Author Topic: Need some advice  (Read 1679 times)

ducky19

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Need some advice
« on: November 29, 2016, 07:56:41 AM »
DW and I moved into our new house a couple of years ago and decided to hang onto our old place and rent it out. We have been fortunate to have really good tenants. The mortgage, which is on a 15 year note, is $804 including taxes and insurance. We are renting at a market rate of $1000/mo which means we are cash flowing a little under $200/mo. We have about $40k in equity in this home.

I recently started thinking it might be a good idea to sell this place and use some of the equity as a down payment on a couple of other properties and finance them over 30 years. We live in a fairly LCOL area and I have found an abundant supply of properties in the $50-60k range that would rent for $800-900/mo. I've done the math and even after accounting for vacancies, taxes, insurance, etc. we could cash flow $700-800/mo, plus still have $15-20k as a cash cushion for maintenance/repairs. I figure that at 42-48% ROI (if my math is not off).

I mentioned this to DW and she seems to be a little put off by the idea. She mentioned the risk that both properties could be vacant at the same time, which is definitely a possibility although improbable. I see it as spreading the risk of this happening vs. keeping all of our eggs in one basket. I get the feeling she has other reservations but has not voiced them. Her dad has approx. 20 rental properties, so I know that I can pick his brain for advice at any time. I have no problems keeping our situation status quo, but I feel like we're missing out on the opportunity to generate significantly more cash flow (which could in turn be used to buy more properties).

I guess I'm looking for pros v cons of selling the old house and moving ahead with this plan. Any input would be appreciated. If you need more information just let me know. Thanks in advance!

ducky19

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Re: Need some advice
« Reply #1 on: November 29, 2016, 11:30:12 AM »
New information: escrow on the old house ran short this last year, so new payment starting in January will go to $931, meaning we're not even cashing $100/mo. It's looking more and more like we should offload it...

arebelspy

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Re: Need some advice
« Reply #2 on: December 04, 2016, 07:03:17 AM »
You are not cash flowing at all, when you take into account vacancies, repairs, etc.  You are losing money.

Of course, that's on a 15-year note, so we'd need more data to see how it actually looks, but probably not stellar.  It's very likely a sell, regardless of if you decide to put the money into more rentals, or stocks, or what.

See the case study sticky in this section of the forums for how to post more details for feedback.

She mentioned the risk that both properties could be vacant at the same time, which is definitely a possibility although improbable. I see it as spreading the risk of this happening vs. keeping all of our eggs in one basket.

Definitely.  More houses = less risk per house.

A vacancy when you own one is 100% lost rent.  When you own 2, only 50% lost rent. When you own 10, only 10% lost rent.  Etc.


Quote
I get the feeling she has other reservations but has not voiced them.

Ask her, not us.  Have an open, and honest, and non-accusatory conversation.  :)

Good luck!

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ducky19

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Re: Need some advice
« Reply #3 on: December 07, 2016, 12:10:51 PM »
Thanks for the response. Here is the info for a complete case study:

Market Value: $112000
Original Purchase price: $91,200
Original Mortgage Amount: $91,200
Interest Rate: 3.10%
Mortgage Term: 180 months
Term remaining: 132 months
Amount remaining on mortgage: $71,307.77
Gross Rents: $1000/mo
Principal and Interest (the P&I of your PITI - should match with the above info): $534.21
Taxes and Insurance (the T&I of your PITI): $297.06
HOA costs: none
Deferred maintenance notes: not sure what this is, assuming N/A
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): N/A

I suspected before the escrow amount increased that it made more sense to sell, but now I'm even more convinced. Since we bought our current home about 2.5 years ago, do you know if we would still qualify for the capital gains exemption? The way I understand it, as long as you lived in the home for 2 of the past 5 years you are good, but I wasn't sure how that worked since we've claimed depreciation on it as a rental.

arebelspy

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Re: Need some advice
« Reply #4 on: December 07, 2016, 12:20:15 PM »
Right around the 1% rule.

Your taxes and insurance suck.  No HOA is nice.

You aren't cash flowing because you're on a 15 year am. That's basically like taking your cash flow and dumping it into your low rate mortgage.

I'd personally get a 30-year loan at those rates, and just pay the minimum, as an inflation hedge against the US dollar.

It's a marginal keep vs sell. If it was on a 30 year, with that rate, I'd lean towards keep.

Unless you didn't want to be landlords.  Since you're talking about putting the money in other properties, that seems not to be an issue.

Since it's about 50/50, given the frictional costs of selling, I'd lean towards keep.

Basically right now if you had the down payment, but not house, I probably wouldn't buy it.

But if you have the house, I probably wouldn't sell it.

Normally if you wouldn't buy, you should sell, but that's assuming no costs. I would buy for the net equity you could get out after costs.

Hang onto it, and it'll provide roughly 6k/yr in ER in a decade, inflation adjusted. Pick up another 9 more and you should be about set.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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ducky19

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Re: Need some advice
« Reply #5 on: December 08, 2016, 11:16:24 AM »
Thanks for the response. Part of me feels we should keep it as is and just raise rent to $1100 when the lease is up (will have no issues getting it) knowing that we're building equity and it will be paid for in 11 years. The other half of me sees the equity as the perfect way to expand and start a little rental empire. Will definitely have to talk with DW more and go through our options. Thanks again!

arebelspy

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Re: Need some advice
« Reply #6 on: December 08, 2016, 06:24:26 PM »
Thanks for the response. Part of me feels we should keep it as is and just raise rent to $1100 when the lease is up (will have no issues getting it) knowing that we're building equity and it will be paid for in 11 years. The other half of me sees the equity as the perfect way to expand and start a little rental empire. Will definitely have to talk with DW more and go through our options. Thanks again!

It's worth 112k.  You owe 71k.

Minus say 10% to sell (Realtor fees, closing costs, any minor fix ups needed from an inspection, etc.).  That leaves about 30k.  Minus taxes on the gains (say, 25% on the 112-91k selling/buying difference = 5.25k.  Depends on how long it was a primary residence vs rental though).  You're left with about 25k.

I mean, it's nice to have, but it's not that much equity, frankly--you think you'd be able to use that to get more than one rental, in your area? (I don't know where you are, so I couldn't say.)

I'd guess no, because banks will typically want 25% down for a rental, and won't lend on amounts < 50k.  So the purchase price has to be at least 66k (so that 75% of that, after you put 25% down, is 50k or more).  Meaning the downpayment has to be about 16k or more. So with 25k, you wouldn't have enough to do 2.

The frictional costs that cut the equity from 41k to 25k is why I said I'd lean towards keeping it, since you already own it.

I'd just work on saving up the down payment for the next one.  And then the next. Get 30 year mortgages, and roll the cash flow into the next downpayment, not into paying down loans at low rates.  Eventually you may do a massive refi on the portfolio or something once you have significant equity, but for now, it's just the buildup phase.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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Landslave

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Re: Need some advice
« Reply #7 on: December 14, 2016, 07:20:17 PM »
I am with Arebelspy.  Keep it.  A 3.1% rate is going to look better and better.  The total rate of return does not count depreciation to you, nor appreciation of the house.   AND...if you increase rents to $1150 or $1200 HALF WAY through the payoff period of the mortgage the balance changes. 
And, here is another thing, you are already renting a house which you own which is renting at about 3% per month on your equity....that makes it a keeper to me....in otherwords, it is fairly well levereged, still, and you are cashflowing with added principal being paid in each month. Hello!  Isn't that what we are all seeking?

 Especially considering that you will have 10% selling costs if you sell it, I say raise the rent to get a safety margin cash flow and let the tenants pay for the house for you. No mortgaged homes with mortgages 90% loan to value are going to make that much money.  So do you want a 30 year mortgage or a 15 year mortgage?

  You can also possibly eventually get some of your equity value out of the home by a second mortgage.

   Instead of selling, have you considered keeping it and, instead, saving hard to get a downpayment for the next one.  Possibly to BRRR with

  Buy
  Renovate
  Rent
  Refinance
  Repeat

  Good luck.  These are nice problems to have!

  - Landslave