INVESTOR ADMITS: It’s time to sell my property
I'm a big believer in holding onto rental properties for the long term. However, I'm selling one of my duplexes, and I want to explain why it's a good decision for me. Maybe some of you are in a similar situation with a property that isn't performing well, or you're on the fence about selling. I'll walk you through my thought process so you can learn how to apply it to your situation or how to evaluate selling in general.
To give you context, this property is in a high-appreciation area north of Boston. I bought it with my father in 2015 for $510,000. We renovated it, rented it out, and had great cash flow until 2018. In 2018, it appraised for $860,000, and we took out $250,000 through a cash-out refinance. We used that money to buy another duplex in an off-market deal, which has been a great investment.
However, the increased mortgage payment from the refinance has reduced our cash flow to only $500-$1,000 per month. Additionally, there's not much potential to add value to the property. As an investor who prioritizes cash flow, I've been considering selling because the current income doesn't justify the management and upkeep responsibilities.
On the other hand, the property has appreciated significantly and is still in a desirable area with high rental demand. Selling seemed like a tough decision. So, I sat down and analyzed the situation quantitatively.
First, I compared my net income for the past few years with the time and effort spent managing the property. It became clear that the income wasn't worth the effort. So, the first indicator suggesting I should sell is: income not justifying the effort.
As a data-driven investor, I like to back my decisions with numbers. When buying a property, I underwrite it thoroughly to get a sense of ROI (Return on Investment) and project future performance. However, selling requires a different approach. While the ROI on this property would be fantastic, that doesn't necessarily justify selling. It's more about future potential.
The most relevant metric in this situation is return on equity (ROE). This represents the current return you're getting on the equity invested in the property. My calculations showed that we have about $266,000 of equity and a net income of $14,500 per year. This translates to a roughly 5.5% ROE. Since the property will likely appreciate, I need to factor in a reasonable estimate of that increase. In this market, I estimate an average annual appreciation of 2%, bringing the total ROE to 7.5%.
While 7.5% isn't terrible, it gives me a benchmark to compare against other investments. I know I can get a return of around 5% in safe options like high-yield savings accounts or Treasury bills. I could also get similar or better returns in the stock market, and even higher returns with potentially higher risk through accredited investments. All these options are entirely passive, meaning I wouldn't have to manage the property or deal with maintenance, emergencies, or snow removal.
This is my second indicator suggesting I should sell: ROE equal to or lower than passive investments.
Another point to consider: in this competitive market, finding new deals is challenging. So, I've been focusing on maximizing rents within my existing portfolio. I'm calculating the ROI of potential improvement projects to prioritize those that offer better returns than passive investments. For this specific property, I'm undecided between reinvesting the proceeds in the stock market or adding a bathroom to one of our short-term rentals.
My final indicator, and the most important one, is simply the need for the money. My father is semi-retired and wants more liquid savings. I recently had a child and have high-interest debt to pay off. While most of the proceeds will be reinvested, the portion used to pay off debt will significantly reduce our financial stress. Additionally, having a good chunk of savings provides peace of mind and allows us to jump on new investment opportunities when they arise.
Therefore, my third indicator suggesting I should sell is the positive impact the sale proceeds will have on my personal life.
Before selling any property, it's crucial to determine your after-tax proceeds, which is the amount you'll actually walk away with. This calculation can be complex, so it's a good idea to consult with an accountant.
