Investment Question - Sell or Hold - Posted by Cevans

Posted by John Corey on May 20, 2006 at 07:16:19:

It is the fact that most credit rating exercises rate cash as being a lot more valuable than lines of credit. That you need a bit of a balance. More important is the cash you can control while lines are subject to the lender changing their mind. Less likely with a line that is secured compared to a line that is unsecured.

John Corey

Investment Question - Sell or Hold - Posted by Cevans

Posted by Cevans on May 19, 2006 at 09:55:11:

Would greatly appreciate some expertise. I currently own a duplex and recieve approximately,$250 Monthly NOI. Total Investment into property is $30k. Owned the property 2.5 years. If I can sell the property, I could net approximately 100k. I would anticipate reinvesting 70% of the proceeds.

My question is any suggestions on hold or sell and reinvest. ALl ideas suggestions are appreciated!

Re: Investment Question - Sell or Hold - Posted by David Krulac

Posted by David Krulac on May 19, 2006 at 16:09:08:

I like Buy and Hold. Its not the only thing I do, but its one thing that I do. I have property that I bought 2 and 3 decades ago.

  1. B&H saves on paying taxes. If you B&H you never pay short term capital gains and seldom pay long term capital gains.

  2. Refi is a great tool to use when B&H. You can refi 80% of the value. If you sell and have a low basis, your state and federal income tax could approach 20% In PA, the Federal Tax on appreciation would be 15%, Federal recapture would be 25%, state income tax would be 3.2% and transfer tax would be at least 1% Why pay all those taxes when you can refi and not pay any taxes? If you like paying taxes, good for you. We need more people like you but I’m not one of them.

  3. You can doa Section 1031 IRS Tax free Exchange. I’ve done a bunch of them including right now. Its not as easy as you’ll think. You need to do everything exactly right or you blow the exchange. There is a cost involved in the exchange. There is a lot of pressure to find the acquired property and the 45 days will fly by before you know it. If you’re a dealer you can’t do an exchange.

  4. Some properties that you buy will be better than others. Why sell good properties. Keep the good one sell the less than good ones.

Re: Investment Question - Sell or Hold - Posted by John Corey

Posted by John Corey on May 19, 2006 at 11:00:10:


Mind is I restate the question and then have you answer it.

Assuming your NOI calculation is correct you are earning 10% return on the capital you have invested.

If you sell you will reinvest no more than 70% of the proceeds. You will have closing costs on both sides. You may or may not have to pay 15% on the capital gain and something around 20% (maybe higher as I am fuzzy on this) on the recapture of the depreciation.

I can not tell what you debt might be secured by this property (if any at all).

Assuming that you are earning 10% on the capital invested now (not the equity), what are you going to do with the money that will provide a better return after all closing costs, taxes, etc?

If you do not mind, a second question. Have you looked at pulling out equity and using that cash to buy another property? The cash flow would change but not sure what the total would look like if you owned two with the same equity (or better) spread over two.

Tell us more about your motivation to even consider selling.

John Corey

Re: Investment Question - Sell or Hold - Posted by Cevans

Posted by Cevans on May 19, 2006 at 11:47:17:


Thanks for the feedback. The motivation to sell is am building a home and need the $ cushion and also would like to take the 70% of the proceeds and reinvest into 2 properties closer to where my home is being built. The current investment property is now an hour away.

My rate on the subject property is 30 yr. fixed at 5.625, refinancing the property would push it to a higher current interest rate plus closing costs. If I sold the property now , the 100k proceeds would reflect the closing costs and gains for 1 year ( Lived as primary for a year - already spoke with accountant).

What would be your strategy for pulling out equity? I already have a credit line ( Adjustable prime minus a 1/4) on the property now which I use for short term flips.

Still unsure. It is easier when the situation is not yours.


Re: Sell or Hold (long-winded response) - Posted by Chris in FL

Posted by Chris in FL on May 19, 2006 at 15:02:18:

Let me first give you some more to think about, then, at the end, tell you how I make a similar decision.
Based on what you have said so far, you are making 10% on your money ($3k/year on $30k investment), but, worse, you are only making 3% on your equity ($3k/year on $100k equity - maybe). Odds are that equity can be put to much better use (if it isn’t already). Decision is not whether to sell or not, but, whether to sell or to take money out of the property and reinvest.
However, you mentioned having a credit line that you use for flips. How big is the line, and what returns are you making using it (maybe you are already making maximum use of the equity; you haven’t given us enough details to make a full conclusion about that).
If you lived in the property two of last five years, and, thus, could sell the portion that was your home tax free, that would be more motivation to sell. I think you said only one year, though? Also, you mentioned not liking the distance. How much will you pay in taxes on the sale/profit? Have you considered a 1031 exchange into a property or two that are closer to you (to defer taxes on the profit)? If you exchanged into just one property you should have enough equity in it get another line of credit, giving you your peace of mind and/or money to use for flips again, and taking away the distance factor, not to mention which, hopefully you buy a bargain, which could more than offset closing costs, etc… If you exchanged into two properties you might not have enough equity in either to borrow more against them.
There are usually so many variables in this type of decision that it is impossible to make it an easy math decision one way or the other, especially if you don’t already know replacement property information (ROI in current property versus replacement, cashflows, anticipated appreciation on both, tax considerations, closing costs, buying more equity or not, etc., etc.).
IMHO, you definitely should look at the math, but this tends to become a personal decision. When I make this kind of decision, and a mathmetician couldn’t possibly factor in everything involved, I stop and ask myself “what is right for me, now?”. Can I get what I want out of this property if I sell? Do I want to continue owning it or not? Make your decision based on your own peace of mind, and know that, regardless what you do, you are going to invest the money/equity well, and you will come out ahead in the end either way.
Almost all wealthy people make decisions quickly, and don’t easily change those decisions later (I couldn’t tell you now what study that is from). So, gather all relevant data, evaluate quickly, make the decision that feels right in your gut, and move forward! Lastly, be okay with your decision, whatever it is, and never stop to second-guess yourself!
Best wishes!

Re: Investment Question - Sell or Hold - Posted by John Corey

Posted by John Corey on May 19, 2006 at 12:13:17:


  1. If you can successfully claim that this was your primary residence and obtain tax relief that can change the situation quite a bit. I defer to your accountant.

  2. Worry less about what your long term interest rate is and more about if you can put the funds to productive use. If you can access the capital and flip a deal 1x a year where you make a true profit of $20K then paying 2% or 3% more on the 1st mortgage will not be much of an issue. So, focus on a decent rate but more on how best to tap the capital when a good deal comes along. A HELOC is certainly one possibility.

  3. Having a cushion given the new home makes sense. That cushion can be the HELOC already in place. Rainy day cash need to be liquid but it does not need to be in a savings account.

Break down the present property. What is it worth, what do you owe on it, What is the limit on the present HELOC vs. the 1st?

Assume you will never get 100% out of an investment property. Sometimes it happens but that is so rare it is not that important to squeeze out the last few dollars.

John Corey

Re: Sell or Hold (long-winded response) - Posted by Cevans

Posted by Cevans on May 19, 2006 at 16:44:53:

This is the best website! Thank you all for your response.

Never understood the idea of ready cash - Posted by Marc Donovan

Posted by Marc Donovan on May 19, 2006 at 18:42:07:

My bank likes me to have a good pile of cash - me too, but they don’t consider any open credit lines as liquidity. If I can go borrow to meet my foreseable needs, why do I need to have ready cash/securities lying around? I know those lines can be closed, leaving me high and dry - but that’s why I have many open lines. For that matter, why do big corps feel the need to have millions in ready cash laying around? Is it just to brace up their bond rating? Otherwise its just silly. I don’t get it, but then again Im not a financial risk manager either.

Re: Never understood the idea of ready cash - Posted by John Corey

Posted by John Corey on May 19, 2006 at 19:50:30:

VERY good point!

John Corey

Re: Never understood the idea of ready cash - Posted by Killer Joe

Posted by Killer Joe on May 19, 2006 at 23:13:34:


I missed the good point, can you expand on that? Thanks.