Formula? Is equity high enough to justify selling? Sell / Hold?

Question

When comparing sell or hold options, what formulas are most helpful? What is the ratio that drives you to decide one way or the other? I have a bit of equity on a property with very low debt, and it looks like prices are high enough to consider letting go of one property, the one with the lowest debt and the highest equity, but it is cash flowing very nicely, and will only cash flow better over time. It is an SFR with a detached in-law suite, so it has two rental incomes, just like a duplex, but has the LT equity growth of an SFR.

Option 1: Refinance and hold. I have a cash flowing property, that generates $1557/mo ordinary income BEFORE debt. Debt is low, only $72,000, so if I refinance at 4% amortized 25 yr, payment will be $380/mo. This would leave $1177/mo income after paying debt. Combined rents will probably increase $100/mo in the next 12 months too.

Option 2: Sell the property, pay off the debt, for an after tax net of $220,000.

Prices won't be this high forever. Property is in Tampa Florida and prices are very high in Tampa right now. Tampa is becoming known as an up and coming tech hub, and people are flocking here like crazy. So prices in Tampa are going up up up. The property in question is in a low income boring neighborhood, 1 block away from very low income area, a block from the bus route, but for some reason it is a little street that has mostly owner occupied houses, that are kept up nicely, and it is a quiet street.

It's under property management, and the numbers quoted above are net of property management fees, so I no longer actively manage it, which makes it more attractive as a keeper. But I don't see anything exciting coming to that neighborhood, it really is a low income neighborhood that will probably always be exactly that. But again, its quiet, and well maintained street. I did a full renovation 6 years ago, and since then just about every repair possible on the house. So the house in in good shape, including a new roof 2 years ago.

Michael Haynes · Answer

Hello Jon S. There is a lesson that is given about the Value of Gold which applies to the Value of a Single Family Home, based on Inflation over Time. In 1920 an ounce of Gold would buy you a good suit. In 2021 the same ounce of Gold will buy you a good suit. This is the same thing that you have with Single Family Homes. Your Home is not an Investment that grows in Value over Time after all the considerations involved with, "The Numbers." When you Invest in something, you always try to have a Profit, the day you Buy, not the day you Sell. You need to watch Buying a Home in 2021=Financial RUIN? Find Out Why on youtube. Nick at ReventurConsulting.com does all the studies using Government data etc. He displays it for you to easily understand all you need to know about Real Estate in your area using Graphs and Charts and simple explanations. The reality is that Single Family Homes almost never make Money. In Tampa, at this time it is very difficult to buy a property that makes the 1% Rule work. This is why the members are always looking to Buy a Duplex and House Hack or BRRR etc. to add on enough Value to make even $100 a Door. If you are a Wholeseller, like the couple a day who are calling me on my 3/1 all fixed up to Rent house in N. Seminole Heights, you want to offer me $160,000 when I am asking $212,000. They try to get their Profit up front, before they might do some improvements and Flip the property. "Formula...is my Equity high enough to justify Selling?" Did you add on the Taxes?

Evan Polaski · Answer

@Jon S., there is no simple formula, as you need to look at upcoming Capex items for the rest of your projected hold period, and need to factor in appreciation (or stagnation) of values.  If you hold 10 more years, you are likely in for a new kitchen, bath(s), HVAC, water heater.  Roof you have more time on, but hold long enough and you will be replacing that again, or giving a credit at sale.

From there, I look at my return on equity: annual cash flow, including reserves, divided by current equity.

Then you have to factor in appreciation, if you anticipate any.  When you take your current ROE + net projected appreciation, you get your annualized return.  If you can beat that number elsewhere, you sell.  If you can't, you hold.

Jon S. · Answer

@Evan Polaski

This makes sense. I have just been taking a straight 10% (5% and 5%) for maintainance into my projections. I have not looked at the difference between keeping long term vs keeping for 7 yrs before large maintenance items start occurring. My hunch has been that its less expensive to hold long term and keep a house repaired than it is to gold 7 years, sell, and buy another, but perhaps I should be more detailed in that assumption and compare projections. I wish I had a software that would do this sort of analysis on a single property and on a portfolio, does that exist?

Michael Haynes · Answer

Hello Jon S. from Tampa. All the Real Estate numbers aside, it is the time to Sell at these Tax rates before the new Administration destroys us with thousands of bad rules and fees and higher Taxes. Have you heard that Biden wants to charge a Tax on Unrealized Gains...can you imagine that next year you have to calculate the increase on the value of your property and pay a Tax on that amount, before you actually Sell it? And the Fed is "printing more Dollars" which is one way we get Inflation at the "current rate" of 5.5%. You need to make more than that to just keep the current buying power of your Dollars without any Profit after Taxes. Have you not heard about, "The Great Reset?" And that "they" are going to "Build Back Better." Along with the final absurdity that, "You will Own Nothing and Like It."

Jon S. · Answer

You are correct. No exceptional headaches. Some repairs of course, but with PM, I just get partially involved, not totally involved in how repairs are done, they will ask me if I prefer to send my own plumber, or if I want them to send one. Sometimes I have to override them on choosing a plumber, when its just a handyman job, ie, when the handle set screw comes loose on the shower hot cold water handle, that does not require a plumber, but the PM was all set to send in my plumber, and I told her that a handyman can do that.... of course she agreed, and got me a handy man within 24 hrs. So I have found I appreciate that PM contacts me and consults on how I want a repair handled. Other than that sort of thing, or deciding how much to charge for rent, I don't get involved in the day to day, I don't even know the tenants. So I would agree, this property is not a headache at all. On the flip side, I am looking at doing larger investments, specifically looking at developing townhouses on raw land, and capital is king in that zone. But I'd rather keep my cash flowing rentals and leverage their equity, even if I can only leverage 60% of the capital I would have if I sold. Having the cash flow just feels like a safety net, especially if I am going to venture into deeper waters like development. But that being said, I also was wrestling with the fact that cap rates are in favor of sellers right now, and it might now be as low a cap rate a year from now. sort of worrying about missing out on these crazy low cap rates.... and crazy high equity.

Steve Vaughan · Answer

I didn't hear this being a headache for you.  Those I sell.

If you have a specific use for cash, a refi may make sense.  Just don't become a motivated buyer.

If you want to transition your rental to a better neighborhood, though yours doesn't sound horrible, find your purchase first.  I'd keep an eye out and only sell after I have my new purchase under contract.   Much easier to sell than redeploy in this market.

And congrats on holding what sounds like a great asset!

Formula? Is equity high enough to justify selling? Sell / Hold?

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