Author Topic: Real estate conundrum  (Read 2188 times)

wellnessmobile

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Real estate conundrum
« on: June 18, 2017, 06:46:06 PM »
Hello all,

I am contemplating a few things and figured I would regurgitate it on the forum to receive some insight.

I have a rental property on a 5/1 arm that actually does well in regards to cash flow each year. The 5/1 arm is coming to an end in 2018. I am currently a gradaute student and will be finishing my program in Dec 2018 as well. Funny how life works. So here is my barrage of questions:

- Is it more advantageous to pay more than my minimum monthly payment to tackle principle or pay the minimum payment and invest the cash flow?
- I plan on refinancing once I finish graduate school to a 10 year fixed rate. The monthly payment will basically eliminate my cash flow but I will save in the long run by not paying excessive interest on a longer loan. Thoughts?
- Is it worth moving back to the house to refinance as a primary residence or just do it as an investment property?

Thanks!

-Jimmie


waltworks

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Re: Real estate conundrum
« Reply #1 on: June 18, 2017, 09:04:11 PM »
Yo, grad student - provide the details needed to answer these questions.

Such as:
Interest rates!
Life situation - do you *want* or *need* to move back in? Are you headed out of town after you graduate? What's the market like?
Equity/lack thereof?
Monthy rent/PITI/etc? Self manage? Pay a management company?
How much did you pay in the first place? Why did you get an ARM?
Future earning prospects? Investments? SO? If so (har), their finances if relevant?

You have provided no information at all, basically, other than the term of the loan. Nobody can answer any of your questions or help you if you don't tell us anything.

-W

wellnessmobile

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Re: Real estate conundrum
« Reply #2 on: June 19, 2017, 08:07:35 PM »
-W, I solemnly swear that my lackluster was unintentional. However, I will applaud your probes because even with more conviction I would not have covered all the bases.

Current 5/1 ARM interest rate --> 4.5%
10 year or 15 year fixed rate I could get around 3-3.5% ( Of course I cannot pursue this until school is done at the end of 2018)

Life situation: I am rootless at this point and enjoy moving around so I do not need to move back in but I would do it temporarily if it was strategic. The house is in Charleston, SC and I currently live in Miami. There differences could not be more alarming. Honestly, I have not checked the marker lately but I have my house setup for college students and military members so the market is consistent.

Equity = $30,000 or so

Monthly rent $1,565  - (taxes 2,054 + 482 HO6 policy + 2,005 (per year HOA) + 593 (monthly payment but I started paying 800 a month) = $14,141
$18,780 - 14,141 = 4,639 cash flow

**Is it wise to pay the $800 a month vs the minimum? The monthly payments almost split directly now between principle and interest.

Self-managed

At the time I got an ARM because I bought the place from an investor and used a local bank for financing. Purchased the condo for $130,000.

After graduate school is complete and I start my career including my two rental properties I should be hovering around 6 figure mark.

No SO.

waltworks

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Re: Real estate conundrum
« Reply #3 on: June 20, 2017, 10:23:41 AM »
You are in sort of a weird position there. Very little equity, to the point that selling the place would not yield you much after commissions, fees, closing costs, taxes.

But you're also accounting for zero maintenance cost, zero vacancy, and no HOA surprises. Let alone capex. I'd say you probably are cash flow neutral or very, very slightly positive.

Given that you are self-managing from out of state, I'd sell the place just to avoid potential headaches while you finish school and go out into the world.

But I guess that wasn't your question. If you insist on keeping the property long term, I'd refi into a fixed rate loan, and pay the minimum while investing any excess cash flow into something else (not real estate, unless you find a lot better properties).

-W

wellnessmobile

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Re: Real estate conundrum
« Reply #4 on: June 20, 2017, 03:35:06 PM »
I appreciate the candor Walt! A couple things though. I have already dealt with minor maintenance costs since the purchase in 2013 so I do realize it being a potential setback. Since procurement I have never had a vacant room for more than 30 days and since I rent the place out per room I'm still always covering the fixed costs if one room is empty. Thanks for the feedback, it got my gears turning. I'll definitely drop back down to the minimum payment! That will increase my cash flow (minus any surprises) by 2,484 to invest elsewhere.

-J

waltworks

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Re: Real estate conundrum
« Reply #5 on: June 20, 2017, 03:39:18 PM »
Out of state self managing and you're renting it by the room?

Jesus.

Good luck!

-Walt

Blindsquirrel

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Re: Real estate conundrum
« Reply #6 on: June 20, 2017, 06:46:53 PM »

- I plan on refinancing once I finish graduate school to a 10 year fixed rate. The monthly payment will basically eliminate my cash flow but I will save in the long run by not paying excessive interest on a longer loan. Thoughts? - No! your cash flow is not all that great and you have 1 property-

-Cash flow is king and you will end up negative after expense, possibly very, very negative.  If you had 6 paid off places or that pump out cash like a well and wanted to ditch a payment yeah, sure do that. Otherwise no, you do not know what will happen in 10 years, do not sign yourself up for poor cash flow. Unless your grad degree is finishing residency and you will get a fire hose of cash- nope on this.

- Is it worth moving back to the house to refinance as a primary residence or just do it as an investment property? - eh, might be but I agree with Walt, probably ahead to ditch it unless you think appreciation will have you way ahead. Also, the longer you keep it, the steeper the recapture of depreciation costs.  My 2 cents worth and a bargain at half the price.

wellnessmobile

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Re: Real estate conundrum
« Reply #7 on: June 20, 2017, 08:15:16 PM »
Haha, thanks man I love the feedback. I failed to mention I have another property that I have paid off. It is in a small town and only brings in $400 a month. I'll rethink the refinance strategy based on your logic for my condo. The entire property is only worth about $30,000. I bought it from my grandfather for $15,000 when I was 22 years old. In theory, I have been positive every year collecting some money but as you both have mentioned it is chump change if something major happens. Ideas on this house? Sell it and invest elsewhere?

- Taxes = 7xx
- Insurance = 8xx

Around $3,000 cash flow for this place. I have a feeling you guys are going to tell me to get rid of this as well. I may have been living a lie this whole time.

waltworks

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Re: Real estate conundrum
« Reply #8 on: June 20, 2017, 09:46:02 PM »
Which house are you talking about?!?

Is this how you write things up as a graduate student? I mean, sorry, but it's so disorganized that it's hard to even tell what you're talking about from sentence to sentence.

If you aren't making 1% of the market value of the property, per month, sell it. If you are, assess whether the hassle/potential downsides are worth it to you to keep (ie, $30k property might rent for $400 a month - but what happens when a bad tenant sues you?)

If you are a future professional, you can make $4k in a week or two in your career soon, just by showing up to work, even when you're starting out. A $30k property is no way, no how worth the headache at that stage. Just ditch it and stick the proceeds in something boring like a target retirement fund from Vanguard and don't think about it again for 10 or 15 years.

-W

Cwadda

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Re: Real estate conundrum
« Reply #9 on: June 21, 2017, 06:47:59 AM »
Attached cashflow spreadsheet for organization purposes. Use it for your (both?) properties. Assess cash on cash return, factor in property management if you are living halfway across the country, then make a decision whether to sell.

Lan Mandragoran

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Re: Real estate conundrum
« Reply #10 on: June 21, 2017, 08:41:49 AM »
Cwadda, I really like your calculator there (or whoever made it). I especially like the idea of breaking out CapEx like that.

Cwadda

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Re: Real estate conundrum
« Reply #11 on: June 21, 2017, 08:47:31 AM »
Cwadda, I really like your calculator there (or whoever made it). I especially like the idea of breaking out CapEx like that.

Thank you. It was a calculator that someone else made that had most of the content and I just modified things a bit.

wellnessmobile

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Re: Real estate conundrum
« Reply #12 on: June 21, 2017, 11:43:59 AM »
-Walt, you are like the Dad I never had. Your tough love and criticism is refreshing. For the sake of my manliness I will retort that my graduate work is superior to my post.

-The entire last post was relating to the small home that rents for $400. The only sentence regarding the other home was the statement about refinancing since it is the only house with a mortgage. In the future, I'll be sure to not raise your blood pressure. Thanks for the help!

-Cwadda, the spreadsheet is solid, thanks for looking out.