Sell or Keep Rental in North Dakota oil boom

[Orion303702]

About five years ago I bought a fourplex in Minot, North Dakota for $138,000. As the Bakken oil reserve started to become big news, prices nearly doubled throughout Northwestern North Dakota.

I currently owe $122,500 on my property.
I have talked to several realtors who value my property between $195,000-$225,000
I'm making $2,825 gross on the four units

The cashflow on this property is netting around $1,150/month currently. Which, is great. However, the property is extremely dated and has several large expenses looming. The roof is 20+ years old, the furnace is 10+ years old, the property still has FUSES (No circuit breakers), the plumbing could use a little work, and other small fixes loom over the horizon.

I bought this property with ZERO down being a VA loan, which is nice if you're looking at this from a leverage standpoint. After I discharged from the USAF I moved back home to Texas and have been a little weary on having an out of state rental. I found an excellent management company and have had success with them for over a year now however.

There are a lot of factors at play here. I'm worried about my cashflow being absorbed over the next 5 years with the pricey repairs I will have to make. I also am worried about the appreciation of the property, I have a feeling I will experience zero appreciation over the next five years with real estate being built in these small cities. Should I take the $100k and run or hang in there?

[SDREMNGR]

I would personally hold it.  Both answers are good in your circumstance.  My reason for holding is to let winners run until you have a good reason to sell.  Also, you will get more for it if you did the major repairs before sale usually.

If you do plan on selling, look into doing a 1031 exchange to a new property where you live. 

[GrayGhost]

I think I'd sell. The oil boom in North Dakota is just that, a boom, and when it ends, you might end up sitting on a property that needs a lot of work and justifies very little from tenants. Apart from that, regardless of how good your management company is, if you've got a bunch of repairs just waiting to be done, you can see all of that cash you've made in the past months vanish pretty quickly.

That said, if you sell now and the property goes up in value by another hundred thou, you might feel like an ass. This is something active traders deal with, as they very rarely time their exits perfectly. It's all a matter of managing risk, and I think your property is getting a bit too risky, at least for my tastes.

[ch12]

I think I'd sell. The oil boom in North Dakota is just that, a boom, and when it ends, you might end up sitting on a property that needs a lot of work and justifies very little from tenants. Apart from that, regardless of how good your management company is, if you've got a bunch of repairs just waiting to be done, you can see all of that cash you've made in the past months vanish pretty quickly.

That said, if you sell now and the property goes up in value by another hundred thou, you might feel like an ass. This is something active traders deal with, as they very rarely time their exits perfectly. It's all a matter of managing risk, and I think your property is getting a bit too risky, at least for my tastes.

Sell

When you pay the money for the maintenance costs, those will become money that's sunk into the fourplex, even if the oil runs dry. This is the best moment to sell it, when the market will definitely snap it up.

Even if it appreciates in value, remind yourself that you would've had to put in more cash to fix everything.

[climber1]

I would like to get a better idea of the finances of the property. You stated that you are netting $1150/month. Is this after mortgage payment? Also, what is the current balance on the mortgage, interest rate, and term?

If I assume that the $1150 is post-mortgage payment, but you are only paying interest (nothing to principal) on the mortgage which I assume is a pessimistic assumption, then the P/E ratio on the investment is 14.1 (using the 195k valuation). I would be very happy with this kind of P/E ratio on stocks. However, what I don't know is how long the Bakken fields are expected to last and how much you think repairs on the property will cost. If you have estimates (even very rough ones) for these questions, I could do a more qualitative calculation.

[former player]

You are worried about it.  That is reason enough to sell on its own - life is too short, and having a source of worry in your life is anti-mustachian, whatever the financial returns.

[frugaliknowit]

Management company is eating a good chunk of your take, out of state Real Estate is a hassle and the Oil boom in ND has probably peaked.  I'd do a 1031 starker exchange and buy something local or just pay the capital gains and move on.  Good job!!

[rmendpara]

About five years ago I bought a fourplex in Minot, North Dakota for $138,000. As the Bakken oil reserve started to become big news, prices nearly doubled throughout Northwestern North Dakota.

I currently owe $122,500 on my property.
I have talked to several realtors who value my property between $195,000-$225,000
I'm making $2,825 gross on the four units

The cashflow on this property is netting around $1,150/month currently. Which, is great. However, the property is extremely dated and has several large expenses looming. The roof is 20+ years old, the furnace is 10+ years old, the property still has FUSES (No circuit breakers), the plumbing could use a little work, and other small fixes loom over the horizon.

I bought this property with ZERO down being a VA loan, which is nice if you're looking at this from a leverage standpoint. After I discharged from the USAF I moved back home to Texas and have been a little weary on having an out of state rental. I found an excellent management company and have had success with them for over a year now however.

There are a lot of factors at play here. I'm worried about my cashflow being absorbed over the next 5 years with the pricey repairs I will have to make. I also am worried about the appreciation of the property, I have a feeling I will experience zero appreciation over the next five years with real estate being built in these small cities. Should I take the $100k and run or hang in there?

Bulls make money, bears make money, but pigs get slaughtered.

Don't be a pig. Be happy with your gains and move on. Because of the higher repair costs and inherent risk of the area (value driven completely by the oil boom), you should require a higher return to compensate for the added risk. At this point, future maintenance/repairs and limited appreciation will eat into your future gains.

I would sell when it makes sense for a fair price.