Posted by John Behle on October 25, 1998 at 17:39:40:
Your return on the cash flow you are getting is 18.55%. Of course that is just the cash flow and doesn’t account for increase in value (appreciation), tax benefits, loan amortization, or expenses.
Selling is only one of MANY ways to get your equity out of a property, so you can have the best of both worlds. Keep the property for the future benefits and crank the cash out for doing more or better deals.
decision time…rent vs sell???what to do? - Posted by Jeff in CT
Posted by Jeff in CT on October 21, 1998 at 18:18:41:
Please help I need some input on how to analyze this situation.
I have six rental units currently. I just purchased a single family 3 Bd 1 bath house with beach rights in Niantic
Connecticut. I originally bought it with the intent to do my first flip…but now I’m wavering…I could rent it for
1100.00, with a 375.00 positive cash flow …OR…
sell it for a net profit of about 20,000-25,000. If I did sell it I would be re-investing the proceeds so there is no tax situation to consider. Also, I’m not destitute so I don’t NEED the money, although it would be nice.
Any input would be greatly appreciated.
Thanks
Jeff
17.91% yield/ 22.47% yield - Posted by John Behle
Posted by John Behle on October 25, 1998 at 17:35:00:
Your cash flow is worth between a 17.91% and 22.47% yield. That’s just the cash flow alone. Without your prices, holding period, expected appreciation, etc. it is impossible to show a more precise rate of return.
If you plug those factors in, your yield of course will be higher. So, plug in the cost of the property and any fix up or other costs. Project the cash flow out for the period of time you plan to own it plus rent increases and less expected expenses. Add in major repairs expected in future years (i.e. new roof, furnace, water heater, etc.) Figure those cash flows in with your tax rate. Add in depreciation. Project it out to the time period you plan to sell and you have it.
You then bring all the cash flows to a net figure on a monthly basis. Add in a sinking fund rate for money needed for future repairs or expenses. Add in the reinvestment rate for the money as it is received. Then you have your true rate of return called the “FNMR” or Financial Management Rate of Return (provided your assumptions are correct).
Sound complicated? Well ya, it is a one week course (CI101) through the National Association of Realtors, but it sure works well.
But what do you compare it to?
What would you do with the 20-25K? How much could it turbocharge your investing? Or, are you doing nothing down type deals that don’t need cash?
If that money will bring you over a 25% rate of return wherever you put it, by all means. Yet, you don’t need to sell to get the money out.
You can finance that equity out with a second and still have the rental. You can use that equity to buy other properties. For example, create a second against this property as a portion of the seller financing on the next deal you buy. You can “liquidate” your equity and profits without having to sell the property.
Just some things to think about.
Re: decision time…rent vs sell???what to do? - Posted by phil fernandez
Posted by phil fernandez on October 21, 1998 at 19:42:47:
Jeff,
Your wrong with your assumption that you will not have to pay tax on the gain if you sell by reinvesting the profits. Unless you do a 1031 tax defered exchange and do it correctly, you will be taxed. Also if you live in the house as your personal residence for 2 of the next five years and the gain is not more than $250,000 for an individual or not more than $500,000 for a couple you would not be taxed.
Re: decision time…rent vs sell???what to do? - Posted by The Baze
Posted by The Baze on October 21, 1998 at 18:55:23:
Jeff,
I was in the same situation several weeks ago. Sell for a fast $17,000, or l/o for $2,500 down and $225/mo cash flow. I decided take the money now. Unfortunately, nobody wanted to give me the money. I had set a time limit for selling the house, and it ran out, so I had to go ahead and rent it out. Of course, I’m not sure telling this story helped you out any. Oh well.
Tom Bazley
Re: decision time…rent vs sell???what to do? - Posted by Rick Vesole
Posted by Rick Vesole on October 22, 1998 at 24:30:19:
Phil is right about not being able to avoid tax by reinvesting the proceeds. Also a 1031 exchange may not be available to you unless you can show that you intened to hold the property as investment property prior to selling. If you bought it to flip - you lose 1031 eligibilty.
You didn’t say how much cash you had invested in the deal. If you have little or no cash into it, and if you don’t need the money, and if you don’t mind the management, hold on to it. You are making a good rate of return, getting some tax benefits and are building equity.