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Even the rich and successful among us have trouble deciding what next step is best. I’m currently in that very situation with my real estate holdings (sounds better than my rental property). So here’s the situation and my options.
I bought a rental property about 5 years ago. At the time I had two mortgages, the first was my primary residence, the place I lived, and the second was the rental property. In the next few years, property values had risen dramatically and I was sitting on a large increase in equity between my two properties. Having lived in my primary residence for quite a few years I’d also gained equity from the years of payments. This post gives a more complete account of what I did but the short version is that I refinanced my primary residence, taking enough cash out to pay off my rental property. There was no change to the amount of money I owed but now I owned the rental property outright. And had lower monthly payments to boot.
In the years since that maneuver, property values have continued to increase. If I knew this trend would continue indefinitely my decision would be easy, keep the property. But I believe that values are going to sink and I think, at least in this area, the potential decrease in value could be significant.
The way I see it I have two options. Choice one is to keep the house and continue saving at my current rate so that when property values do drop, I’ll be in a good position to buy more properties at significantly reduced prices.
Option two is to sell the property and sit on the cash (investing it in a liquid and safe location) waiting for the bottom to drop out and be in a good position to buy more properties at a good price.
The benefit to option two is that if prices fall a lot, then I’ve done a pretty good job of timing the real estate bubble, buying at or near the bottom and selling at or near the top. The selling would be skill (even though I’ve already missed the absolute top), the buying was total luck. But the downside is that if values continue to rise or prices don’t fall as far, I might have a nice chunk of change but I can’t do anything with it and have eliminated any possibility of continued growth.
The benefit to option one is that if property values don’t fall or continue to rise I still have the property, the income from rent and the increase in value. If I keep the property, however, and prices do fall then I may have missed out on a nice profit.
I asked a realtor to give me a estimate for what she thought I could sell the house for. If I sold it I would have a huge profit but I’ve decided that the potential gain is not enough to offset the positive aspects of owning the house. The decisions we make get more difficult, the more money you have. Was this the right decision? I don’t know but it is my decision and I’m comfortable living with it.