Cash flow is a wonderful thing, and it’s one of the main reasons many people get into real estate investing.
When my wife and I first started investing in real estate over a decade ago, our realtor at the time told us that, if we played our cards right, took care of our property, and held it long enough, we might be able to get it to be “cash flow positive” one day. We didn’t really know what that meant at the time, but we were on board to try.
Fast forward to today. We’ve now invested in multiple markets across the country and have multiple cash-flowing properties that pay us every month. We have happy tenants and well-maintained properties.
When we started investing in real estate, we always thought that we’d hold our properties forever. After all, why sell something that’s paying you every month, right?
But, as we’ve become more savvy real estate investors, we’ve learned that there’s more to it than just cash flow, which is what led us to the difficult decision to sell one of our cash-flowing duplexes in Oakland.
A few years ago, my wife and I purchased a duplex in Oakland for $500k. We’d been getting about $5,500 per month in gross income over the past couple of years.
After mortgage and expenses, we were cash-flowing approximately $1,500 per month, or about $18k per year. When our tenants moved out earlier this year, we were faced with the decision of whether to hang onto it and rent it out to new tenants, or to sell.
Sell or Continue Renting It Out?
To help us decide whether to sell our duplex or continue renting it out, we started by looking at our ROI, or return on investment.
We’d originally put $100k down on the property. A cash flow of $1,500 per month ($18k per year) meant our ROI was about 18%. Not bad, we thought. Certainly better than the stock market.
But of course, that’s not the whole story.
Based on the other properties selling in the area, we guesstimated that our duplex could sell for around $800k, which means we had roughly $400k in equity, not counting the principal we’d already paid down.
Return on Equity
Using that, we then took a look at a different metric – ROE, or return on equity. With roughly $400k in equity, returns of $18k per year would be just 4.5%.
Suddenly, not so hot anymore.
Exploring Our Options
If we could make 18% returns on our equity, rather than our original investment, we thought, then we could be cash-flowing not $18k, but rather, four times that amount, or $72k per year. This is the point at which our wheels started turning.
We started to think about what else we could do if we could “unlock” that $400k in equity. We realized that we could sell, and then put that $400k into a $1.5M property, either here in the Bay Area or elsewhere, and stand to create substantially higher cash flow returns.
What We Decided to Do
Since cash flow is important to us at this stage in our lives, we decided to sell and invest in a different market.
To our surprise, we did even better than expected. Our duplex sold for $890k, giving us about $450k to reinvest.
By investing in a different property, and, in our case, in a different market, we’re able to achieve higher cash flow returns for our family now, rather than wait for potential appreciation someday in the future.
We’re delighted with how things turned out and are excited for our new investment.
What’s Your Story?
If you’ve read this far, it’s possible you’re thinking about your ROI versus ROE, and what your options are if you could “unlock” some of that pent-up equity.
This is one of our sweet spots. My team and I LOVE helping people navigate their options when it comes to situations and decisions like this.
Ultimately, it might make most sense to continue holding your property as you currently are, but wouldn’t you like to do so knowing that it’s the best option, given your investment goals?
That’s what we’re here for. We can help you take a look at your goals, compared with the returns your property is currently achieving, and compare those with other investment options both here in the Bay Area and in other markets.