

With the chunk of $ you have, you'd be able to start an incredible portfolio right off the bat.

What I'd do is sell, making several assumptions I imagine you'd have a 15% long term capital gains rate & would finishing with ~$230k (for a new investor I'd avoid 1031, complicated with short deadlines to find properties, etc.) Then I would buy 4 solid duplexes with 30yr conventional investment loans for $200k each putting down $50k down payment each. With the remaining $30k I would house hack a 5th solid duplex in a nice area with a 3.5% down FHA you feel comfortable living in (think Powderhorn Park area, NE, etc) - just make sure you're living for free here.

You could do above in 6-8 months & have a portfolio cash flowing $1,300-1,600/month while living for free, not to mention the 3 other wealth generators appreciation/loan pay down/tax benefits!!
1 Reply
Daniel Anshus
Realtor · Bloomington MN (bloomington, mn) · Member since 2016 · 451 posts · 263 votes
6y
@Noah Chappell great idea, but you're not going to find a duplex in the twin cities for under 200,000. There is one on the market currently in Saint Paul for under 200k but it needs A LOT of work. I like the idea but would recommend looking for one or two larger investments that have a higher COC. Anything around that price is going to need work so I would want more reserves for repairs.
1 Reply
Noah Chappell
Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
6y
@Daniel Anshus you're right, inventory's down & demand remains strong so looks like its still a hot market, looks like there's a few tri & 4 plex at <&100k/door, possibly due to condition, or maybe less buyers for the larger residential multi family, just something to think about..
2 Reply
Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
6y
@Puja Shah lots of good adviceand just something so think about here: “never exercise the option early”
great candidate for a LOC with a local bank. Tougher to come by today if course. That way you can be ready to go, exchange or not.
If there are no assessments coming down the pike, and no deals immediately presenting themselves I wouldn’t leap to sell an appreciating property. Stock that pays 4.5% dividend is nothing to sneeze at even if it doesn’t go up. What are cd rates these days?
People forget defense is as important as offense sometimes. Is this risk capital or nest egg?
1 Reply
Bruce Runn
Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
6y
@Puja Shah

@Noah Chappell
Because most people have different components they throw in to calculate their return, a 4.5-5.5% ROI might be good or bad. I've seen people load every contingency in the world into a calculation and then complain they can't find a 2-4 unit multi family cash flow. I also know people who buy a fixer upper and value add and get a 20% COC return but self manage and don't hardly ever have a vacancy. a lot of times, it comes down to experience. One of the keys seems to be: slow and steady wins the race. We don't ever buy anything w/o cash flow as it needs to stand on it own. As places have appreciated and more people have gotten into real estate investing, more people are looking at the same deals and creating competition. I wish you the best fortune as you continue to look/pursue deals.
3 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
6y
Originally posted by @Puja Shah:
Will the cost of agent fees, listing, closing cost etc make it a pointless excercise.
It’s a fully paid 270k condo that generates 1750$/month and has a 500$ association fee.
great neighborhood around losing park in Minneapolis. Could probably make the rent 1850.
Should I sell and buy a better rental property which generates better i returns? Any thoughts or tips appreciated.

This property actually seems like it may have nothing wrong with it, just the capital deployment and utilization.
A key aspect to better know if I would advise sell or keep would be the appreciation forecast potential.
With correct deployment of your capital, tapping correct % of leveraged funds, you could easily double/triple the performance not only on that property but also additional acquisitions, and there in a sizable increase in overall performing portfolio numbers.
I currently focus on Twin Cities outer ring areas, not inside twin cities itself, simple reason is competition has driven market prices far to high, profitability down, and simply put because i don't have to go into TC market to beg for table scraps. I would suggest that, look to diversify your holdings with some added good acquisitions and tap into leveraged funds.
I would advise not to exceed 70% LTV, and if at all possible 65%. A very successful approach has been to leverage funds in this manner, and re-fi when LTV get's down around 45%-55%, roll the added capital into additional acquisitions much like reinvesting stock dividends. At an appropriate point re-fi a package into a commercial loan which will achieve your lowest cost of funds.
Know, it's not an all or nothing as your presenting it. You can keep the performing property, greatly improve the performance, expand your overall portfolio, revenue stream and equitable gains, it's all about utilizing the capital leverage power.
2 Reply
David BarnettPro Member
Rental Property Investor · Cambridge, MA · Member since 2016 · 634 posts · 415 votes
6y
@Puja Shah I quickly skimmed through the responses and wanted to throw a quick item out there. You'll probably pay somewhere in the $22k-$25k range for closing costs. I sold a condo last year and my closing costs were about 10% of the sales price.
1 Reply
Puja Shah
OP
New to Real Estate · Minneapolis, MN · Member since 2020 · 11 posts · 7 votes
6y
@David Barnett thank you for that. definitely something to account for.
0 Reply
Puja Shah
OP
New to Real Estate · Minneapolis, MN · Member since 2020 · 11 posts · 7 votes
6y
@Bruce Runn good point and great insights as usual. I have decided to hold onto it, until it becomes a problem child.
0 Reply
Puja Shah
OP
New to Real Estate · Minneapolis, MN · Member since 2020 · 11 posts · 7 votes
6y
@James Hamling wow, thank you for the detailed answer. Super helpful. Also Agree that twin cities is over bought but with me Having a 9-5 job and real estate not being the primary job as yet- I need to focus on properties that are close to work/ home.

0 Reply
John D.
Investor · Wake Forest Area NC · Member since 2020 · 42 posts · 70 votes
6y
Sell it immediately. You are losing the use of your money and taking risk for no return. Cash is king, but not if you keep it locked in this condo.
0 Reply
Michael Murphy
Rental Property Investor · Eden Prairie, MN · Member since 2016 · 5 posts · 0 votes
6y
I could see pulling out a HELOC or similar and using that cash for 1-2 down payments on some higher-end properties or 3-4 down payments on some lower end properties. If I was in your position and wanting to stay invested in the Twin Cities I would agree with James Hamling and try to look in outer-ring suburbs that still have some good values.
0 Reply
Tim SwierczekPro Member
Lender · White Bear Township, MN · Member since 2016 · 1k+ posts · 1k+ votes
6y
@Michael Murphy I'm referring to the downpayment required to buy the two properties. I'm not considering that she would buy them in cash.
0 Reply
Michael Murphy
Rental Property Investor · Eden Prairie, MN · Member since 2016 · 5 posts · 0 votes
6y
Originally posted by @Tim Swierczek:
@Michael Murphy I'm referring to the downpayment required to buy the two properties. I'm not considering that she would buy them in cash.

Yep my mistake, I realized that after and edited my comment :-)
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.