I think I know the right answer but I look to the more wise for advice.

I owe $100K on a rental. I could sell it tomorrow for $300K. Or if I'm patient, a bit more.
After mortgage, taxes, and insurance I clear about $500/month. This does not include annual HOA dues and flood insurance. The tenants are good. Have been in almost 3 years. I could probably raise the rent $50 when they re-up this summer.

When interest rates were lower it acted kinda like a savings account, but with my current savings account at 3.85 maybe it's time to sell and park the proceeds there for a bit. But I have to consider capital gains tax too.

Ideally I sell for $300+ and find a couple more cash-flowing properties. I've never done a 1031 exchange.

What else am I missing?

tia

I am in this exact predicament, although with sky high HOA, prop taxes, and insurance I am just barely breaking even.

I can cash out and make over double my money but no idea what to do with it?

NoahAg said:

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I think I know the right answer but I look to the more wise for advice.

I owe $100K on a rental. I could sell it tomorrow for $300K. Or if I'm patient, a bit more.
After mortgage, taxes, and insurance I clear about $500/month. This does not include annual HOA dues and flood insurance. The tenants are good. Have been in almost 3 years. I could probably raise the rent $50 when they re-up this summer.

When interest rates were lower it acted kinda like a savings account, but with my current savings account at 3.85 maybe it's time to sell and park the proceeds there for a bit. But I have to consider capital gains tax too.

Ideally I sell for $300+ and find a couple more cash-flowing properties. I've never done a 1031 exchange.

What else am I missing?

tia

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You won't have capital gains taxes with the #'s you show. So don't worry about that.

If you could do an 80%LTV, and you can still cash flow, you could have $140K to buy several rentals & increase your cash flow. You should figure in HOA & insurance to make sure you are + on that.

Good luck!

Where is your rental? I have some investor friends looking for some properties to diversify their portfolios.

You should always be looking to get a decent return on equity, and it doesn't appear that OP is. So, sure, lever up, divest, cash out, or whatever gets your return on equity to where it needs to be. You can still make good investments with current interest rates.

The problem with real estate is at it's paid off it frequently doesn't have very good returns. Most investors I've talked to focus on the check and don't do that math.

That 5.5% return calculation above is not accurate, but the question is at what level is it not worth the risks and costs? For me, anything less than 12% ROE in real estate and I'm redeploying the capital somewhere.

cjsag94 said:

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You should always be looking to get a decent return on equity, and it doesn't appear that OP is. So, sure, lever up, divest, cash out, or whatever gets your return on equity to where it needs to be. You can still make good investments with current interest rates.

The problem with real estate is at it's paid off it frequently doesn't have very good returns. Most investors I've talked to focus on the check and don't do that math.

That 5.5% return calculation above is not accurate, but the question is at what level is it not worth the risks and costs? For me, anything less than 12% ROE in real estate and I'm redeploying the capital somewhere.

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Im not even close to 12% when everything is taken into account. I dont see how that is possible with our property taxes and insurance costs-let alone if an HOA is involved and dont forget repairs, etc.

It's very possible. Take the above calculation that said $16500 annual returns. That number doesn't change if you have 100k or 200k of equity. So, as your equity increases, your ROE typically decreases. So, when your equity reaches a point where return is below your threshold, you are underperforming if you don't make a change by redeploying your capital.

What do you clear on a monthly basis after you factor in HOA dues and Flood Insurance. These need to not be left out. Sounds like you will probably closer to $300/month.

Sure you cannot get more rent than $50/month when you increase rents? That seems like hardly an increase and rents are rising because good inventory still low and interests rates on the buy side are high. Those two factors really help achieve higher rental rates.

What are you home's specs: bed/bath, sqft, year built, garage, etc ?

Your suggesting to put around $300k in gold bars in my garage or living room?

jagvocate said:

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BoDog said:

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Your suggesting to put around $300k in gold bars in my garage or living room?

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With the level of savvy indicated in the response, no.

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Ok then please explain it to us simpletons..

cjsag94 said:

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It's very possible. Take the above calculation that said $16500 annual returns. That number doesn't change if you have 100k or 200k of equity. So, as your equity increases, your ROE typically decreases. So, when your equity reaches a point where return is below your threshold, you are underperforming if you don't make a change by redeploying your capital.

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You don't refinance into punishing debt at high rates, cashing out at cyclically high pricing relative to economic indicators, and redeploy capital into equally punishing debt scenarios, when the likelihood of an economic contraction far outpaces the chances of continued unrealistic asset valuation growth.

In a sale, this would be selling near the top. In a refinance, it's the equivalent of buying at the top.

Some here obviously have only ever existed in a central bank created historical bull market fueled by money from thin air. We are not in those times anymore. Investing like we are is foolish. Only two things can happen now. The first is the FED drops rates or prints money or both. Either will result in rates lower than today and a better situation to take advantage of for a refinance. The other is we are going to have co to use higher rates, a major recession, and a massive asset valuation decline. And if you refinanced now, you would be crushed.

zagman said:

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cjsag94 said:

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It's very possible. Take the above calculation that said $16500 annual returns. That number doesn't change if you have 100k or 200k of equity. So, as your equity increases, your ROE typically decreases. So, when your equity reaches a point where return is below your threshold, you are underperforming if you don't make a change by redeploying your capital.

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You don't refinance into punishing debt at high rates, cashing out at cyclically high pricing relative to economic indicators, and redeploy capital into equally punishing debt scenarios, when the likelihood of an economic contraction far outpaces the chances of continued unrealistic asset valuation growth.

In a sale, this would be selling near the top. In a refinance, it's the equivalent of buying at the top.

Some here obviously have only ever existed in a central bank created historical bull market fueled by money from thin air. We are not in those times anymore. Investing like we are is foolish. Only two things can happen now. The first is the FED drops rates or prints money or both. Either will result in rates lower than today and a better situation to take advantage of for a refinance. The other is we are going to have co to use higher rates, a major recession, and a massive asset valuation decline. And if you refinanced now, you would be crushed.

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So this is the top? Ok, glad to know. Can you let me know how much lower it will be in 5 years and 10 years?

I didn't say refinance and buy real restate, I said redeploy the capital. If you can refinance, at higher rates, but also get a great deal on a purchase (then refinance later when rates aren't at a high), then that's certainly an option. Or buy something other than real estate.

Reading your comment then you should absolutely sell the asset and buy something completely different. If you think 2% extra interest rate is the death knell, then by all means stay away.

Bottom line, if you are getting 5-10% ROE, in an environment you've painted that suggests real declines in principal valuation, then redeploy the capital to something with a better risk/return profile.. could even be cash.

Yes, this is the absolute worst time to refinance which is why nobody is doing it no matter their situation.

Sell

I didn't say refinance, but you seem to think that's the only option no matter how many times I list several options.. I said redeploy the capital. You do understand they aren't synonymous, right? It's about maximizing risk adjusted return on investment, whether in real estate, hard assets, business ventures, the stock market, etc.

Based on your stated "facts", you should absolutely sell if you own real estate.

Also, these interest rates a are very possibly the new norm,. Still lower than what you got for multiple decades prior to the financial crisis.

https://tradingeconomics.com/united-states/30-year-mortgage-rate#:~:text=30%20Year%20Mortgage%20Rate%20in,percent%20in%20January%20of%202021.

I don't see this mentioned yet but I would strongly consider a HELOC on the property.

Run the numbers on on pulling out enough to cover the down payment on a 2nd property.

Use proceeds cash flow from initial property and second property to pay down the HELOC (depending on the rate).

Once HELOC is paid you've got 2 cash flowing, appreciating assets and the first property may be pretty close to being paid off at that point.

This way you don't cash out your equity entirely from the original property but can still get a second if desired.

I personally wouldn't sell given the long term tenants, how much equity you have, and the principal pay down at that point in the loan but I'm a long term hold guy

MS08 said:

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What do you clear on a monthly basis after you factor in HOA dues and Flood Insurance. These need to not be left out. Sounds like you will probably closer to $300/month.

Sure you cannot get more rent than $50/month when you increase rents? That seems like hardly an increase and rents are rising because good inventory still low and interests rates on the buy side are high. Those two factors really help achieve higher rental rates.

What are you home's specs: bed/bath, sqft, year built, garage, etc ?

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Factoring HOA and flood, return is just under $400/month.
You're probably right. With the current tenants, I imagine they'd stay even with a $100+/month increase. Really, on the open market it may rent for $150+ more than they're paying now.

My hesitation on raising it that much is how much I value good tenants. They take great care of the house, pay on time, don't complain. So do I want to take a chance on new renters (and possibly have it sit for a month or 2) just to make $1,200-1,500 more a year? I don't know.

The house itself has great specs for the neighborhood. 4/2, 2000ft, 2-car, built in 2008.
At some point the next big expense will be a roof. But that could still be a few years away.

NoahAg said:

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MS08 said:

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What do you clear on a monthly basis after you factor in HOA dues and Flood Insurance. These need to not be left out. Sounds like you will probably closer to $300/month.

Sure you cannot get more rent than $50/month when you increase rents? That seems like hardly an increase and rents are rising because good inventory still low and interests rates on the buy side are high. Those two factors really help achieve higher rental rates.

What are you home's specs: bed/bath, sqft, year built, garage, etc ?

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Factoring HOA and flood, return is just under $400/month.
You're probably right. With the current tenants, I imagine they'd stay even with a $100+/month increase. Really, on the open market it may rent for $150+ more than they're paying now.

My hesitation on raising it that much is how much I value good tenants. They take great care of the house, pay on time, don't complain. So do I want to take a chance on new renters (and possibly have it sit for a month or 2) just to make $1,200-1,500 more a year? I don't know.

The house itself has great specs for the neighborhood. 4/2, 2000ft, 2-car, built in 2008.
At some point the next big expense will be a roof. But that could still be a few years away.

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Good specs indeed: 4 bedroom, garage, built in past 15 years, good sqft. What's your location? Generally, this should rent for 2200+, maybe more (depends on the immediate market) in this higher interest rate climate.

It's near Cinco Ranch but not in Katy ISD. Across the Westpark tollway so it's Lamar Consolidated. If it was in KISD I'd say $2,200 would be right on.
I see 7 in the neighborhood for rent on HAR, asking between 2,300 and 2,700.
One is listed at $2,195 with the same specs as mine. That seems steep. It's been listed for 69 days.

Wow, on further review, anything under $2,100 may be a bargain. Got lots to think about.

Altogether fine area still. I still think you could get $2200/month in that it is only $1.10/sf which is not an overly aggressive rental rate. Who knows, your current tenants may not want to leave and would gladly pay it because good/worthwhile inventory still hard to find. They may not be able to find something better for the same value, as in the $2195 other listing you mentioned, and how yours was better.

So if you pegged it at $2200/month, how much more is that then you are getting now?

I think you keep it and buy yourself more time and let 2023 economic climate continue to unfold. It's a solid investment. As I side note it's probably worth $340k at minimum, because that's only $170/sft.

Just my 0.02

cjsag94 said:

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So, when your equity reaches a point where return is below your threshold, you are underperforming if you don't make a change by redeploying your capital.

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I'm in same situation as OP, but I don't have the confidence to redeploy the capital to improve return. No guarantees, and one could certainly be staring at negative return if a mistake is made.

I just wish I had a 2nd rental. Chickened out a few times.

Why don't you have confidence? Plenty of places to get help.

South Platte said:

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cjsag94 said:

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So, when your equity reaches a point where return is below your threshold, you are underperforming if you don't make a change by redeploying your capital.

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I'm in same situation as OP, but I don't have the confidence to redeploy the capital to improve return. No guarantees, and one could certainly be staring at negative return if a mistake is made.

I just wish I had a 2nd rental. Chickened out a few times.

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There are certainly no guarantees with real estate either. You could lose market value, endure vacancies, cost increases (such as taxes and insurance), maintenance and repairs.

I'm thinking in OPs situation, any reluctance to raise rent is emotionally driven. I don't know that he ever actually said what he is currently charging, just that he could raise it $50. Now realizing $2200 is probably a bargain. Problem is.. they are "good tenants" so he doesn't want to raise the rent.

What I said is I don't want to increase rent so much that it drives good tenants away. I believe there is an opportunity cost in losing a good tenant. There's also a material cost in vacancy while you screen new tenants.
Again I didn't say I am not raising rent. Just deciding how much.
They're at $1,850 right now which I understand is below market (2 years ago it was not).
I really appreciate everyone's insight. It really does help.
Oh and with the recent hail storm I'm probably getting a new roof.

cjsag94 said:

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I didn't say refinance, but you seem to think that's the only option no matter how many times I list several options.. I said redeploy the capital. You do understand they aren't synonymous, right? It's about maximizing risk adjusted return on investment, whether in real estate, hard assets, business ventures, the stock market, etc.

Based on your stated "facts", you should absolutely sell if you own real estate.

Also, these interest rates a are very possibly the new norm,. Still lower than what you got for multiple decades prior to the financial crisis.

https://tradingeconomics.com/united-states/30-year-mortgage-rate#:~:text=30%20Year%20Mortgage%20Rate%20in,percent%20in%20January%20of%202021.

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Historical rates have absolutely no bearing on anything today. It doesn't help the fact that initiating new debt in any manner today is foolish if you are not doing so on a significantly reduced property valuation. Especially if the debt you'd be replacing was acquired in the last 5 years. Telling someone he's better off than twenty years ago means nothing because valuations are higher by a similar factor as the lower rates today from historical.

You're welcome to explain the ways he can pull his capital out so that he can redeploy it. So far, none of your options would be smart in this market other than to sell.

"Lever up" - bad advice right now - too costly to do so And too risky to take on more more risk that would leave you with thin margins for any sort of market price correction.
"Divest" - probably the only decent advice
"Cash out" - not doing that without taking on more debt at a significantly higher cost than before, when he already doesn't have much cash flow. Lowers the return and neuters the effectiveness of the freed up equity.HELOC likely isn't any cheaper - bad advice.

I'm not disagreeing that these are all usually good options. It's real estate investing 101. But it's just not the time for it unless you can make the numbers work and given the info on this thread I don't see a situation that would.

There is very little information provided by OP. For instance, you are assuming his $100K mortgage balance is at a rock bottom rate. So let's assume it is. Let's say 3.5%, 30 year. Assuming based on the numbers he has provided, his P&I note is somewhere around $900 maybe (have to assume because very little actual data has been presented).

I'm going to assume, with principal pay down, and what he has stated so far, that he is clearing about $900 per month, which would be 5.2% ROE.

Now, assume did a full cash out refi and pocketed $200K. That new $300K loan would now require about $1900/mo (6.5%). Use the $200K to put $100k down on 2 additional properties identical to what he owns). Borrows an additional $400K at 6.5%, bring loan service up an additional $2500/mo, for a total of $4400/mo on $700K total debt.

This takes him from $200K equity on $300K asset (3% appreciation), clearing $900/mo, with debt service of $900/mo. $9000 asset apreciation plus $900/mo (9.9% ROE)

To

$200K equity on $900K asset (3% appreciation), debt service of $4400/mo. Let's say he now breaks even on monthly cash flow at these "punishing" interest rates. But he is still paying down $4800/year principal, and now assets appreciating $27000 per year, for a net of $31,800 on $200K equity, bringing it to close to 16% ROE. It's about compouding the growth by increasing the assets not about the check in the mailbox.

So, moving past Real Estate 101, this is how you make real money in real estate. It looks easy, it is difficult and really risky because you have to have other assets to handle the cash flow, and be able to afford the ups and downs. But at 5-6% ROE on equity, I am absolutely making a move to redeploy those assets.

Addition tidbit...now back to the idea of getting the rent right. Sounds like OP has figured out he is at least $350/mo too low. Fix that, and ROE goes up by $4200/yr, per asset. So, at $200K equity, that is an extra ROE of 2.1% on 1 property, or an extra 6.3% on 3. Cash flow increase of $4200 on one, or $12600 on 3.