The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: RockYourSocksOff on January 24, 2017, 06:23:20 AM
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I'm trying to determine if my rental property is worth hanging onto. Here are the pertinent details:
- -Property was our first home
- -Property is a town home with an HOA
- -Purchased in 2008 for $125,000 with like 2-3% down
- -Refinanced in 2011 at 3.75% 30-year
- -FHA loan so mandatory PMI for 5 years
- -Current balance $97,920.50
- -No more PMI starting March of this year, this is close to $100 per month
- -Monthly HOA fee of $167.50
- -Monthly payment of $801.22 including interest, taxes and insurance
- -Property management fee of $80 per month plus half of one months rent for every 12 months of signed lease
- -Rents consistently for $1150 a month with usually less than 2 weeks turnover time
- -Maintenance expenses have been incredibly small, will need carpet and paint in the next 2-3 years
- -I would estimate the current value at $120,000 to $125,000
- -A large lake, recreational trails, retail and new home development is going in across the street so I hope to be able to increase rent soon
We decided to keep this home as a rental because when we were ready to move the value had dropped 20-30%. We didn't feel comfortable selling at that price and it turned out to be very easy to find tenants. I think the value has mostly recovered and after 5 years of renting the property we've had no problems or surprises. I don't think I would have ever purchased this property as an investment but with the costs associated with selling compared to how easily it's rented I'm not sure it makes sense to sell. I'm sure there is something I'm not thinking of. Would love some feedback. Thanks!
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I'd hold on to it until these projects have been completed. Then I'd figure out what I could sell it for contrast that with what I could rent it out for.
I think those improvements would lead to a greater increase in sale price rather than monthly rent. However in the coming years it seems interest rates could rise which could push home prices down (and rents up).
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I'm guessing the actual interest & expenses cost of this loan is about $500 a month. I find it appropriate not to include principal repayments as this is just swapping cash for equity.
Can you calculate a return on equity for us?
Rent (assume 50 weeks) then deduct,
- interest, taxes, insurance
- property management fees
- utilities
- repairs and maintenance
= cash income
(about here I add in 3% long term appreciation)
Divide the total by your equity invested in the property which is $22,000
= % return. If you are happy with the % figure then keep it.
You will get a lot of people here who say they will only invest if blah blah or rule this and rule that. For me it's just never that simple (capital appreciation is the wildcard in my area, otherwise no one would ever do it).
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I'd definitely keep it until the neighborhood improvements are complete. Trails, lake, new homes and new shops will improve your value here no matter if you end up choosing to sell or to keep it as a rental.
Also, do you really need the property manager? are they worth $80/month and 2 weeks of lost rent per year? Can you do this yourself?
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I'd definitely keep it until the neighborhood improvements are complete. Trails, lake, new homes and new shops will improve your value here no matter if you end up choosing to sell or to keep it as a rental.
Also, do you really need the property manager? are they worth $80/month and 2 weeks of lost rent per year? Can you do this yourself?
Based on the numbers you gave you are barely breaking even each month.
$1150 Rent
- $1050 Expenses
- ??? Repairs/Maintenance
= $0-$100 per month.
Without any major repairs in the last 8 years, its likely you have some bigger ticket items coming soon. Just a water heater or appliance could wipe out almost a full year of profit.
I agree with the others so far. Wait until improvements are finished in your area. Unless you can increase rent by $200+ a month, probably isn't worth holding as an investment.
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If you plan to have rental property as part of your strategy, you should keep this one. For several reasons. First, you have already paid the big costs of purchase and loan origination. Second a sub 3% interest rate fixed for 30 years means that you will be paying no interest over that time as the value of the house and the rent will increase about the same pace as the loan interest rate. An $800 payment will likely be laughable 30 yrs from now. Third, the costs of this rental are confined. A row house is relatively low risk as the costs of maintenance are unlikely to have many surprises. Fourth, when the PMI drops off the mortgage in March, you will have a decreased payment about 2/3 the cost of the HOA fee. That seems to tip the value of keeping it to your favor. Fifth, you are highly leveraged at a low cost, which gives you a darn good return already, when you add the bottom line value of depreciation, this is going to become an ever-increasing value to you.
For me, this is a keeper. I would still be paying that $800 payment in 2042 when it is a lower cost than the typical 2014 electric bill will be. And by 2042, the rent will be more than double what it is now.
My friend bought a house for $32,000 in 1969 when he was 27 yrs old. The mortgage was about $260 per month and was finally paid off in 1999 when we was 57 yrs old. The home was worth $186,000 in 1999 and rented for $2000 per month. At the end, my friend was paying his mortgage quarterly. He still owns that house today (75 yrs old) and it is worth $410,000 and rents for $3,100 per month. It yields the same amount as his social security check.
I say keep the long view, keep the property, and buy 5 more like it.
Landslave :-)