Dave:
How do you know when to sell a successful property or should you hold on to successful properties or refinance them? This is one of the most common questions that I get these days, and as I was thinking about how to talk about this on the podcast, it actually occurred to me that I have a property that I am about to go through this process of thinking through. And I’ve invited on Henry Washington to join me to actually just talk through this property and this problem, this challenge, this question that I’m facing in real time. And although we were going to talk about one of my portfolio properties, I think this conversation is going to be super helpful to everyone because it helps provide a framework for thinking through the best way to use your money and to optimize your portfolio over the long run. So Henry, welcome and thanks for helping me out on this portfolio management question today.

Henry:
First and foremost, this is really cool because a lot of investors either have faced this problem or will face this problem in the future, and I believe people need to be analyzing their portfolios at least once a quarter. But selfishly, this is fun for me. I love spending other people’s money. So let’s talk about how I would spend yours.

Dave:
I’m nervous now, but let’s do it.

Henry:
Alright, so first things first, Dave, tell us about this property.

Dave:
Well, it’s my former primary residence as you might know in 2019. About five years ago, my wife got transferred to Amsterdam for work. So we moved from Denver, decided to rent out our primary residence. We bought it back in 2016 for 460,000. It’s in a great neighborhood, been very fortunate. It has appreciated. I think it’s worth conservatively like seven 50. I sold the property just down the street for 800, but that was in 2022, so it was a little bit hotter then. And right now I’m renting it out for 34 50. I’m getting probably on average 500 bucks a month in cashflow after really truly all the expenses. I have a really good interest rate on it, refinance in 2020 to 3, 8, 7, 5, and so it’s a solid rental property getting six grand a year in cashflow. But as I just mentioned, I’m sitting on a lot of equity, which is a good problem to have, but it sort of brings up the question if I’m using my money efficiently.

Henry:
Yeah, well, I mean, yeah, you’re sitting on about $300,000 worth of equity. And so one of the things that I typically ask people when I’m faced with questions like this or when they ask me questions like this is what are your real estate goals over the next one to three years? Because your goals should dictate what you do with your current portfolio or how you choose to grow.

Dave:
That’s a great question. So basically I split up my investing into three different buckets recently. So I do long-term rentals, I still buy long-term rentals, mostly in the Midwest now. Then I invest sort of passively in larger value add types of projects either in syndications or passively into flips. And then I’ve started doing some private lending over the last couple of years. And so I keeping it sort of a third, a third, a third roughly. And so if I did sell or refinance this, I would want to fill up that bucket of long-term rentals, so more low risk kind of cash flowing properties, but I don’t need ’em to cashflow today. I buy rental properties because I want to 10, 15 years from now to have them mostly paid off and to have a solid income that I could replace my full-time job from.

Henry:
Okay, so said differently, you would sell this or you would cash out of this and essentially take that money and buy more cash flowing assets. It’s not like you take that money and use it to go lend more money.

Dave:
Yeah, I think that’s sort of what I would think about doing here.

Henry:
Okay, well that’s good information. I obviously am going to have more questions, but as I see it right now, you’ve probably got about four options. There’s probably a couple of more, but typically they’re going to fall in these four buckets, which would be one, you could keep the property but try to increase the cashflow or monthly return that you’re getting. You could look to refinance that property, which would give you access to some cash that you could use to go and buy more cash flowing assets. Or you could sell the property just straight, sell it cash out of it, and then use that money to go invest in more properties. And lastly, you could change the strategy. So maybe you could convert this property to a different rental strategy that might produce more cashflow for you.

Dave:
Yeah,

Henry:
So let’s talk about a few of these options. Sound good?

Dave:
Yeah, let’s do it man.

Henry:
Alright, so starting at the first one, keeping the property but trying to get a better return. How do you feel about that?

Dave:
So I think there’s two parts of this. Can I get a better return? Probably a little bit. I think I could get rents up a bit higher. There’s actually a two car garage at the property that I don’t rent out because I have, again, I never knew how long I was going to stay in Europe, so I kept a car there. So I actually have a car sitting there and just some stuff so I could clear that out and rent it out. And I think that could raise rents a hundred bucks, 150 bucks a month. So that would help. But it wouldn’t really fundamentally change the math here. I think the biggest question to me is, should I hold onto it for future appreciation? Denver has been great for appreciation and I guess maybe I’ll just explain to you a little bit about the neighborhood.
Denver a couple of years ago, built this light rail from downtown to the airport as this big project, super successful. And as part of that, they announced that they were going to basically convert this entire street into this really cool park. And so the only time I’ve ever been not so lazy and called around to find off market deals was because I was like, I got to get a house on that park. And so my agent found out where they did eminent domain, he found out exactly where the lines were and I just called people on the line and got someone to sell me that house. That park is built now. It’s awesome. It’s obviously helped increase the value of the property and there are some more plays that can happen there, but Denver’s pretty flat these days. Rent growth is flat, housing prices pretty flat. Multifamily is overdeveloped there. And so I’m not feeling great that I’m going to get some huge appreciation boost in less, not in the next year or two at least.

Henry:
So you’re just assuming your average to national average increase in home value?

Dave:
Yeah.

Henry:
Okay. And in terms of rent, you don’t think there’s much more you can do there? You’re at the max unless you get a little creative and rent out a garage space to an existing tenant or something like that?

Dave:
Yeah, I don’t see it going up that much more.

Henry:
Okay. The other question is, considering that you are considering tapping into some of these funds in order to buy more cash flowing properties, if you got rid of this property, which would, and in my opinion refinancing it or selling it is technically getting rid of your cashflow, you’re going to refinance it at a higher price point, which means

Dave:
Yes, I’ll

Henry:
You’re going to kill your cashflow. What’s the cash on cash return you’d be looking to get in comparison to what you’re getting on this property?

Dave:
Yeah, so let me figure out what the cash on cash return is because you said it. So I owe 3 92. Let’s just round down and say after all the selling costs, I clear 700, right? So that’s 3 0 8. So I’m only making this is not good number 600 grand divided by 3 0 8, that’s 2% cash on cash returns. So I could do better than that. I could do better than that. Some of the Midwest rentals I’m getting after rehab stabilize ’em 8%, something like that right now. But I think those properties have as good of a chance of appreciating and actually at least one of them I bought is much better a chance of appreciation.

Henry:
So obviously if you go to refinance this or you go to sell it, you can take that capital and you can go buy more properties. How many properties would you be looking to buy based on the amount of money you could access on a refinance?

Dave:
So the way this math works, I’ll just sort of do it out loud for people, is if I think this property is worth seven 50 and that’s what it would appraise for, I as an investor now have to put 25% down and so 25% down would be $187,000 and my equity was 3 92, so I could pull out roughly 200 grand, let’s call it. So I think given the four units I’ve bought in the Midwest this year, I could probably do that again, four more units roughly. I would basically be repeating two similar deals and at that rate I would be increasing my cashflow on that 200 grand to let’s call it 9,000 a year. But I would’ve to subtract the negative cashflow because raising my interest rate would probably, and pulling out the equity would probably make my cashflow on this property in Denver go negative.

Henry:
Absolutely. Yeah, I don’t see how it wouldn’t go negative if you were to refinance. That’s why I don’t really love option two for you either. So keeping it as a rental, no, not bad, but not great refinancing. This is my least favorite option so far is refinancing.

Dave:
The only thing I like about this deal right now is that interest rate. And so if you refinance it, I hate it. I don’t hate it. There’s nothing very attractive about it anymore So far Henry and I have talked about option one, which is keeping the property. Option two is refinancing, do a cash out refi for the property. We are going to take a quick break, but after that, Henry is going to walk me through the third and fourth scenarios he talked about, which was selling the property or converting it into a different strategy. We’ll be right back. Hey everyone, I’m back here with Henry Washington. He’s helping me out with a portfolio management question. We are talking about my former primary residence and Henry, I think you were about to ask me about the third option you proposed, which was potentially selling this place.

Henry:
Yes, that’s right Dave. We’re here to talk about option three and that is selling this property. So if you were to just say, you know what, I’m going to stick this thing on the market, what do you think it would sell for? But more importantly, what do you think you would net And that’s before taxes.

Dave:
Yeah, so I think that I would net 700. It’s just kind of maybe a little bit, probably around 700 because I think the value is about seven 50. I sold a very similar house down two blocks away
For 8 0 5, but that was in April of 2022. So time that one. Well, and I think it’s a little bit softer in Denver right now, so I would think 7 50, 7 60 commissions spend 1520 grand cleaning it up, I’d say 700 and then my loans at 3 92. So what does that come out to? Yeah, 3 0 8 was the number I was using before and I’d probably do a 10 31 or I think I would mean maybe we need to talk about that. That’s my assumption. If I’m going to put it into another rental property, I’d probably do a 10 31.

Henry:
Yeah, so that was going to be the next question is obviously there’s going to be capital gains taxes, right? You haven’t lived there two out of the last five years since you’ve been in Amsterdam,

Dave:
Correct? Zero of the last five

Henry:
Years. Zero of the last five years you’ve lived there. And for those of you who don’t know you as an investor, if you sell a property that has gone up in value, if you have lived there two out of the last five years, you actually do not have to pay capital gains taxes. But since Dave has not lived in this property to out of the last five years, he would have to pay long-term capital gains, which is at what percent right now

Dave:
I think it’s 20%,

Henry:
So not terrible, but it’s a chunk of change when you’re talking about putting $300,000 in your pocket. So yeah, your options are sell it and 10 31 or sell it and not do a 10 31. Here’s my unpopular opinion about 10 31 exchanges is I don’t love them.

Dave:
They’re so stressful, I’ve done them, they’re so

Henry:
Stressful. In theory, they’re amazing, but in practical application, oftentimes they’re not executed well because what happens is you get yourself into a time crunch. Do you want to talk about the time windows that you have in a 10 31 exchange? Real quick?

Dave:
I think that the rules, and I will look this up as I’m talking, is that you need to identify the properties that your replacement properties within 45 days, which is tight, and then you have to close on them within 180 days. So closing’s actually not hard at all,

Henry:
Correct?

Dave:
It’s that you have 45 days to find, negotiate and put under, you don’t actually have to put them under contract, but in practice you kind of do have to put them under contract to make it worthwhile. That could be stressful, especially in a really hot market. Now it’s a little bit cooler, but it still is stressful.

Henry:
And the other hangup with that strategy is not only do you have to stick to this time window, but you have to be buying something of value or higher. So that property has to be a more expensive property or a more valuable property than the one that you are selling. Now you can package properties, so you can buy a couple of them in the Midwest, but what I find often is because of the time crunch and because people are so scared about the tax hit that they’re going to take is they go and they buy something that’s not necessarily the greatest of numbers because they’d rather avoid paying the capital gains taxes than to wait around and find a deal that financially makes the most sense. And so I would just say that if you choose the 10 31 strategy, you’re going to have to truly find something that works or else you could end up still paying that money. You’re just now not paying it in taxes, you’re just paying it in less cashflow because you bought a deal that doesn’t make as much financial sense.

Dave:
Yeah, that totally makes sense. I’ll also add one other rule is that you have to take on as least as much debt too. So you can’t with a 10 31, just like I can’t just buy a property for cash. That was something I would think about with a 10 31. If I could just buy something for 300 grand cash, that would be great and then I would refinance it later, that would work. But that’s not allowed under a 10 31. And the story I was going to tell is from 2018, things were just going so crazy in Denver, I did a 10 31 and I was like, you know what? Even if I have to do a okay deal, the market had such strong tailwinds and I was so confident in them. I was like, it’s fine, even if it’s not the best cashflow market I was buying in a great neighborhood that worked out great, I don’t feel that confidence

Henry:
Anymore. So still given that tight time window, I still think this is the best of the options we’ve talked about so far for you.

Dave:
Same

Henry:
Another option to think about in terms of taxes. Now I’m going to give the caveat that we are not tax professionals. Please consult a tax professional before you make any decision like this. But there’s also the option of just selling it, not doing a 10 31, but then buying rental properties that are currently in service, meaning they’re not properties that you have to do a big renovation on, they’re actually ready for tenants and you can put them in service quickly. And by doing that, then you can do a cost segregation study on that property. And that cost segregation study can help you offset some of the capital gains taxes that you will have to pay when you sell.

Dave:
Yeah, that’s true. I would need to think a little bit more about what the 10 31 versus not strategy, but I agree so far selling is the best option of the three. And I don’t know, let me just ask you. So many people say that they buy properties and never sell. You don’t believe that, right?

Henry:
You

Dave:
Know

Henry:
What? No, I don’t believe that. And I would love to be that old guy in 20 years that’s like, I never sold anything I bought and you should never sell it. It sounds all that sounds amazing. Until you need money and you have to sell something, it’s a business that needs funds and holding properties. As we are discussing here, it’s not big bucks. We’re talking about being a landlord, we’re talking this $750,000 properties making you $500 a month. You need to be able to turn real estate to make money.

Dave:
Yeah, absolutely. I bought this deal not for cashflow, I bought it to live in and I thought it would appreciate it, appreciated. It’s done, its job very well. Thank you. Need to use that money for a new job.

Henry:
Alright, we’ve covered three options so far, which is keeping the property, refinancing the property and selling the property. And the fourth option we have here is converting the property to a different strategy like a short-term rental or a midterm rental. This can seem daunting, but from a portfolio perspective, what I like about an option like this is it forces you to look internally within your current portfolio to see if you can find returns similar to what you might get if you were to sell, but you could get them in your same portfolio. So what do I mean by that? I have a duplex right now that is a long-term rental and it does fine as a long-term rental, but we have recently had three short-term rentals that we converted to midterm rentals and they are kicking butt.
And so instead of us going and buying another duplex and using it as a long-term rental, we looked internally within our own portfolio and said, what do we have that we could convert to a different strategy and increase the cashflow? So we’re taking that duplex, we’re going to furnish the units, and then we’re going to put them up as midterm rentals and take the rent from $1,200 a month up to around 3,500 to $4,000 a month based on what we’re doing in our other units. And so it’s going to cost us some money, probably around $10,000 to furnish the property, but that $10,000 is going to net me a much better return in terms of monthly rent than if I were to go take that $10,000 and try to buy another property with it. And so I’m not saying it’s the best strategy, but I’m saying it’s worth a look into your portfolio to see if I just spend a little money on this property, can I increase the return from two to 3% up to 8, 10, 11, 12% cash on cash return without having to get rid of the property or tap into the equity?

Dave:
Right. Yeah, that’s a great question. So I actually, I looked into this a little bit in Denver, there is a ban on short-term rentals unless it’s your primary residence. And although this is technically mine, I do plan to buy a new house as a primary residence soon. And so that is not the spirit of the law and I’m not going to mess around with that, so I can’t do that. Mid-term rental is kind of interesting and I do think I could probably get rents from thirty four fifty to let’s call it 3,800 in a really good location.
It’s really nice because it’s right near the train and it’s also walking distance to a lot of offices and stuff. So if people are there for corporate work or you just wanted to come work out of Denver, it could be appealing. The problem is just logistical and my, it’s not laziness. Sometimes I joke that I’m lazy, it’s just operational. My property manager doesn’t do midterm rental management, and so I don’t know if I want to another one, I already have a short-term rental manager in Colorado. I have a long-term rental manager in Colorado. I don’t want a midterm rental manager in Colorado. It’s just a lot of work I guess I would consider it, but that is sort of the one reason I would second guess it.

Henry:
Yeah, well, I don’t know if that reason is financial reason enough for you not to consider this option, but I would say that if you’re only going to go from 34 up to $3,800, then it’s definitely not worth it. I think if you’re going to go from a long-term to a short or midterm strategy, you need to be two to three X-ing what you’re making per month for it to make sense because your property management for a midterm is going to cost you a lot more than 8%

Dave:
And you’re going to have vacancies. Yeah, it’s going, if you spread out 3,800 over 12 months, I might lose money. So I don’t know. It’s also, I’ve thought about can I put a dad an A DU? But it’s a pretty small lot.

Henry:
That’s a lot of work.

Dave:
So out of all of these, I’m kind of liking in selling the property to be honest.

Henry:
Yeah, I mean after reviewing that, again, I think the only getting about a $400 a month boost by curing it to a midterm definitely isn’t enough. So I would say that takes this option off the table for you. Now, for somebody else in a different market, that may be a very wise thing to do, but in your market you’re not going to get that return. So I don’t like that option for you either. So that leaves us with the option to sell it. But what if there was a fifth option, a super secret ninja fifth

Dave:
Option? Oh, an Easter egg. Yeah. What is it? Easter egg option? Are you going to buy it for

Henry:
Me? I am absolutely not going to buy Dave’s property, but after the break I am going to give him some more advice on what he could as a super secret option. Number five, we’ll be right back and we’re back with Dave and we’re about to dive into a less likely option that people should be thinking about as they’re analyzing their portfolio.

Dave:
I’m on the edge of my seat. You made me wait through the whole ad break.

Henry:
One of the things people don’t think about when they think about tapping into their equity of a property a lot of the times is they think refinance, but that’s not your only option. You can also tap into the equity of a property by getting a line of credit against the equity. And what I like about this strategy, the old HELOC strategy, is it does not require you to get a new loan at a higher amount. You keep your current mortgage payment, but you can access the equity. And so would the bank would essentially take a look at the property, do an appraisal, and then if they say, Hey, the property is worth 700 and you owe 400, you’ve got $300,000 of equity, we’ll loan you between 70 and 75% of that equity on a line of credit. And so you could then access that line of credit, but you don’t have to use it all. You could literally only use what you need now, you will be paying interest only payments on the money that you use, but if you factor that into your underwriting of the property that you’re buying, you can technically have that property work to pay back your line of credit through the return that you’re getting over the first couple of years. And then once that line of credit’s paid off, then your cashflow increases substantially.

Dave:
I kind of like that idea. What are HELOC rates right now just so we can talk

Henry:
About that? I bet they’re about a point above prime.

Dave:
So eight and change right now. Probably we’re recording this towards the end of November. Honestly, for a rental property, no, that’s not that bad, especially when I’m thinking about this is if you remember, the original scenario here was I could probably get the rent up a little bit if I cleaned out that garage and did something with it. So if I got a little bit more rent and then did a heloc, then I’m getting, I’m going up to seven grand a month, and then if I can earn money above and beyond what I’m paying an interest on that heloc, then this becomes interesting and give myself potentially some upside here in Denver. So there’s basically this just long shot appreciation play that I’m kind of holding onto.

Henry:
Yes, that’s what you’d be betting on.

Dave:
So right across the park, there’s this old industrial site, which every developer now just salivates at these old industrial sites, and it’s incredible. It’s this amazing beautiful old property, but the financing always falls through, and I kind of just, I know if it gets built, it would be one of these mixed use developments with retail and restaurants and it would be super cool, but I’m losing my patience on it. But this might be a good hedge where if I’m earning seven grand a year in cashflow and I could wait and see if in the next cycle this is realistically going to happen, maybe I’d take that bet. But I don’t know, maybe I think I’ll have to do the math on selling versus a heloc. Those feel like the two right options here.

Henry:
So here’s my personal opinion based on this is based on what I know about you and your goals in your portfolio. In other words, this may not be what anybody else in this situation should do or what I would recommend. I don’t think that you, Dave, are in a position where you need $300,000 in your bank account. I feel like it would be nice, but you’re probably surviving just fine. So I feel like you taking a very educated gamble, air quotes on appreciation while still being able to meet your goals of buying more cashflow seems like a good option for you versus just selling it. Now, if somebody was in a position where the cash is much more needed for them, then selling, it’s probably the best option in that situation. But it sounds like you can reach your goals, keep your property, keep your cash flow, and hopefully get even more appreciation in the next one to five years.

Dave:
So

Henry:
If it were me, that’s the option I’d pick.

Dave:
I do like that. It’s because I think it would change if all of a sudden in the Midwest or some came up where it was a screaming deal and I wanted 300 grand, but they’re better cashflow deals. But like I said earlier, I think depending on the deal in the Midwest, they have an equal opportunity to appreciate in the next couple of years. So maybe you hedge a little bit and spread it between the two. And although Denver’s been flat, I do think Denver’s one of these markets like Austin and Boise where it’s like it got oversupplied, it got too hot, it’s still a popular city, it’s a great place. I still think that it’s going to grow in the long term. There’s a lot of job growth there, and so I do think it’ll pick back up, but it might take a couple years.
Well, thanks again, man. I really appreciate it. This is really great information and hopefully for all of you who own properties, you can see some of the thought process and the math that goes into this equation because a lot of people ask me this question, I don’t know if you get this too, Henry, but they haven’t done any of the math or really considered what they would do with the money if they sold. And that’s really the whole game, right? At least to me it’s just opportunity costs. Yes, it is cost. I am making money on this property, but it could be costing me something because it’s not the most efficient use of my money, but I only know that because I’ve run deals in other markets to see what else I could be doing with that money.

Henry:
And I think the cornerstone of being able to answer this question appropriately for yourself is having a good understanding of what your short-term and long-term goals are. I think a lot of time people make decisions and they don’t necessarily have their goals mapped out or flushed out, and that could cause you to make a decision that you end up regretting later on when you do finally flush out your goals and so said differently. I don’t know that you have a terrible option here with this property, which is a good position to be in, but you’ve got to have your goals mapped out and know where you’re going so that you can make very educated decisions with your portfolio that are going to help you get to your goals faster. I mean, you’ve essentially got this property, which is giving you a big stepping stone into getting to your goals faster, but you’ve You’ve got to leverage it the right way.

Dave:
Totally. Yeah. And it just goes to show, although people say, Hey, you shouldn’t buy a primary residence, bad investment, it can be a good investment. You do it

Henry:
Pretty awesome

Dave:
Estimate. Yeah, it actually could work really well. I don’t know if you’ve done this. I know James, our friend James Danner has done this too. If you buy your primary residence, it can be a great stepping stone, especially given the tax benefits Henry was talking about before too.

Henry:
I bought my property in 2020 right before the market popped off. I have a 2.3% interest rate.

Dave:
No, are you serious?

Henry:
Yeah. And about $300,000 of equity myself. So I love this buying.

Dave:
Never get rid of that 2.3. That’s like an heirloom you should pass down through your family.

Henry:
Absolutely. That’s the new family heirloom.

Dave:
Yeah. No watch, no jewelry, anything. Just pass down your 2020 interest rates to your daughters. All right. Well thanks again man. And thank you all so much for listening. We’ll see you again soon for another episode of the BiggerPockets podcast.