Once you buy your first property you will be doomed to make this decision at some point. Wouldn’t it be great to have some help with this? Read on.
When to Decide?
Let’s face it: the best time to decide is before buying the property. You should have your exit strategy planned out before signing. And it has everything to do with your long-term goals. Do you want to sit back in retirement and collect mailbox money? Do you want to be truly headache-free when you retire? Do you want to pass down wealth to your children? These questions should be answered right now. If you haven’t done this, then read my post on goal setting.
How Do You Decide?
If you already bought your property and are considering its disposition right now, you can still make it work. You still need to think about your goals, even if they will come sooner than later. Let’s work backward and consider why you might want to do each strategy.
Sell
Selling allows you to be completely done with the property. You can take every dime of value out and move on to the next thing. You’ll have a bunch of cash. This works best if interest rates are low, so sellers don’t have to pay as much to the bank – and they can pay that money to you in the form of sale price.
If you want a lump sum right now, this might be a good option. Be prepared to pay the IRS 20% of the capital gain though. That could be a big chunk of cash depending on how well you did on the property. If that is a big concern, you can do a 1031 exchange, deferring the tax, and potentially wiping it out if you die and pass the new property on to your children. Of course, you won’t get that lump sum for your year-long cruise you are planning, so this may not work for you.
Selling does truly allow you to not have to worry about any aspect of management, but you kill the golden goose, and you’ll likely need to invest that money somewhere else if you want it to continue producing. But it won’t likely do as well as real estate.
Refi
Refi, or refinance, allows you to keep the property but take out money for that vacation. Typically, you’ll be able to finance up to 80% of the value, meaning you could pull out 80% of the current value. You’ll first have to pay off the current loan, so it needs to have been paid down or the property value has to have increased.
This strategy is also going to be dependent on interest rates. If they are high, you’ll have a bigger payment, which might not work for you.
This is a good option to allow you to keep the property but get some cash. I’m not a huge fan of this because it kind of resets what you were trying to do. You’ll have very little cash flow for the next 20 years. But it does allow you to keep the property and get some ready cash, hopefully handing it down to your kids someday.
Hold
This is going to be a good option in high interest rate environments. I love equity, as you know. If you hold on to it and get it paid off, you’ll enjoy mountains of cash every month. You’ll suddenly flip from equity to cash flow when you need it and reap the benefits. For this reason, I usually recommend to hold. The exception would be when doing a 1031 exchange and moving into a larger investment, which will net you more money in the future.
You might not want to hold if you have little equity in the property or it is under-performing for some reason. Or perhaps your kids want nothing to do with real estate and you are getting up there in age.
I hope this post has helped you, but ultimately you have to be the one deciding. I wish you the best of luck.
