Should I Keep or Sell My Rental Property? (Huge Equity Gains) (Rookie Reply)

0:00Ashley Kehr:What if the deal your mentor told you to buy is actually a trap? A cheap property in the wrong neighborhood that eats every dollar you thought you'd cash flow.

0:09Tony J. Robinson:Or maybe you're house hacking and your roommate just trashed the place, but you never had them sign a lease and now you have zero legal protection.

0:17Ashley Kehr:And what if you're sitting on three rentals with$700 ,000 in equity and sub-3 % interest rates? Is it smarter to sell, borrow against them, or just let them ride?

0:34Ashley Kehr:Today, we're breaking down all three of those questions. This is the Real Estate Rookie Podcast, and I'm Ashley Kerr.

0:40Tony J. Robinson:And I'm Tony J. Robinson. And with that, let's get into our first question, which comes from the BiggerPockets forums. This question says, I'm looking to acquire my first property in 2026. I've been eyeing a few markets in the Midwest and came across this deal. The purchase price is$70 ,000. Closing costs are just over$1 ,000. My down payment is 30%, which is$21 ,000 at a 7.1 % interest rate. Property taxes are$612 annually. Insurance is$276 annually. That is a crazy low insurance cost. The rental income, it's currently occupied at$750 per month. It's about a 7 % cash on cash return. Home is turnkey with the option to do a slow burr.

1:26Tony J. Robinson:uh, looks like it could use some basic cosmetic updates. Um, it's located in a C-class neighborhood in Indianapolis. I have my vacancy rate higher than I would expect due to the C-class neighborhood. Even at 15 % occupancy, it's still cash flows solidly at 5%. Anything as a beginner that I'm missing as an FYI, I would be an out-of-state investor as I live in California. I feel like I always get the California investors looking to invest elsewhere with, uh, with the questions. But, But I think a few things jump out to me on this deal. Number one is first insurance at$276 a year. That seems super cheap.

2:07Tony J. Robinson:Ash, have you ever had a property where insurance for the entire year is only$276?

2:13Ashley Kehr:No, and that was going to be my first thought or question too as to where did this number come from? Is it an actual quote from the seller or, you know, where did that come from? Because in my experience, I've, you know, when I was looking at buying a campground, I asked, you know, what was your insurance you pay each month? And he told me or whatever, and he sent me the policy. In every single cabin was a wood-burning stove. And this policy did not cover wood-burning stoves. And if any of those wood burning stoves caused a fire, they wouldn't have covered a thing. So I think one important thing is like if you are getting that information from the seller, ask to look at the policy and see what is actually covered on the policy.

2:59Ashley Kehr:Like maybe it's just a liability policy. Maybe they don't have a mortgage on the property, so they don't have any like property coverage, which I bought in houses like that where the investor just says that I self-insure. it's a$30 ,000 duplex. If it burns down, it burns down.

3:15Tony J. Robinson:Yeah, that's a great point. Yeah, but yeah, I just, and again, I've never invested in Indianapolis, so maybe I could be wrong, but that feels incredibly, incredibly low for any piece of real estate to be insured for an entire year. I think the other thing too is that when we talk about like class of neighborhoods, right, and they're, you know, A class, B class, D class, D class, we're talking about a few things. Sometimes it's, you know, you can look at things like the average income of folks in that area, the school ratings in that area, and just the general kind of demographic makeup, socioeconomic makeup maybe of the folks who would be coming into those units.

3:56Tony J. Robinson:And in an A-class neighborhood, we're talking premium rents, typically higher income-renting individuals. And in a D-class neighborhood, it's the inverse of that, right? It's typically lower income individuals, lower end of the rent spectrum. And the kind of wear and tear on the property is kind of higher on the low end if you're in a D-class neighborhood. And it's maybe a little bit easier in an A-class neighborhood. So I just – I guess I just want to make sure that we're accounting for the fact that if this is a C-class neighborhood, A, can you validate that it actually is given that you're in California and that you're not actually walking into like some kind of war zone in Indianapolis?

4:37Tony J. Robinson:And then B, if you have validated that it is a true C-class neighborhood, just making sure that you're actually accounting for some of those things. You know, he did say 15 % vacancy rate, which, you know, maybe that's enough, maybe it's not enough. But just making sure that we're accounting for the fact that different class neighborhoods operate in different ways.

4:53Ashley Kehr:This is one mistake that I made when I first started investing was I was only looking at cash flow. And I realized 10 years later that the real wealth is from appreciation and that mortgage pay down and the equity you're building up in the property. and you can get a lot farther over time by also focusing on appreciation. I bought at first really, you know, small duplexes for$20 ,000,$30 ,000,$50 ,000 in these classy neighborhoods. And they cash flowed pretty good, but they were headaches. There was the, you know, the tenant pool wasn't as great. A lot of people in these areas struggled to have a great credit score.

5:34Ashley Kehr:So it really made it hard to screen someone that, you know, had a great credit already. Lots of turnover on these properties. They had cosmetic updates, but just like this property, over time it's going to need repairs and maintenance because it was just never done correctly. A lot of DIY behind the scenes on these properties. So in that scenario, it sounded great. I'm getting these cheap properties. I'm getting into real estate investing. And, yes, they were the foundation for a long time of my real estate portfolio and got me to where I am today. But they saw very low appreciation. So, for example, one of the$20 ,000 duplexes I bought, I was able to sell it for four years later for$40 ,000.

6:15Ashley Kehr:So I doubled my money on it. Like, wow, amazing. But that's only$20 ,000 I made on that. Another property, the same time period, got over$100 ,000 in equity because it was in a better area, better class of tenant, and just a better property overall. all. And looking back now, what I would have done different is I would have not as bought as many properties, but bought better quality properties and not have had as many. But I was too focused on cash flow and not thinking about appreciation at all. And I missed an opportunity there. And the only reason that my class scene properties sold for double is because the market was perfect.

7:00Ashley Kehr:And that was no timing on my part. That just happened to be I got to buy my properties from 2013 to 2018. And then I was able to offload a lot of those dumpy duplexes, I call them, in 2020, 21, 22, when the market was super hot. And that was the only reason I probably ended up making money on them.

7:18Tony J. Robinson:Great, great point, Ash, about like quality of the portfolio versus quantity. I also just want to quickly cover the math, right? because if we look at the numbers that this person gave on the rent amount of, what did they say, 750 bucks per month, principal interest taxes and insurance, again, using the numbers that you gave us, is about 400 bucks per month. Vacancy at 15 % is just over 100 bucks. Repairs, 10%, another 75. CapEx, even if we're being like conservative at 5%, which I feel like you might need more, is about$40 per month. And then a property manager at maybe 10 % is$75. So the actual cash flow on this thing is, when you account for all of those expenses, is like$50 a month.

8:04Tony J. Robinson:So you have to ask yourself if$50 per month on a$21 ,000 investment, is that worthwhile to you? Oftentimes, rookie investors, they just think about principal interest, taxes, and insurance as all of their expenses, but you've got to account for everything as well. maintenance capex property management fees as well.

8:23Ashley Kehr:Coming up, if you're house hacking and your roommate isn't on a lease, he might already be in legal trouble. We'll break down how to protect yourself. We'll be right back.

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11:41Ashley Kehr:Our second question today comes from a SoCal investor in the BiggerPockets forums. I have four rentals, all single family homes, bought starting in 2013. Three are in Southern California and have appreciated quite a bit. In the three SoCal houses total, I'm now looking at$703 ,000 equity split among the houses, $162K,$204K, and$336K. The cash-on-cash return is good compared to my original investment, but if I do an ROE-Cal return on investment, it's really only around 3.5 % to 4%. All of them were refinanced and have 30-year interest rates between 2.5 % to 3.5%. This was a VA home loan. I've considered lots of options, selling and getting something local in SoCal, 1031 exchanging into out-of-state cash flow markets, or cash out refinancing.

12:38Ashley Kehr:I feel like the big equity gains are already realized here. So there isn't much point holding out for more. What would you do? I think before we even get into answering this question, we need to break down a little bit of the metrics here, ROI, ROE, cash on cash return. So let's start with return on investment. So this measures the total return that is relative to your original investment put into it. So he bought it in 2013. The property has doubled and he's earning cash flow on top of it or tripled for some of the properties. And so for return on his investment, this actually has been a great decision on his part to buy these properties.

13:23Tony J. Robinson:And return on equity or ROE, as he said in the question measures what your trapped equity in this property is actually earning you right now. With$703 ,000 in equity sitting in these properties, generating three and a half to 4%, the question is, is that the best use of this$700 ,000? And I think that's what we're trying to answer here, right? So the key point here is that ROI looks backwards. Was this a good deal. ROE looks forward saying, is this still the best use of the equity and the money that I've generated? Both matter, but the return on equity helps drive your next decision.

14:03Ashley Kehr:So let's look into one of the scenarios here. What if he decided to sell one property and 1031 it into another property in the Midwest? So let's, for example, take the 336K equity property. we're going to sell it for$500 ,000 and we're actually going to net$460 ,000 after cost. So we're going to do a 1031 exchange. A 1031 exchange is where you sell the property and you're deferring your capital gains tax. So not eliminating tax, you're just deferring it. So you don't have to pay any tax on that gain when you sell the property, but you have to follow the 1031 exchange rules. So you have to identify another property that you're going to purchase with those funds, okay?

14:48Ashley Kehr:So we're going to say he does the 1031 exchange, and he's going to go ahead and buy two$230 ,000 properties each in the Midwest with putting$115 ,000 down on each of them, which will give him 50 % loan-to-value.

15:05Tony J. Robinson:And if we look at the Midwest rents, and I'm using just some examples, obviously, right, but let's say that they rent between$1 ,800 to$2 ,000 per month at 7 % interest rates we're probably seeing today. the cash flow per property after all expenses might be somewhere around between 300 to 400 bucks per month. That's six to$800 per month in total versus maybe the 200 bucks per month the SoCal property was generating. So the return on equity jumped from three and a half percent, all the way up to maybe seven to 9 % on the deployed capital. So the cash flow basically triples or quadruples from this decision.

15:41Tony J. Robinson:Now, the catch here is that we're giving up an almost irreplaceable 2.5%, 3 % interest rate. That sucks, right? Because that debt is locked in for 30 years. But you have to ask yourself, what makes more sense, right? Is it maybe losing some of that interest advantage on that deal over the long term? Or is it getting the additional cash loan and better return on the investment today?

16:08Ashley Kehr:Okay, let's look at scenario two. And scenario two is where he's going to take a line of credit to actually tap into the equity of these properties without selling. Okay, so on the$336 ,000 equity property, most lenders will go and lend you up to 80 % to 85 % of the loan-to-value minus the balance you already owe on the mortgage payment. So if your property's worth$100 ,000, they'll lend you up to$80 ,000. But say you have a mortgage of$40 ,000. That$80 ,000 minus$40 ,000 leaves$40 ,000 of a line of credit that you'd be able to get on that property. Okay, so for this one, he might be able to access between$120 ,000 to$150 ,000.

16:48Ashley Kehr:Now, he's going to use that as a down payment on a new property in the Midwest. and he can keep his 3 % mortgage on that other property and add a new cash-flowing asset by using the line of credit. So interest rates on lines of credit between 8 % to 9%. Actually, I just got a notice in the mail that my one line of credit went down to 7.75%. I was so excited. I was like, oh, my God, is it that low forever? I think when I first got that line of credit, it was like 6.5 % by line of credit. So it's working its way back down for me, hopefully. Okay, so 8 % to 9 % in this scenario. We're going to say$130 ,000 borrowed for that down payment.

17:31Ashley Kehr:And that would be about$870, maybe a little more,$975 per month in interest-only payments, okay? So your new rental has to cash flow enough to cover that payment and still leave you positive. of. Plus, you need to have a plan in place to actually pay off that line of credit. So I would look into it to make sure that you're going to be able to make some principal payments on that line of credit also.

17:59Tony J. Robinson:Yeah. I think the other thing too, we didn't like model the math on this one, but as you're talking, Ashley came to mind. I think the other scenario that will work here as well, and this kind of ties into the first question is, well, maybe you use your line of credit and the funds from that to not, you know, not to put it directly into a down payment, but to put it into a BRRRR opportunity. And maybe you're taking that money, combining that with some hard money, and now you're going out there and you're BRRRRing properties in the Midwest. And now every time you close on that refinance for the BRRRR property, you can pay back your line.

18:27Tony J. Robinson:So now it becomes this almost reusable source of funding that you can use to continue to build your portfolio. And with 700K in equity right now, I mean, that's a lot that you can go deploy from these different lines to hopefully BRRRR a lot of properties in a short period of time as well. So the upside there, right, is that you keep all the SoCal properties, but then you're leveraging that equity to burr additional properties in these other markets. And every time you close on a refinance, you're paying back that line of credit. So it could be maybe the best of both worlds. You get the SoCal properties, equity continues to grow there.

19:00Tony J. Robinson:You keep the super low rates, you get the appreciation, and the portfolio grows without actually selling anything.

19:05Ashley Kehr:Okay, so let's go to scenario three, where it's just you hold everything and let it ride. So SoCal has averaged 5 % to 7 % annual appreciation if you're looking at the past 30 years. So on$703 ,000 in equity, that's about$35 ,000 to$49 ,000 in annual wealth building just from appreciation alone. And that's also tax deferred. So now if you add in mortgage pay down across the three properties, that's, you know, every year you're going to increase more equity, maybe$5 ,000 to$8 ,000 per year in cash flow you're also getting and plus tax benefits of owning real estate. So your total annual return of just looking at that may be$55 ,000 to$75 ,000.

19:54Tony J. Robinson:Yeah. So there is kind of an argument for doing nothing as well, right? Your sub 3 % debt on strongly appreciating assets in California might be the best financial position. And trading that for 7 % Midwest cash flow might look smart on a spreadsheet today, but you're trading an asset that builds long-term wealth for one that just pays you monthly. So I think a lot of it depends on what this person actually needs. Do they want monthly income right now, portfolio growth without necessarily messing up their current equity, or just continuing to build long-term wealth? I think each one of those kind of lends itself to a different situation.

20:28Tony J. Robinson:All right, we're going to take a quick break before our last question. But while we're gone, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us at Real Estate Rookie. And if you want to be a guest on the Real Estate Rookie podcast, head over to biggerpodcast.com slash guest. Be sure to apply. And we'd love to get you as a guest on our next episode. We'll be right back after this. Billion-dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit.