Author Topic: Continue Renting Out or Consolidate Down  (Read 1307 times)

Ensign1999

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Continue Renting Out or Consolidate Down
« on: June 27, 2016, 11:57:36 AM »
  Next year I will be retiring out of the Military.  We currently own two rental properties from previous duty stations that we held onto (partly out of desire and partly out of not being able to sell without a huge loss due to the crash).  With the shift in jobs we started thinking about potentially selling one of the properties and using the proceeds from the sale to pay off the second properties so we can reduce our mortgage obligation and generate more income.  Below are the stats on the two properties...

MD house we are considering selling:
Market Value: Zillow has it at $235k, but it is a unique property (separate mother-in-law suite) and I think would go for a bit more
Original Mortgage: We paid $290k for the property, and the current mortgage's original amount was $217,414
Interest Rate: 3.5% Fixed
Term: 15 year
Term Remaining: The last payment would be December, 2027 so 11.5 years or 138 payments
Amount Remaining: $176,365.55
Gross Rents: $1620 ($1,800 - 10% management fee...we might be able to get rid of the management as we live a bit closer to this property now)
P+I: $1,554.25
T+I: $277.17
No other fees.

FL Rental
Market Value: $184k
Original Mortgage: We paid $149k for the property, and the current mortgage's original amount was $126, 034
Interest Rate: 2.875% Fixed
Term: 15 year
Term Remaining: The last payment would be September, 2027 so 11.25 years or 135 payments
Amount Remaining: $99,418.46
Gross Rents: $1350 ($1,215 - 10% management fee)
P+I: $862.81
T+I: $203.13
No other fees.

The MD house has great long term renters in it that just signed on for another year, and might be interested in buying the property.

The FL house has new tenants in it that are six months into a 12 month lease.  They seem like solid tenants and are quick to let the management company know when there is a problem so hopefully this is translating into the property being taken care of.

The thought was to sell our MD house to the current tenants without using any real estate agents so we could get close to what we owe on the FL house.  This would get rid of two mortgage payments and start generating some income.

Any thoughts and recommendations are appreciated.  Let me know if you need any other information.

dandarc

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Re: Continue Renting Out or Consolidate Down
« Reply #1 on: June 27, 2016, 12:31:32 PM »
My thought is sell them both and invest the proceeds in better-cash-flowing property or just dump into index funds.

Even if you had no mortgage and no management fee on the Florida property and no other costs whatsoever other than T+I, you're only seeing $1150 / month on something with a value of $184K.  That works out to about 7.5% annually.  And that's in fantasy land where the house is already paid off and you don't have any other expenses.  The only way to make this particular house pay decently is with leverage, and even that only really works to any significant degree in a similar fantasy-land without much in the way of maintenance / vacancy / marketing / other costs.  In reality, you'll clear quite a bit less than that.

Find a better investment, or accept you're banking on appreciation and not cash flow, and approach the investments with that in mind.

Ensign1999

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Re: Continue Renting Out or Consolidate Down
« Reply #2 on: June 27, 2016, 12:46:41 PM »
My thought is sell them both and invest the proceeds in better-cash-flowing property or just dump into index funds.

We have thought about that as well, but have a couple of concerns we are looking into.  The first is that the FL house has been a rental since 2004.  With depreciation we might end up paying quite a bit in gains tax.  We are having a CPA run these numbers for us.  The second concern is just a comfort one with not having the income.  Both houses have done well for us with respect to having reliable rents.  As I continue to learn more to help us progress to FI I might become more comfortable with Index Funds and other investments, but I'm not there yet.  We are not apposed to selling both if it makes sense to though.

Thank you for the feedback!

dandarc

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Re: Continue Renting Out or Consolidate Down
« Reply #3 on: June 27, 2016, 01:04:21 PM »
Taxes are a consideration.

Back of the napkin math says you'd clear something like $45K on the Florida house today, or $145K if it were paid off, after tax.  So, say your MD sale goes swimmingly, and you get exactly enough to pay off the Florida house.  You'll clear $145K after federal taxes if you sell the florida house (plugged the numbers into the calculator here - went with $149K / 27 * 12 years for depreciation amount, and 10% selling costs): http://www.orexco1031.com/Calculators/CapitalGains.aspx). 

So you've got a best-case current cash-flow of 9.5% on that $145K if you dump the property manager and you never need to fix the place up or spend money to get a new tennent - better than just looking at the gross sale price, but still not great for real-estate.

Ensign1999

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Re: Continue Renting Out or Consolidate Down
« Reply #4 on: July 03, 2016, 09:14:01 AM »
Bumping back to the top in hopes of getting any other thoughts from some more folks.

Thank you!