Sell a Property That Cash Flows Like CRAZY!?

Question

Hey everyone out there in BP Land! I'm looking for some feedback on a decision that we've been flipping back and forth on for awhile now. Here's the run down.

We bought a condo here in a mountain town 3.5 years ago. We paid $147k with 7% down and did some minor remodeling (about 15k cash invested including down payment). We rent it on Airbnb to gross around 3500/month, cash flowing around 900/month after mortgage and ALL expenses. This is a GREAT deal, right?

However....

The appreciation in this market in the past three years is ABSURD, and the property would sell for around 270k right now! We only owe 130 on it, so we could be walking away with some serious cash if we sold it right now. (also, we lived in it as our primary residence for the first two years, so no capital gains) We could take the 100k+ gains and walk away to invest in a larger property that would be more passive than the actively managed A

irbnb.

HELP! We love the cash flow on this property, but hate the idea of the market potentially dropping in the near-ish future and losing the opportunity to take advantage of all this equity! Thoughts?

Robert Freeborn · Answer

Its hard to say what the best option would be. Personally, I'm with Shawn: I'd be ecstatic at $900 cash flow a month.

Crunching some numbers, if you get a 75% LTV, you should be able to refinance for around 203,000, which gives you a cash out refi of 55,500. A 203,000, 30 year mortgage at 4.5% is approximately $1,028 a month.

While it sounds like you would get higher cash via selling, you'd also lose that amazing cash flow (even with a slightly reduced number, its amazing!).  If you keep it and cash out, you'd still be cash flowing and would have a tax free 55k to reinvest. 75% LTV also gives you a great buffer if the market corrects.

I know what I would do, but your situation is probably different. Just make sure you crunch the numbers and they work for you.

Shawn Q. · Answer

I have two thoughts - one actionable, and the other personal. The actionable is first - you say you're thinking the market is overheated and primed for a drop, but there are ways to double-check that. If you have a realtor in the area, ask them to check year-over-year change in listing volumes, days on market, and sales prices. If you have a trailing three years of data there you can check it periodically (quarterly?) and see if the market is cooling. I'm sure others can suggest better metrics, but those would be the ones I would initially choose. It seems unlikely we'll see another precipitous market crash, but you can see indicators and exit at that point. You're never going to hit the absolute market peak, but if you follow the numbers and sell when the market is headed towards the top (or has just peaked and is just starting down) you'll likely do Ok.

The personal thought is to go back to your "why". What part of your overall investing/life goal is this property? Is the cash flow enabling you to enact part of your larger strategy, or would a sale allow you to trade into another property that fits your long-term goals better. $900/mo is great (I'd be ecstatic to clear that on a property!) but if it's not in aid of your larger strategy it's probably time to move on.

Shelby Pracht · Answer

Thanks so much for your feedback, @John W., @Robert Freeborn, @Matt R. and @Shawn Q. It sounds like I need to look more seriously at doing a HELOC or a cash out refi!

@Thomas S. I'm not sure I understand what you're getting at. I see that I am leaving money on the table by not making use of the equity, but it doesn't make sense to me to count that against the cash flow I am already generating. I don't agree that the property is a liability when I put 15k into it and generate $900 cash flow per month...

Thomas S. · Answer

You need to sit down and study your financials a bit to determine you path.

As of now you have $140K in equity with a opportunity value of 10% conservatively. That equates to a lost income of $1166 per month. Or a deduction off of your rental income of $1166 monthly leaving the property with a negative cash flow of $266/month. Not a great investment in fact it is terrible. You could make more money if you sold and put your money into a REIT or investment fund.

Unless you can pull out the equity to reinvest and still generate some positive cash flow this property should be sold asap. The property itself is a liability. The only thing generating any return is your equity making the property a high risk liability.

Sell or leverage.

John W. · Answer

Seems silly to sell to me unless it's a lot of work to manage and you want to move on at a strategic point in time. Take a HELOC out on it or a cash out refinance and continue investing. You won't get into trouble with a cash-out refi unless you make poor investments and for some reason it depreciates significantly.

Matt R. · Answer

Right on. One of my brothers has one in Snowcreek and another brother has one in June. As I recall Mammoth can be a feast or famine historically but some of those dymamics may be stabilizing.

REI is considered high risk already and that's why you have the high gains. So far this sounds like a homerun. Consider long run expect demand to increase. I know Mammoth Mt. has changed hands a couple times and each time the next outfit had way more mula behind them.

If you can find something better it could be a good reason to adjust is my thinking. Or if you just want something non airbnb maybe. El problemo is any equity move has a solid chance to be less valuable across the board too ( rei = high risk).

Shelby Pracht · Answer

@Matt R. It's in the La Residence IV complex :)

I guess we could technically do a cash-out refi, but I'd be so nervous about the market dropping and being under water. I feel like the market is really volatile. Is that a fair concern, or am I being overly risk averse?

Shawn Q. · Answer

One other thought I had, brought to mind by @Robert Freeborn's post: don't forget to consider the branding value of the Airbnb traffic. You're running it well (you have to, to get top dollar) and you're pleasing multiple guests per year. I don't know the terms of an Airbnb host contract, but I'm guessing you're in the process of developing a contact list of high-dollar individuals that might be interested in future flips or vacation rentals in the area. If they visited and had a great time, they'll be more likely to visit another of your properties. If you use a refi or HELOC to purchase another vacation property in another niche or area, you'll likely have a built-in customer base for the new purchase. This would eliminate some of the uncertainty of a new purchase, while deploying your funds more quickly and easily. Just an additional thought.

Matt R. · Answer

That's awesome. What complex? Can you refi? I guess if one had a better deal to invest in go for it.

Sell a Property That Cash Flows Like CRAZY!?

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