SELL and TAKE PROFITS? - Posted by Bill

Posted by David Alexander on March 03, 2002 at 24:29:36:

I meant the cash on cash return of his equity…

His equity is only earning him 7%…

If he could get to his equity and get a 112% return… then lifes good… especially if he could 1031 it.

David Alexander

SELL and TAKE PROFITS? - Posted by Bill

Posted by Bill on March 02, 2002 at 17:08:42:

I own a two family home that I purchased for 165k. I currently owe about 150k on it. In the last three years, the value on this property has risen to 380k. I believe it’s just about at a peak at that price. Is it a good idea to sell at this point? Property pulls in $1400/month after all bills are paid. Walking away with over 200k is sure tempting at this point. I can do a lot with that kind of money! What to do?

Re: And then there were two - Posted by Rolfe Kurtyka (Mpls/StP)

Posted by Rolfe Kurtyka (Mpls/StP) on March 03, 2002 at 18:01:31:

I’d suggest either 1031 into larger property or refinancing to pull out a down payment on a second or third property. Then let those properties perculate for a few years, and repeat the process.

Once cash flow from your own assets exceeds your expenses, you’re financially independent!


Never sell because it’s gone up. - Posted by GL(ON)

Posted by GL(ON) on March 03, 2002 at 08:52:41:

The way you make the real money in real estate is by buying and holding. Your experience proves this. You could own that property for 50 years and it would keep going up.

The only reason to think it’s going to go down would be if you are at the peak of a boom. When a boom is on people get quite irrational, they will rush to buy even though the price makes no sense at all.

Check out other rentals and make sure your rents are in line with the market. Figure out what the break even price would be. In other words at what price would the building’s rent pay the expenses, and mortgage payments? If the market price is way over this, and well into negative cash flow territory, then maybe it is a boom and you should consider selling before prices drop. Even so, prices can continue to climb for 2 or 3 years after they get into negative cash flow territory. In California they have been there for 40 years, in places.

So don’t sell just because it’s gone up. That is normal and nothing to worry about. If you are considering cashing out anyway, the peak of a boom is definitely the time to do it. But if you are not in a hurry you could also wait until the next boom.

If you’re not exchanging then you will… - Posted by David Krulac

Posted by David Krulac on March 02, 2002 at 20:27:11:

have taxable capital gains, most likely 20% of your profit goes to Washington DC. Depending on your state and local tax structure some of your profit might go to your state capital, etc.

Besides section 1031 exchanging, another alternative is to refinance at 80% loan to value, leaving 20% equity in the property, coincidentally the same as the capital gains tax, and take the remainder as tax free loan. Then you have the potential of future growth appreciation beyond today.

David Krulac

Depends… - Posted by David Alexander

Posted by David Alexander on March 02, 2002 at 19:26:49:

On where your at and what your goals are…

Do you wnat cashflow or do you want the cash… and then go back to work… to put the money to work…

My opinion is… if your at the top of the market…

and for whatever reason you can get $1400 a month…

Take the cash… Netting around 230k… not taking into consideration of taxes, expenses etc… which you must…

Your current Cash on Cash return is only 7%… Actually a little less if you consider expenses…Can you place the cash at higher returns… I know I can…

At 10% you’d be getting close to 2k a month…
At 15% you’d be getting close to 2800 a month…
At 20% You’d be getting close to 3800 a month…

And you could probably do better than that…

David Alexander

CAn you 1031 a rental property? - Posted by Dave

Posted by Dave on March 03, 2002 at 19:14:37:

Hi Rolfe,

I know that you can 1031 owner occupied, but is it possible to do the same on rentals?



Re: Depends… - Posted by Dave T

Posted by Dave T on March 02, 2002 at 23:21:21:

Please explain how you calculate Bill’s cash-on-cash return at 7%.

If he purchased the property three years ago for 165K and has a current mortgage balance of 150K, then he has only 15K invested in the property (let’s disregard closing costs for the purposes of this discussion).

If he is “netting” 1400 per month, then Bill’s annual cash flow is 16800. When I divide this cash flow by his 15K investment I calculate Bill’s cash-on-cash return as 112% (pre-tax).

Where did I go wrong?

You can NOTsection 1031 a personal residence… - Posted by David Krulac

Posted by David Krulac on March 03, 2002 at 21:01:43:

only investment real estate, including rentals, vacnat land, commercial, residential.

You can’t 1031 personal residence or second vacation homes, but the $500,000 tax free capital gains for a personal residence is a better deal for most people and a lot less complicated.

David Krulac

Re: Depends… - Posted by Chris-Fl

Posted by Chris-Fl on March 03, 2002 at 12:15:42:

I think how Dave was trying to explain it was if he has 230,000 in equity and he’s bringing in a cashflow of 16,800 a year. He is earning about 7.3% return (16800 divided by cash or buying power) on total cash, or buying power, which in this case is 230K (380K - 150K). If he were to move that 230K into an investment that is bringing in say 10% he’d be making 23K a year (230 X .10) instead of 16,800. Now imagine if he could earn 20%? or 30%? It is possible to earn that and much more with the proper leverage and investment.

What I took from Dave’s post was that if you don’t mind earning 7.3% a year on your money then stay put. If you want to increase your cashflow or annual return… move the monies over to something that will put you in line with your goals.