Author Topic: Case Study - Rent or Sell  (Read 1566 times)

ingrownstudentloans

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Case Study - Rent or Sell
« on: August 21, 2017, 06:54:39 AM »
Hey guys/gals, thanks in advance for your thoughts on this one.  It's a close call for me as I don't do anything right now other than get a deposit every month from the management company.  I would appreciate your thoughts/ideas/input.

Background: 2 cross-country moves ago I bought a 2 family brownstone in a popular old neighborhood in downtown Albany, NY.  The property is 2 blocks from the capital and walking distance to a number of decent restaurants, bars, parks, etc.  I lived upstairs while the garden-view basement apartment paid the mortgage.  It was a good deal for me, but I had an that had me leave the area.  I do not think I will ever return to live in this particular city.  For those of you who are not familiar with New York taxes, they are high and not going down anytime soon.  I think the City of Albany, and this particular neighborhood, will continue to do okay without major downturn or upswing, due to the presence of the state government and a couple of college/universities in town.  One neighborhood over just went through a major revitalization as the hospital bought a couple of blocks and added a new wing. Developers bought a bunch of properties, cleaned them up and are selling/renting them for much more.  The neighborhood my property is in is somewhat segregated from that neighborhood, though I see some trickle down (over?) happening.

Market Value: $225,000
Original Purchase price: $204,000 (plus seller's concession of $10,000) = $214,000
Original Mortgage Amount: $203,000 (FHA loan with minimum down and 5 year/20% LTV PMI - $127.51/month)
Interest Rate: 4.00
Mortgage Term: 30 years
Term remaining: 24 years 6 months
Amount remaining on mortgage: 182,002.90
Gross Rents: $2,775/month -- $1,825 for top unit, $950 for basement = $33,300/year (current amount, raised rents in last few months)
Principal and Interest:  $970.17/month = $11,642.02/year
Taxes and Insurance and PMI:  $909.79/month  = $10,917.48/year
HOA costs: $0

Deferred maintenance notes: The entire inside is painted approximately every 3-5 years for $1,500, the roof (flat, built-up) is sealed every 4-5 years for $800. These expenses are included in the summary below.  The water heater will likely need to be replaced in the next year or so.  There are no major repairs/maintenance issues otherwise as this is solid brick townhouse that has been standing since 1883 (electrical and plumbing were all redone in the late 90's).

Anything else special or unique in regards to the numbers of the property: I pay water, electric and gas with a cap on each - single meter for both.  Average for entire property is $200/month.  Max exposure is capped at $250/month or tenants split the difference among the units (I have never had to use this, even in the cold winter of the arctic blast a few years back, or whatever it was called).  Management company takes 10% of all collections (rent/fees, etc.) and 6% of the total lease amount at the start of the lease. 

My PMI will fall off when I reach a balance of $162,400.

I cannot use the passive income loss of depreciation against my ordinary income.

I think management fees are a little high and hope to negotiate the lease initiation percent down when my contract is up this October.

In the five years I have owned the property (and 3 that I have rented through the management company), there has not been more than 1-2 days of vacancy for tenant turnover timing.

Actual numbers from the management portal for the last year:

2016 - Gross Income = $31,864.50, Net Income (what I received after management fees, maintenance, materials, repairs, snow removal, etc.) = $22,320.21

If you take into consideration all of the above, I am cash-flow negative $1,200/year, but I gain about $4,300/year in equity.  As rents rise and once the PMI falls away, I will be cash-flow positive, but this will take a couple of years.

Open to your critique and thoughts.  Thanks in advance.


tralfamadorian

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Re: Case Study - Rent or Sell
« Reply #1 on: August 21, 2017, 03:21:38 PM »
Yeah, those NY taxes are killing your returns.  How confident are you that $225k is the market price?  If relatively confident, then you can probably refi now to get rid of the PMI and be cash neutral based off of your actual 2016 numbers.

If you sell, then
Sell: $225k
Mortgage: $182k
Selling Costs: $18k
Walk away with cash: $25k
Capital gain taxes on that (15%?): 3.75k
Depreciation recapture (25% tax): ?
7% returns on 21.25k: 1.49k/yr

Or you could 1031 into one or more properties in Nashville, avoid the taxes and get a real estate portfolio that cash flows...

ingrownstudentloans

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Re: Case Study - Rent or Sell
« Reply #2 on: August 21, 2017, 08:11:33 PM »
Thanks for the response, Kelly.

I am pretty confident on the $225, but a refinance would come with closing costs (when I looked a couple months ago, I was quoted $10,000 in closing costs) which would almost defeat the purpose, unless you know of a resource that could maybe do it for less.

I had not thought about the 1031 - I will look into that more.  Thanks!

My basis for recapture purposes is right around the mortgage balance.

I often think about what it would have been like to start my career in Nashville.  That $200,000 property would be worth $450,000 or more by now!

tralfamadorian

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Re: Case Study - Rent or Sell
« Reply #3 on: August 22, 2017, 06:43:03 AM »
I'm not an expert on refis but I hear about low and no cost ones relatively often. If you want to keep the property, you can shop around.

Nashville is thrown around as a great place to invest for cash flow. Since you live there, you have an advantage over the out of state investors.

Let us know what you decide!

Cwadda

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Re: Case Study - Rent or Sell
« Reply #4 on: August 22, 2017, 08:33:15 AM »
Here's a useful calculator for running the numbers. I'd be interested in seeing what your cash on cash return is.