Kill it, or keep it?
I’ve written to you before about the story of the goose and the golden egg. Just to remind you, it’s about a poor farmer who discovered he had a goose that would lay a solid gold egg each day. The farmer would sell that egg and then live lavishly off the proceeds. Eventually, he became impatient with receiving only an egg a day and decided to lop of the goose’s head and retrieve all the eggs out of the goose at once. But when he did, he found there were no more eggs inside. And his daily income stopped because he killed the goose that produced the golden egg.
That story, like most of Aesop’s fables, has a great moral that can be applied to many different scenarios. For real estate investors, I submit to you that your rental properties are your golden geese. That’s because they produce monthly income for you as long as you take care of them. But if you kill them — i.e. sell them — the monthly income stops just like when the farmer killed the goose.
That being said, the current housing market has a lot of people questioning if they should keep their preverbal golden goose or kill it.
Take the conversation I had the other day with an investor pondering that question: He had a rental, on which the mortgage had just recently been paid off. It went vacant and once they inspected the property, they realized they were going to have to do a $20,000 rehab to get it rent ready.
Looking at comparable sales in the area, the investor deduced that the house would resale for $140,000 if it were all fixed up. But it would take $40,000 to get the house in good enough condition to sale for that price.
As we were talking, he wondered what he should do. I suggested we break down the numbers and see what made sense.
The first thing we needed to know was the houses cashflow. He said that since the house was paid for that after all expenses it would produce a positive cash flow of $650 a month.
That is a healthy cash flow.
So, if he got it rent ready for $20,000, and received $650 a month, he would recoup all of his rehab cost in just over 2 1/2 years. After that, the cashflow would be pure profit.
If he sold the place, he thinks he would pocket $86,000 after all closing costs and rehab expenses. I asked him if that was before or after taxes. He said it was before, but that he had called his accountant and she said after paying long term capital gains, he should still have $73,000.
I then asked him how long it would take for him to receive that same amount in rental cashflow. He took the $650 a month and divided it into the $73k and came up with 9 1/3 years. Then, he remembered that he had to add the time needed to recoup the $20,000 in rehab costs and added that 2.5 years to the timeframe.
He said, “It will take me nearly 12 years of uninterrupted cash flow to equal what I can make off this property if I sell it. Twelve years of no vacancy and no big repairs is a long time. I have to admit, even though I want paid-for rental property, I’m having a hard time not killing this goose.”
Looking at it from that standpoint, I could understand why.
But I asked him what he planned to do with the money if he sold. He said he would pay off two other rental mortgages, which would increase his cashflow by $1,500 a month. At that cashflow, he would make the $73k in only four years.
Where this investor differs from the farmer with the golden goose is that he has a flock of golden geese, not just one like the farmer. So, his income won’t stop when he kills this goose. It will actually be multiplied.
I understand the quandary here. He doesn’t want to give up a paid-for rental, but the gain here is almost too good to pass up. And I’m sure there are many of you pondering the same thing. So, look at the numbers from this standpoint, taking time into consideration, and let me know which way you go. I’d be interested to see if it makes more sense for you to keep it or kill it.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.