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Rental property: status quo, pay off or sell

Home Real Estate Investing Rental property: status quo, pay off or sell

  • Avatar Larry Ragman 
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    On another note, as i read more about calculating rental CAP rate, what do people use as a denominator? 

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    Its always just your purchase price. So your CAP rate should increase over time as rents increase, I’d imagine this is very likely in DC.

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    Always is such a strong word… https://www.investopedia.com/terms/c/capitalizationrate.asp many investors use current market value.

    #206364 Reply
    Zaphod Zaphod 
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    On another note, as i read more about calculating rental CAP rate, what do people use as a denominator? 

    Click to expand…

    Its always just your purchase price. So your CAP rate should increase over time as rents increase, I’d imagine this is very likely in DC.

    Click to expand…

    Always is such a strong word… https://www.investopedia.com/terms/c/capitalizationrate.asp many investors use current market value.

    Click to expand…

    Your personal cap rate should be what you paid for simplicity sake. Current market value is really for someone considering purchasing.

    If you want to see what youre getting in relation to current prices as some sort of rent gauge, sure, but it means little in a ROI sense to me.

    #206384 Reply
    Avatar Larry Ragman 
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    Sure, we can agree it depends on what metric the investor is trying to capture. I confess that I personally don’t track cap rate in either sense on my properties, because I don’t intend to leverage them. I just look at cash flow.

    #206389 Reply
    Liked by Zaphod
    Avatar Tim 
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    I just look at cash flow.

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    This a perfectly reasonable goal. Is it the best? Possibly and possibly not. Rental property is one asset class, I would suggest that one consider cash flow similar to dividends. It is a piece of total returns along with price appreciation, carrying costs, taxes and risk. I am sure Larry is not ignoring the risk of principal loss. One metric alone is not enough to evaluate and investment. Great ROI ignores declining value, Poor CAP rate ignores the advantage of tax advantages of leveraging. Great cashflow can be return of capital in a declining market. Basis, return, cashflow and the current value are all factors for evalutating keeping an investment.

    #206394 Reply
    Avatar Larry Ragman 
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    Joined: 08/30/2018
    I just look at cash flow. 

    Click to expand…

    This a perfectly reasonable goal. Is it the best? Possibly and possibly not. Rental property is one asset class, I would suggest that one consider cash flow similar to dividends. It is a piece of total returns along with price appreciation, carrying costs, taxes and risk. I am sure Larry is not ignoring the risk of principal loss. One metric alone is not enough to evaluate and investment. Great ROI ignores declining value, Poor CAP rate ignores the advantage of tax advantages of leveraging. Great cashflow can be return of capital in a declining market. Basis, return, cashflow and the current value are all factors for evalutating keeping an investment.

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    For other investors, listen to Tim. I did pay attention to all those factors years ago. Today however, I have my investments balanced the way I want them, and my particular rentals are positioned to cover ~20-25% of my retirement income. That said, should we choose to retire out of state, I’ll probably sell them, so to Tim’s point, it is wise to keep an eye on the egg basket. (Cap rate still isn’t much use to me, though.😎)

    #206403 Reply
    Avatar dennis 
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    Personally I would chose to do a cash out refi and buy another property. It’s a time honored way to build real estate wealth. It’s also about increasing the “velocity” of your money. You are using a tax free source of funds to increase your income producing assets. By finding the next property before you do the refi that gives you time to make a good decision without the stress of the time pressure you have with a 1031. I also suggest you find a local reputable management co. to relieve of the worry about the management at a distance.

    #207649 Reply
    Avatar mobilehomegurl 
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    It depends on your situation and your overall goals. If you want something closer to where you live and don’t want to manage long distance anymore, selling is always an option. Though, if things are working fine managing the property long distance and the property cash flows where you’re comfortable then you may want to keep it and give it more thought. Refinancing is another option if you’d like to pull out some cash and purchase another property. Good luck with your decision!

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    #207700 Reply

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