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.)
