Author Topic: Need mustachian advice on rental property options :)  (Read 2285 times)

jeastith

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Need mustachian advice on rental property options :)
« on: March 12, 2014, 08:48:34 AM »
Hi!  Jeannie-stache here!

I'm hoping a more experienced landlord can chime in and offer some advice.  We currently own two homes in Philadelphia.  The dilemma is whether to sell one or both of our houses, turn them both into rentals, or hold onto one and sell the other.  Which one makes most sense financially?  We've been back and forth.

We just completed paying off $50,000 in student loans in 6 months after jumping on the STACHE-train!  Whahoo!  However, while we are very happy to now have NO DEBT besides these two mortgages, we have very little cash on hand right now.  We have $10,000 in savings and want to move as soon as possible to be closer to my husband's work and have more room for our family.  We are squished into a tiny 2 Bedroom house, with a baby and my sound booth (I'm a professional voice over artist) sharing a bedroom.  Plus we want to have another baby soon.   

If we chose to stay in our current house until we had 20% down payment to avoid PMI, it would take us about 5 or 6 months to save the amount needed. 


So, here's the story:

House ONE:
We could sell it for:  $200,000
We owe: $150,000
Mortgage payment per month: $750
We are getting: $1500 per month in rent

House ONE is currently a rental property. While nice, the area isn't a particularly desirable one, and the house is old.  Much of it has been renovated (new kitchen, nice bathrooms, etc) but it has very old wood floors (not in a nice way), no central air, and old plaster walls.  It currently needs $5,000 in stucco repairs and about $1000 in other random repairs.   

The second house:
We could sell it for: $325,000
We currently owe: $252,000
Mortgage payment: $1751.00 per month
We could get: $1900-2000 per month if we rented it

House TWO is in a very up and coming area of the city.  Everything in this house has been re-done.  It's shiny and newly updated with an enormously desirable roof deck.  We both feel that if we held onto House TWO, that it would significantly increase in value in the next 10 years because of the area in Philadelphia that it is located in - its an area that seems to already be appreciating quickly. 

Advice please!!!

   

KingCoin

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Re: Need mustachian advice on rental property options :)
« Reply #1 on: March 12, 2014, 11:23:38 AM »
Both are pretty marginal. Neither strikes me as a screaming sell or a great investment.

If you're a true believer in the appreciation story for house 2, I'd be inclined to hold it for a couple years to see if your thesis plays out. Otherwise, I'd sell it. The numbers aren't good enough as a long term rental.

Also, if you buy a third house, you're getting really levered. You have to ask yourself how well you'll be able to weather an extended vacancy, major repairs, or a price slump in one or both properties. Since neither is a home-run investment, I'd prioritize mitigating financial risk and sleeping well at night over hanging on to these come-hell-or-high-water.
« Last Edit: March 12, 2014, 11:28:53 AM by KingCoin »

Milspecstache

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Re: Need mustachian advice on rental property options :)
« Reply #2 on: March 12, 2014, 05:49:45 PM »
If you are considering buying another house just make sure you talk to the bank ahead of time.  They have really changed the lending laws recently to require large sums of cash in reserve.  What I remember last is 6months of payments for the rentals and new purchase with zero consideration given to the income from the rental.

waltworks

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Re: Need mustachian advice on rental property options :)
« Reply #3 on: March 12, 2014, 11:04:30 PM »
Well, house 2 only works as an investment if you're right about the appreciation. It's going to be severely negative cash flow once you account for maintaining it and if you hold it that long without living in it, you'll also be paying capital gains on the profits when you sell. With enough appreciation (I'd get cozy with excel and try out some scenarios if I were you) anything can be a good investment but given all the overhead costs/negative cash flow and your situation (not enough $ to avoid PMI on another house), it is going to require a LOT of appreciation.

House 1 strikes me as potentially worth holding onto if rents in the area are on the rise in general. You already have experience as a landlord so you know the basics, I assume. If it's in such bad shape that tons of money has to go in to keep it rented (which sounds like the case), I'd probably dump it - especially if you occupied it recently enough to avoid capital gains.

I think the odds of either of these doing better than break even over the long term are mediocre and you will massively simplify your move to a new place by selling them.

jeastith

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Re: Need mustachian advice on rental property options :)
« Reply #4 on: March 13, 2014, 08:01:22 AM »
Thanks all!  At this point, I think we are going to sell house #2 for sure.  I think it will go up in value, but we just need to get on with our lives, and having that huge mortgage on our books doesn't make much sense.  Still up in the air about what to do about House #1. 

arebelspy

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Re: Need mustachian advice on rental property options :)
« Reply #5 on: March 13, 2014, 08:13:18 AM »
While I probably wouldn't be purchasing under those numbers, I'd almost lean towards keeping because of transactional costs.  Letting it sit and allow equity to increase isn't a bad play.

However that's iffy due to this:
Quote
the area isn't a particularly desirable one, and the house is old.

If that wasn't the case, it'd probably be a keep.. as it is, it'll be a more personal call.
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