Case Study #16: Sunset Vista – The Hold/Sell Decision
THE BACKGROUND
You are Alexa Rivera, a real estate financial advisor who supports small investors, including teachers, business owners, and retirees, who own real estate as part of a long-term wealth-building strategy. Your clients typically hold single-family rentals, small multifamily properties, or vacation homes as a “side business,” intending to generate passive income and long-term appreciation.
Over the years, you’ve built a reputation for delivering clear, actionable financial insights tailored to non-institutional investors. One of your long-time clients, Arthur Vandelay, a small business owner based in San Diego, purchased a three-bedroom single-family rental in Oceanside eight years ago. The home has appreciated nicely, and Arthur approaches you with a key question centered on a classic hold/sell decision:
“Should I keep the property for another five years or sell now and reinvest the proceeds into a different opportunity?”
Arthur’s concern is whether he is letting potential gains slip away by holding onto a maturing asset. At the same time, he’s cautious about transaction costs, capital gains taxes, and the uncertainty of future returns.
SUNSET VISTA – PROPERTY DETAILS
Arthur’s property, nicknamed “Sunset Vista”, is a 1,650-square-foot single-family rental located four blocks from the beach. It’s currently leased to a long-term tenant at $3,200/month. The tenant’s lease ends in nine months, at which point Arthur can either increase the rent to market (~$3,600/month), sell the home, or continue leasing at a modest increase.
Below are the key financial assumptions for Sunset Vista, which will inform the hold/sell decision analysis:
- Current Rent: $3,200/month (below market)
- Market Rent: $3,600/month with 3% annual increases
- Operating Expenses: $7,200/year (excluding debt service)
- Annual Property Tax: 1.25% of the market value
- Current Market Value: $810,000
- Outstanding Loan Balance: $430,000
- Interest Rate: 4.25%, 30-year fixed, P&I
- Selling Costs (Brokerage, Legal, Fees): 7% of sale price
- Reinvestment Option: Buy a fixer-upper for $628,000 and invest $75,000 in rehab with the intention to flip or hold
THE TASK
Arthur needs your help to evaluate two potential paths in a hold/sell decision scenario.
Option 1: Hold Sunset Vista
- Hold for another five years
- Re-lease the home at market rent when the current lease ends
- Assume 3% annual rent growth and similar appreciation
- Reassess sale in year 5
Option 2: Sell and Reinvest
- Sell Sunset Vista immediately
- Net the after-tax, after-fee proceeds
- Reinvest in a fixer-upper project (either to flip or hold long-term)
You advise Arthur that the most effective way to evaluate this hold/sell decision is by quantifying projected returns in both scenarios. You decide to use A.CRE’s trusted modeling tools to support your recommendation.
TOOLS TO USE
1. For analyzing the potential reinvestment (flip):
Use the A.CRE House Flipping Pro Forma Model.
Alternatively, you and Arthur can test the numbers himself using the A.CRE House Flip Web App, which allows him to input assumptions and download the Excel model.
2. To decide between holding or selling Sunset Vista:
Follow the framework outlined in this article: A.CRE Hold/Sell Analysis.
Apply Net Present Value (NPV), IRR, and equity multiple concepts over a 5-year horizon for the hold scenario.
3. To review the full details of the reinvestment opportunity:
You should download the Offering Memorandum (OM) for the fixer-upper deal. The OM includes all key assumptions, project timelines, market comps, and exit strategies.
SUNSET VISTA – THE QUESTIONS
- Using A.CRE’s tools and your assumptions, what is the projected:
- What is the projected levered IRR and equity multiple if Arthur holds Sunset Vista for five more years?
- Levered IRR and equity multiple if he sells now and reinvests in the flip opportunity?
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Debt Structuring: For both the hold and reinvestment scenarios, define a reasonable set of debt assumptions (LTV, interest rate, amortization, loan fees) using publicly available market data or a lender term sheet from similar deals.
- How do these assumptions impact the investment’s cash flow and overall return?
- Would a more aggressive or conservative leverage profile be more appropriate in this context?
- What are the peak equity needs in the reinvestment scenario?
- Which option offers the highest risk-adjusted return, and what factors support that conclusion?
- Beyond returns, what qualitative factors might influence Arthur’s decision (e.g., time involvement, liquidity, tax exposure)?
- Investor Profile Sensitivity Analysis: Assuming Arthur has varying levels of risk tolerance, he might consider alternatives to real estate, such as:
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- A bond fund with stable 4% annual returns
- A diversified stock portfolio targeting 8% returns with higher volatility
How might his hold/sell decision change based on his risk profile (e.g., conservative, balanced, or aggressive)? What would be the most appropriate option in each case, and why?
(Use justification grounded in expected returns, liquidity, time involvement, and risk tolerance.)
Frequently Asked Questions about the Sunset Vista Hold/Sell Case Study
What is the core question being evaluated in this case study?
The central question is whether Arthur should hold onto his current rental property (Sunset Vista) for another five years, or sell it now and reinvest in a new real estate opportunity—specifically, a fixer-upper project. The decision is based on comparing projected returns, equity needs, and qualitative factors.
What financial metrics are used to evaluate the hold vs. sell options?
Key financial metrics include:
– Levered Internal Rate of Return (IRR)
– Equity Multiple
– Net Present Value (NPV)
These metrics are calculated over a 5-year hold period using A.CRE’s Hold/Sell Analysis framework and House Flipping Pro Forma tools.
How does the reinvestment scenario work if Arthur sells Sunset Vista?
If Arthur sells Sunset Vista, he nets the after-tax and after-fee proceeds and reinvests them into a $628,000 fixer-upper, with $75,000 in rehab costs. The new project can be either flipped for profit or held as a rental. Returns are modeled using the A.CRE House Flip Pro Forma or Web App.
What tools are recommended for modeling these scenarios?
Use the following tools:
– Hold/Sell Analysis article for structure and methodology
– A.CRE House Flip Web App or downloadable model for the reinvestment project
– Offering Memorandum (OM) for deal assumptions and comps
Each tool helps quantify risk, returns, and capital needs more precisely.
What debt assumptions should be considered in both scenarios?
Typical debt assumptions include:
– Loan-to-Value (LTV): 70%–75%
– Interest Rate: 6.25%–7.00%
– Amortization: 25–30 years
– Loan Fees: 1%–2%
These assumptions impact cash flow, return volatility, and the peak equity required. Leverage should be matched to Arthur’s risk profile—conservative if he values stability, more aggressive if seeking higher upside.
How does Arthur’s risk tolerance affect the decision?
Arthur’s decision could shift depending on his investor profile:
– Conservative: May prefer holding Sunset Vista or reallocating to bonds (4% return, low risk).
– Balanced: Could benefit from the hold or flip, depending on effort and return expectations.
– Aggressive: May favor the fixer-upper flip with higher upside potential, despite added complexity and risk.
Each path should be evaluated for liquidity, time involvement, return variability, and risk-adjusted returns.
What qualitative factors could influence Arthur’s decision beyond returns?
Non-financial considerations include:
– Time involvement (flips may be more hands-on)
– Liquidity needs (Sunset Vista is less liquid during the hold)
– Tax exposure (capital gains on sale)
– Lifestyle goals (passive vs. active investment)
– Market risk (timing future appreciation or price dips)
These can often tip the scale even when the financials are close.
What is the peak equity requirement for the reinvestment option?
Arthur’s peak equity will depend on:
– Net sale proceeds from Sunset Vista
– Rehab costs ($75,000)
– Down payment based on LTV
– Reserves and closing costs
This total should be clearly modeled in the flip pro forma to confirm feasibility before proceeding.
What’s the biggest mistake to avoid in a hold/sell analysis?
Avoid basing the decision purely on intuition or market comps. Use structured financial modeling, realistic assumptions, and risk-adjusted return analysis. Emotional attachment or outdated performance expectations can lead to suboptimal choices.
