#498: Should I Keep, Refi, or Sell Underperforming Rental Property at 12% ROE

Denver Investment Real Estate

As a landlord, you might be leaving money on the table with your rental property pricing… Many landlords unknowingly undervalue their rental rates, costing them thousands in lost revenue each year. In this video, we’ll reveal the #1 mistake landlords make with pricing and how you can identify the same mistakes in your portfolio.

Case Study: 4-bed, 1-bath SFR in Aurora, CO

The portfolio analysis is run on Property Llama. First, the numbers are showcased as is, followed by the numbers for three scenarios: Should Matt Keep, Refi, or Sell?

Property Overview

Matt owns a single-family rental property in Aurora, Colorado. It’s an older house, built in 1929. Despite its age, the home is decently sized with four bedrooms, though only one bathroom on the main level.
Over the years, Matt has tried marketing this property towards Section 8 tenants, given the 4-bedroom layout despite having just one bathroom. He describes it as a “workhorse” rental—nothing fancy, but a solid cash-flowing asset. However, the neighborhood leaves something to be desired. The property is located half a block off Colfax Ave in an area rough around the edges.

He currently values the property at $400,000, a significant increase from the $89,000 purchase price he paid when he acquired it in 2010. Matt’s remaining mortgage balance is $244,000, which means his loan-to-value ratio is 61%.

For now, Matt has taken advantage of the equity build-up by refinancing previously. His current mortgage interest rate is 3.25%. After a recent market rent analysis, he has adjusted the monthly rent from $2,150 up to $2,365 to keep it well-priced compared to similar properties.

Scenario #1- Keep the Property

• Originally priced at $2,150/month
• A market analysis showed similar rentals got $2,365/month
• By raising rent to market rates, Matt’s potential returns increased significantly:
  • Return on equity went from 12.63% to 13.8%
  • Monthly cash flow increased 160% from $100 to $260
  • Cap rate improved from a subpar 3.7% to a healthier 4%+

The biggest mistake landlords make is under-marketing their rental properties, resulting in rents below actual market value. Factors like long-term tenants or rapidly rising area rents can cause your pricing to lag behind comparable rentals. Regular rental pricing analysis is crucial for maximizing your investment returns. Even raising rents a few hundred dollars can substantially improve your cash flow, ROI, and cap rate.
After updating the rents to $2365, Matt’s cash flow increased from $107.59 to $264.54.

Updated Numbers

Scenario #2- Refinance the Property to Re-Invest

Next, we ran the numbers on a cash-out refinance to pull out equity and reinvest in a new property:

• The current 61% Loan-to-Value means limited available equity
• High-interest rates and high leverage make refinancing unfavorable

Scenario #3- Sell the Property

The final scenario explored selling the rental property entirely. However, two factors made this unattractive:

• Significant taxable gains due to low original purchase price
  • Matt is looking at an $85k-89k tax liability
• 1031 exchange didn’t improve returns

The Importance of Regular Rental Pricing Analysis

After reviewing all scenarios, the keep scenario was the “least-worst” choice until conditions improve for a refinance or sale. But, as Matt’s case study shows, regular rental pricing analysis is crucial for maximizing investment returns. Even raising rates a few hundred dollars can substantially improve cash flow, ROI, and cap rate.

Make Smart Decisions with Portfolio Analysis Software

To stay on top of your portfolio returns, it’s best to regularly check in on your portfolio and leverage portfolio management tools such as Property Llama.
Property Llama allows you to analyze your investments’ performance, run scenarios, and optimize your portfolio for better returns.

https://youtu.be/fvEVn9hjjfM

(01:30) Current Rental Performance

(07:05) Scenario 1 of Keep the Property

(16:45) Scenario 2: Refinance the Property

(19:10) Scenario 3: Sell the Property

(21:35) Final Decision: Comparing All 3 Scenarios