At what point does it make sense to sell a BRRR property?

Question

Hey everyone! Question - I understand that the point of BRRR is to have a property that you hold on to to increase your monthly cash flow as well as build equity overtime. But at what point does it make sense to sell?

For example - If you reached out to an agent and they gave you an honest appraisal of the property and the value was 20k over what was owed, it would not be worth selling a cash flowing property. But if the agent said 100k over? 200k? Where is the line of it being worth it to sell?

JD Martin · Answer

Here's my metric, at least for now: If, after paying capital gains taxes, closing, realtor, and other fees, I can net more money from a sale than I can net in 10 years of renting the property, and that annual rate of appreciation and rent appreciation is not grossly greater than annual rate of inflation, I would seriously consider selling. Example: I have a property that nets $10k/year in rent. That's $100k/10 years. Assuming rent & appreciation are stable/expected to be stable relative to inflation, I would need to be able to gross about $140k-160k in order to net $100k. So I would need to be able to sell a house that I had $50k in for somewhere around $200k. So theoretically if I had my expected next 10 years of rent in my hand now, even just earning some paltry 2-3% return, it would be somewhere akin to having 12-15 years of rental income. Keep in mind there's a lot of assumptions here. If I know the market well (and I only invest where I know it well), and I see 10-15% appreciation each year for the foreseeable future, my price to sell goes way up. Or if appreciation will be tamped, but rents are rising rapidly with no end in sight, same scenario. With today's market, I would be unlikely to sell unless I had already located a great opportunity that I felt better about than my current investments. When I say "for now" that means because I'm in my 50s and I expect (hope?!?) to have at least another 20-30 good years to go. When I am in my 60s, or let's say I have some real serious health issues play out, that timeline may change. Then I may only look at a 5 year window. If I was younger, I'd probably have a longer timeline because I'd expect to live longer. The other metric I would consider using is if I knew that major, massive capital improvement costs or some other issue (highway widening, forced massive property reappraisal, etc) was going to severely limit/decrease my revenue or severely increase my costs.

Michael S. · Answer

@Mike Finn - if you have performed a true BRRRR, then you have zero of your own money in the equity of the property, which makes your COC essentially infinity, because you are dividing by zero.  It's hard to beat a COC of infinity.

So for our BRRRRs, the answer is that it doesn't make much sense to sell unless:

1.  We can deploy the money made on the sale into a much better investment vehicle (maybe 2 BRRRRs for example, or a ridiculous margin flip).

2.  An appreciation amount that we feel is not realistic and will correct.    For example, let's say I have a property worth 150k when appraised for my cash out refinance.  2 years later, I get a cash offer for $300k for the property, and I feel that it is unlikely this property would appraise for this;  in addition, in 5 years, I doubt the property still would be worth close to that amount.  Yeah, I'm taking that deal without hesitation.

Mike Dymski · Answer

sell when you can increase the return on your capital, if you are still expanding, and keep when you are not

Justin Konz · Answer

@Mike Finn In general, there’s a lot of benefit to simply refinancing rather than selling - namely not paying taxes on the money you take out.  That said, in the 15 years of doing this here are the reasons I see most borrowers sell:

1) Not enjoyable - For some investors the stress, work, headaches is just not worth it. Whether it’s the honest realization that landlording is not for them or perhaps just an isolated problem property.

2) Tax Beneficial - If you have a low income year or large loss you’re taking elsewhere, it might be beneficial to sell the same year to negate the tax on gains.

3) Topped Out Market - If you feel confident a market isn’t going to appreciate much further and may in fact decline in the future, time to sell. My very first rentals in Williamsburg Virginia resulted in this when I didn’t think the prices could be sustained vs rents. I’ve checks back over the years and still haven’t seen them move more than 5-10% higher since I sold them nearly 20 years ago.

Hope that helps!

Bruce Woodruff · Answer

It's really up to your and your desires (and financial position) but sell a good property? Why?

I suppose if someone offered you a ridiculous price like twice what it's worth then maybe....

Mike Finn · Answer

@JD Martin Thank you! Really good stuff to think about.

Theresa Harris · Answer

At 20K over what is owed, you are going to lose money.  You have the down payment (normally 20% that you put into the property) and closing costs including realtor fees that you need to factor in.  Look at how much money you'd walk away with after all of the bills are paid and remembering what you paid for the mortgage (including refinancing costs).

It makes sense to sell if you need the money or can do something with the money where you get a better rate of return (ie buy a better property).

Eliott Elias · Answer

It's very situational. Do you want to upgrade to a higher cash flowing property? Do you have a deal in the works you just cant pass up? Sometimes having a ton of equity will hold you back

Basit Siddiqi · Answer

You should sell the house if you no longer think the property would be a good investment compared to alternative investments.The calculation is a little bit more complicated because real estate is not a liquid asset and you have to factor other items such as costs to sell, costs to purchase, current interest rate, interest rate on the new loan, etc.Best of luck!

Curtis Mears · Answer

@Mike Finn

This is a very personal decision as your motivation will be different than mine. I have properties that have skyrocketed in value over the last year (most of us do). But, if you sell, what do I do with the money? After I pay the capital gains tax, are you going to find a property or investment that is better than what I currently have?

If you have a better investment available, sell, if not, them what is the motivation for selling?

At what point does it make sense to sell a BRRR property?

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