Rent or Sell
Hi,
I purchased a rental property 4 years ago for 72000 cash. My tenant just moved out. To date I have recouped 57000 dollars in rent (after taxes, etc). Therefore, if I make another 15000 I will have recouped my initial investment.
I am trying to decide if should sell the property at a projected price of 145000 right now or continue to rent and bring in an additional 10992 per year.
I have tried to do an NPV calculation on my own, but the math isn't making sense. Can you please help me with financial perspective?
Thanks!
Brian
What's your economic situation and what are your goals for the property? How easily would you be able to fill it again? What do you foresee rents will be doing in a few years? Are you in a good, improving neighborhood?
Don't take my advice for fact, but the vibe I've been getting from reading these forums and WSJ / Bloomberg is that the current economic upswing is running out of steam. Best time to sell I believe would be by the end of the year, or in 3+ years. The upcoming correction shouldn't be anything like 2008 (unless this wacky trade war gets crazy) but it's worth asking yourself if you have the means to weather lower occupancy / rent for a few quarters.
Thanks for your response! My goals are basically to maximize game. Financially, I don't really need the money. If I were to sell I would likely invest in the stock markets. The area is a hot neighborhood, I just sold another property in less than 48 hours. I could have it rented within a week for full asking.
I think my primary decision at this point is if I want to take the money and run, or deal with renting longer. My NPV calculation came out to be around 109k. I do not think the property will appreciate much higher than it is. Maybe 3-5% over the next 3 years.
My gut reaction is hold it... if you're looking to simply cash the money out because you want to have cash to capitalize on a market correction/pricing adjustment, then sell since the velocity/pricing will most likely stall out in the short-to-mid-term. However, you're currently making an annualized 15% yield on your initial investment.... It's very hard to beat that right now, especially in the stock market which has been volatile as of late. So if you are simply going to cash out then reinvest for a potentially much lower yield, that wouldn't make much sense to me.
If you do cash out do you have a way to reinvest the money? Or would you blow it on something?
Ask yourself the following: - what’s your cash on cash return right now? - can you find yield like this via any other financial instrument if you sell? - are you levered/unlevered? If unlevered, You could cash out refi and put that money to work. - if you sell the asset, where would you invest those post tax dollars and what return do you think you could get? Run that analysis for 10 years out. Then run the same analysis as if you hold the asset. As mentioned above, a 15% COC Investment is gold and would be tough to let go of unless you are considering 1031’ing into something bigger that has nearly as wonderful of a yield. There’s not shame in that route, if that’s what you’re considering, but I’m also not advocating for buying anything right now.
I think his ideal play is to refinance. Currently, his property is clipping at a 15% Yield with no debt placed onto the property. He could sell the property, but as many have said, he is unlikely to find anything worthwhile clipping a 15% Coupon. Still, with almost no experience, he found a asset that has had a 20% Annual Yield (based on babybaboon math of $14,250), so maybe he's able to source really well priced deals and can repeat this.
Given his new property value of $145,000, he could refinance is at 80% and pull out $116,000. With that money, he could buy another similar deal if he has a knack for this. If he received a 30-Year, 4.5% Loan, he would have an annual debt service of $7,053, which would leave him with $3,939 of Cash Flow and $116,000 of money to use at his discretion. Add in the fact that he can depreciate $2,618 against his initial property's cash flow, it seems like a no brainer.
Again, this all is contingent on the opportunity cost of what else he can do with that money.
I agree the math doesn't make sense. Unless I'm missing something. This is a bare bones thought process:
4 years ago purchased @ $72K $57,000 (recouped after taxes/4 years= $14,250 rent per year income stream (not counting any other sort of expense/income calculation)
Does the $57K recouping only include rent? If so, why drop it down to $10,992 per year?
If you can find another tenant quickly....$10,992/year = $21,984 in 2 years. You will have fully recouped the remainder in about 1.5 years. Once you've recouped your initial investment, everything else is gravy.
TLDR: I echo @MonkeyWrench" cpgame If you want to reinvest in something else, figure out if you can find a replacement at the same yield or better. 15% is sweet.
Disclaimer: Not meaning to be a D on the math piece, just trying to make sense to see if I can provide any more info. I also haven't had my coffee yet.
Culpa ullam reprehenderit reprehenderit. Aliquid qui ad non et. Aut architecto expedita ratione esse.
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