When to sell rentals? - Posted by Stephanie

Posted by ron on March 10, 2006 at 21:09:08:

yes everyone is right in their own way
yes or no depends on too many different things

When to sell rentals? - Posted by Stephanie

Posted by Stephanie on March 10, 2006 at 18:38:48:

I currently have 4 rentals. If I sold them right now I could just pay off all my debt other than the 1st on my house. This debt is around 120k (normal stuff, student loans, heloc for buying property, car). Is it wise to have debt while building wealth through equity. My thinking has been that if I pay off the debt I have by selling my rentals I gain cash flow each month that won’t disappear due to a blown furnace (debt cost approx $1000 each month, mostly int only). But ultimately I want to flip properties for cash flow now, and own some rentals to build wealth for retirement. But since it is so hard to find places that cash flow am I foolish to think about selling ones that break even or a little better right now? Any thoughts would be appreciated.

Btw, I do rehab and flip properties right now. I could continue that until I pay off my other debt. But the plan above would accelerate the debt payoff by years. Thanks for any feedback.

Re: When to sell rentals? @ death. - Posted by John Corey

Posted by John Corey on March 13, 2006 at 03:55:41:


There is no good time to sell that applies to all investors. It is a personal decision based on personal circumstances.

  1. You say you want to build up the rentals for retirement. You note that the present 4 rentals cash flow but it is otherwise hard to find properties that will cash flow.

  2. You talk about being able to buy and sell short term after rehab or just as a quick flip. You pull out lump sums of cash that you can build your nest egg with, pay living costs or pay down the debts on the other rentals.

  3. You appear to think that being debt free is somehow a goal. As it does not mean you will have an income in retirement and you can not spend the ‘lack of debt’ I speculate this is an emotional need rather than part of a rational plan.

Debt is not good or bad. Lack of debt is not good or bad. Someone noted that if you are debt free you can get a job at McDonalds and pay the bills. Focus on what they say. You get to keep working. You need to work to pay the bills. This does not sound like building a passive income to support you in your retirement (or an income with which to quit working early before you ‘retire’ as some people feel retire is not the objective).

Figure out what your goals are. Both the numerical ones (X income from passive investments) and the emotional ones (travel, free of property management might be emotional ones).

Then make a quick list of all the possible ways to get there. The focus is being creative on finding possible solutions. Brainstorm.

Next think hard about the options, the implications of the options, which ones can be combined, which ones seem easy but do not help much vs. the hard ones that might be the best path to the eventual goal.

You said very little about the present details (rental income, rental expenses, who does the management, type of property, local market conditions). With thin facts my position would be…

  • Keep the rentals. You said they cash flow.
  • Avoid paying any tax or incurring any costs associated with selling. Don’t sell is the first suggestion.
  • If there is a good reason for selling the present properties (property that does not cash flow is a good property to sell) then focus on a 1031 exchange so you limit the tax impact. You still have the costs of buying and selling so you still have substantial transaction costs.
  • Figure out what you are good at and hire out the rest. Definitely hire out things that make you worry or otherwise distract you from finding more profitable deals.
  • Commit to the long haul. This is not a sprint.
  • Focus on your short term deals to generate short term profits. Declare all the income correctly so your tax records can be used to support loan applications. Use some of the lump sum profit as a cash reserve for the rentals so you do not have issues if 1 or more go vacant for a month.
  • Forget the debt. It is a tool. The tenants pay for it anyway if the units cash flow. Over time the rents can pay off the debt. Assume zero appreciation. With positive cash flow the rents can pay off the place so you have it F&C. That is a conservative retirement model. Appreciation just makes it better.

Note there is a limit to how many rehab and flips you can do at any one time. The constraint might be money. Even if it was not money you run out of time or deals at some point. Hence the rentals or some other way of creating passive income is going to be needed before you can take a day off or retire.

People can create retirement income without real estate. I have been assuming we are focusing on RE so I did not factor in other options for a retirement income (marry rich, wealthy relatives, win the lottery, work for a company that will honor their pension commitments, become a Warren Buffet in the stock market, die before retiring, join a start up that has a successful IPO and where you are an early employee so you have lots of options, etc).

John Corey

As to the subject line. If you sell after death the next party gets the property at the stepped up basis. You use refinancing to access the increased value before death. You can 1031 your way to completely passive RE that provides a steady income (but little capital growth so best done when you are ‘retiring’).

Re: When to sell rentals? - Posted by Larry

Posted by Larry on March 11, 2006 at 18:45:00:

I would sell them and pay everything off. This is probably the top of the market. You can’t be sure that in a year from now you will be able to sell them for enough to pay off all debt. Buy more rentals when the market drops and you are debt free. Just my 2 cents. When you are debt free you can live on McDonalds wages if necessary. It is a good feeling. Then you will be in a far better position to grow your business. Besides with only 4 rentals it is not like you are back tracking that much. When the market corrects you may be able to pick up 4 more rentals to replace those in a single month.

When they’re Vacant (nt) - Posted by Benny

Posted by Benny on March 10, 2006 at 23:59:37:

When they’re Vacant (nt)

When they’re Vacant (nt) - Posted by phil

Posted by phil on March 10, 2006 at 23:09:17:

When they’re Vacant (nt)

Re: When to sell rentals? - Posted by ron

Posted by ron on March 10, 2006 at 19:11:06:

do you really really need the cash flow right now?

if you want the flip side and decide to hold them, read missed fortune , that book by doug andrews you’ll want to hold them.

Re: When to sell rentals? @ death. - Posted by Stephanie

Posted by Stephanie on March 13, 2006 at 10:27:49:

I should have mentioned that the 2 that I am really strongly considering selling are on a 5yr int only ARM. That is the only reason it cash flows. If and when I have to refi it will not cash flow at all. They are also not in the greatest areas of town (1 is just about a war zone). The debt that I was going to pay off with the sale is bad debt. It is student loans that I only pay int only on right now, a cheap car, and the second on my home that was rolled into my heloc. The money on my heloc eats up a good bit of the heloc which keeps me from having the moey to buy other properties. Part of my plan was to free up my heloc so I can use it to buy other properties and flip them, pay the heloc back off, bank some money and be able to then invest that money in rentals that are in nicer areas. My debt payments are around $1000 a month and that is just int only. So it is a financial reason that I want that debt gone not just an emotional one. That debt is making it difficult for me to get favorable financing, even with high fico scores, because of high dti. I want the rentals for long term investments, but I do not beieve that in my area there will be any great appreciation over the next year or 2 that I will be missing out on.

Re: When to sell rentals? - Posted by John Corey

Posted by John Corey on March 13, 2006 at 02:47:15:


You speak as if there is 1 national market and that every location is peaking. Some markets have not seen much of a rise in the last 5 years, easily cash flow and are otherwise far from a peak.

It could be argued that interest rates matter but one can not conclude that the market for RE is at a peak in all markets. The original note did not indicate what market we are talking about or the real details concerning rents vs. prices, etc.

I agree that being debt free might feel good to many people. I am not sure that being debt free is aligned with being successful as a RE investor. I think (personal opinion) that the key indicator is cash flow and not the debt levels. Second would be cash reserves to deal with the unexpected when the cash flow changes.

As to buying replacement units when the market corrects. This assumes two things that are largely incorrect. Many corrections are not corrections in the true sense of buying opportunities. Housing tends to hit floors where homeowners choose to stay put rather than sell at a low price. If an investor wants to buy at a discount then it is a matter of looking for motivated sellers rather than wait for a market correction (there has not been a national correction since WWII - national figures are also misleading).

Second, selling at a peak and buying later is not wise when the transaction charges and tax impact are high. The true cost of getting out and then back in will easily eat up most market adjustments. If there are taxes owed then the situation is even worse.

Market timing for RE is not a useful strategy. High overheads, taxes and slow market movements lead to a buy and hold strategy if one wants to own rentals. Let the tenants pay the costs and forget trying to time entry and exits. Use refinancing as a way to access the equity. If someone else will pay all the holding costs and the government provides tax benefits then selling is not very attractive. Sell when you are sick of rentals. Better yet to trade to another type of property rather than sell and recognize the tax bill.

Th Market timing for RE is a fools game compared to investing time in finding better deals and organize better financing. Market timing can work well in sectors where the liquidity is high, the transaction costs are low, the carry costs and lack of leverage ties up capital and there are few tax advantages to long terms holds.

John Corey

Re: When they’re Vacant (nt) - Posted by phil

Posted by phil on March 11, 2006 at 24:00:29:

There’s an echo in here.

Re: When to sell rentals? - Posted by Larry (OH)

Posted by Larry (OH) on March 10, 2006 at 21:28:49:

Of the many re books I have read this is by far the Biggest piece of crap I have read.

Re: When to sell rentals? - Posted by John

Posted by John on March 10, 2006 at 20:37:24:

if you want the flip side and decide to hold them, read missed fortune , that book by doug andrews you’ll want to hold them.

Huh? What the heck are you saying? What does Doug Andrews suggest? Not that any one author knows anymore than any other.

Re: When to sell rentals? @ death. - Posted by John Corey

Posted by John Corey on March 13, 2006 at 11:45:52:

The two that do not cash flow very well and are in a difficult area are not really rentals but problems. They likely made little sense as rentals when you purchase them. As Larry noted they sound more like long term flips. A rental in my books pays for itself and leaves extra every month to fund unexpected things. Assume about 40% of the monthly estimated income being used up for vacancies, management, repairs, etc. If the property cash flows with a 40% allowance for expenses then keep the property.

Stepping back from the buy or sell conversation.

You dug a hole with the debt. Maybe the school debt was money really well spent. It does not matter now. You have a hole. How about just working your way out by doing more flips until the profits have filled in the whole?

Make the decision to sell the rentals based on what is best given the rentals. From the way things were presented this sounds like selling 2 and keeping two. Fix the debt problem by earning more income.

The DTI is a temp problem. When you buy a few more rentals you will bump into other reasons why lenders do not want to work with you. That does not change the quality (or lack of) when it comes to a particular rental.

As noted by Larry and myself, consider a 1031 is you decide to sell. Just expect that when you do a 1031 you will not be freeing up cash for other debts.

If it is not clear the transaction costs from buying and selling are not your friend so when you have a rental worth keeping it makes little sense to sell it now with the idea that you will find another later.

John Corey

Re: When to sell rentals? @ death. - Posted by Larry

Posted by Larry on March 13, 2006 at 11:00:00:

That does make things easier. If they are on a int only ARM you must have bought it assumming you were going to have to sell it before the 5 yrs were up. You basically did a flip just a little longer period of time and less taxes to pay. At the right price I will buy in just about any area. As long as there are comps supporting that the place will resale in a timely manner I make my minimum profit. But not for rentals. Avoid these areas like the plague for rentals. These type of areas are the reason for so many burned out landlords. Your 2 choices would appear to be to 1031x into a better neighborhood. Or sell and pay off your debt. But if the latter will allow you to free up money to allow you to buy more properties, plus get yur dti to where it is easier to buy, that is certainly not a bad idea. There are some who believe that you should never sell rentals. I believe there are times when it does make sense. And definitely times when it does not make sense to own them in the first place.

Re: When to sell rentals? @ death. - Posted by Amory

Posted by Amory on March 13, 2006 at 10:45:06:

If they are in bad areas and you have hit somewhat of a wall because of your debt it seems like a no brainer. I would sell.

Re: When to sell rentals? - Posted by Larry

Posted by Larry on March 13, 2006 at 10:37:49:

I am well aware the you look for motivated sellers not wait for a market correction. I have been finding them throughout the re boom. But it is a lot easier to find motivated sellers, and therefore better deals, when the market corrects itself. And you are right that it depends on the market. But if she lives in a market where it has topped out for a while, and she has a lot of debt it may be a good thing to sell. For example, getting rid of debt that costs you 1k a month is 1k a month of extra cash flow. It will not dissappear because of a busted sewer pipe, it is guranteed you will not have to pay the 1k that month or any other. Sometimes backing up and getting things in order will allow you to take off and accelerate your plans. Also with a lot of debt, very little cash flow, and not much money in the bank is not the time to build up a portfolio of rentals. I believe you are much better off stepping back getting things under control, flipping some properties and using that money to get cash flowing properties in good areas.

Re: When to sell rentals? - Posted by ron

Posted by ron on March 10, 2006 at 21:33:19:

why did you think so?

I didn’t think so at all
I did think the last 100 pages on insurance was boring

Re: When to sell rentals? - Posted by ron

Posted by ron on March 10, 2006 at 20:44:18:

he talks about keeping zero equity in the property
read the book

some authors know way more than others, not sure what your statement means

Re: When to sell rentals? - Posted by John Corey

Posted by John Corey on March 13, 2006 at 11:50:22:


If we both go with your suggestion about flipping then I suggest that no rentals need to be sold. You wrote: “flipping some properties and using that money to get cash flowing properties in good areas”

I would look to get out of the 2 rentals that are in tough area as tough areas are too management intensive for rentals. I would expect that the flipping can solve the debt issue with no extra transaction overhead or other tax impact beyond what a flipper already pays.

John Corey

Re: When to sell rentals? - Posted by John

Posted by John on March 10, 2006 at 20:56:51:

I didn’t mean anything about that specific author. Just that for every author you can find that supports one way of doing things, you can find just as many that oppose it and support the exact opposite.