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Rental Question - Sale or Don't Sale

1,024 Views | 5 Replies | Last: 6 yr ago by gvine07
Precision Timepiece
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Question for you other investors:

I have two duplexes (four doors) that I want(ed) to sell.

They went under contract in early August with a late August closing date. The closing was going as planned and then Harvey hit. No problem, we'll push the closing back - I'm in no hurry nor is the buyer. I call the buyer and tell her to extend the contract through the end of September.

Last week, the lender makes a small change to her terms that I'm not sure the buyeris thrilled about. It's not a deal killing change, but a change nonetheless. I inquired to the buyer last week if she's still interested the deal in light of the new change. I haven't heard back from her nor have I been presented with an extension.

I made the decision to sell after a slough of repairs that came through, dealing with jammed up A/C's, etc. and had had enough of other people's problems. I threw a fat number at the buyer and he offered 96% of it. Game on.

In the meantime, I'm having second thoughts about selling them. I currently clear about $900 each month after PITI. Based on my rents, vacancy rates, expenses, etc., the sales price I agreed to is about 3% above market value (Value = Income/10% cap rate).

If I sale, I'll make about 26% in a 30 month time frame.

What do you do?
Bitter Old Man
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AG
Precision Timepiece said:

Question for you other investors:

I have two duplexes (four doors) that I want(ed) to sell.

They went under contract in early August with a late August closing date. The closing was going as planned and then Harvey hit. No problem, we'll push the closing back - I'm in no hurry nor is the buyer. I call the buyer and tell her to extend the contract through the end of September.

Last week, the lender makes a small change to her terms that I'm not sure the seller is thrilled about. It's not a deal killing change, but a change nonetheless. I inquired to the seller last week if she's still interested the deal in light of the new change. I haven't heard back from her nor have I been presented with an extension.

I made the decision to sell after a slough of repairs that came through, dealing with jammed up A/C's, etc. and had had enough of other people's problems. I threw a fat number at the seller and he offered 96% of it. Game on.

In the meantime, I'm having second thoughts about selling them. I currently clear about $900 each month after PITI. Based on my rents, vacancy rates, expenses, etc., the sales price I agreed to is about 3% above market value (Value = Income/10% cap rate).

If I sale, I'll make about 26% in a 30 month time frame.

What do you do?
I'm so confused. Who are you again? Are the Seller? The agent?

Also, Sale is a Noun, not a verb. Sorry, but it kills me.
Kurt Gowdy
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AG
Kurt Gowdy
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AG
Yes. Very confusing.
Precision Timepiece
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Sorry. Should be more clear
Bitter Old Man
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AG
Here are my thoughts:
A 10% cap rate isnt a great indicator for a hold/sell. Your cash on cash (ROE) return is much more important in your situation. Don't forget, you are also amortizing your debt, so that needs to factor in on top of $900/mo plus whatever unrealized appreciation you are earning. I would assume based on a 10% cap that your actual ROE is closer to 18-20%, maybe more.

So, the first question becomes: what are you going to do with the money? If you sell, are you going to be able to replace the income stream? Cash is a poor asset to hold.

If you can't replace the income stream then you need to decide how much your time is worth. How much time are you actually spending on the asset? Residential rentals is a major PITA, but it can be good when you get a good tenant that doesn't break stuff.
So, is it worth it to have a 2nd job that pays whatever your ROE is on a per hour basis?

If it's not, have you examined the 3rd party management route. Sure it cuts into your free cash flow, but if it frees you up, then is the lower ROE worth it, or can you replace that easily in other investments. Factor your free time into this equation as well. It may make it worth it because you are now free to chase other ventures.

gvine07
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AG
It sounds like you're under contract so you'll be selling unless the buyer has an issue with financing.

I don't know much about your situation (age, income, etc.), but I listen to a RE podcast that says, as a general rule, don't sell unless you have another real estate opportunity lined up. Taxes won't be fun and can possibly be avoided with a 1031 exchange IF you can get the money into another property.

Obviously a 26% return is a good problem to have, and there may be other things going on that make selling a wise choice
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