To sell or not to sell Investment Property?

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andysandy
Posts: 1
Joined: Tue May 15, 2018 7:51 pm

To sell or not to sell Investment Property?

Post by andysandy » Tue May 15, 2018 7:54 pm

I wish to have advice on following from members on this forum. I currently own 5 properties as below

Current residence: Bought for $637K, downpayment made-126K​, current mortgage balance - 500K (current market price - $640K)
Investment Property1: Bought for 175K, downpayment made - 65K, current mortgage balance - 105K, net rental cash per month after PITI+HOA fee payment = $445 (current market price - $230K)

Investment Property2: Bought for 209K, downpayment made - 72K, current mortgage balance - 124K, net rental cash per month after PITI+HOA fee payment = $436 (current market price - $230K)

Investment Property3: Bought for 217K, downpayment made - 70K, current mortgage balance - 0, net rental cash per month after PITI+HOA fee payment = $1137 (current market price - $230K)

Investment Property4: Bought for 455K, downpayment made - 90K, current mortgage balance - 253K, net rental cash per month after PITI+HOA fee payment = $287 (current market price - $440K)

I also have investments in ETFs worth around 250K. They have yielded around 6.5% per year net gain so far.
I was thinking of selling investment 1 and 2. This requires me to pay off mortgage worth 105K+124K = 229K.
If I sell ETFs worth 229K and pay off these 2 properties, I expect to add extra cash flow of $1143 per month (on top of net cash mentioned for each property above).
My question is, does it make sense to go this route? Or should I not payoff mortgages and keep investing in ETFs? What option would be better investment decision and why? I also max out my 401K for me and my wife each year. Together we have around 500K worth 401K invested in target date based mutual funds.
Thanks

make_a_better_world
Posts: 30
Joined: Mon Mar 18, 2013 11:55 pm

Re: To sell or not to sell Investment Property?

Post by make_a_better_world » Tue May 15, 2018 9:23 pm

It sounds as if you are in an overall good place. I invest in commercial real estate and the market I'm in (Texas) might be very different than yours. Factors I would take into consideration that I could not gather from your post:
- If you sell any of those properties, will you pay tax at a capital gains rate? I'm assuming you've held them for more than a year and you will.
- Do you foresee a steady flow of alternate income elsewhere in the event some of your units went vacant and you still had to pay fees/taxes/mortgages? Or would you risk being forced to sell some at whatever the market price is if 2 units went vacant for 6 months?
- Are the properties in very different condition? Do you predict you might need to invest in major repairs such as a new roof within the next 5 years?
- Are the interest rates on the mortgages very different?

Personally I believe we are at the late stage of the good portion of an economic cycle, meaning it's generally a good time to sell real estate and a tougher time to buy at a good price. Because you have so much debt among them collectively, they can easily turn from assets into liabilities if there was a major change in the market. I do not think it is wise to carry all this debt and continue to invest into ETFs or anything else for that matter. I would focus on removing debt.

Slacker
Posts: 576
Joined: Thu May 26, 2016 8:40 am

Re: To sell or not to sell Investment Property?

Post by Slacker » Tue May 15, 2018 10:34 pm

Investment property 3 has around a 6.3% return on invested capital BEFORE maintenance costs (assuming no vacancies).

What is your typical maintenance, tenant turnover, advertising, etc costs on a house? Have you checked what the rates of return will be compared to your ETF investments?

In my opinion, you are concentrating too much capital into real estate if you sell off ETFs to pay off a house or two and you get rid of the advantage of leverage (you could always use the ETFs to cover costs if you have vacancies).

...but like the other poster alluded to: what is your escape plan if things go bad?

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