#498: Should I Keep, Refi, or Sell Underperforming Rental Property at 12% ROE
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, COThe 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 OverviewMatt 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 PropertyThe 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.
Next, we ran the numbers on a cash-out refinance to pull out equity and reinvest in a new property:
The final scenario explored selling the rental property entirely. However, two factors made this unattractive:
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 SoftwareTo 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.
(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
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