The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Brilliantine on August 04, 2015, 06:35:17 PM
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Hi,
I have a property in Gilbert, AZ which I bought as a first-time home for ourselves in 2012. After a year in the house, due to a job change, I moved to another state and decided to rent out the house. This seemed like a good idea at the time but I have to say I didn't do the math on it. In light of the recent MMM post, "http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/", I'd like to ask the forum for advise on course of action. Here's some data:
This is a single family home on a tiny lot in a subdivision. Two floors, 2 master bedrooms and 2.5 bathrooms, two-car garage, and (I don't know how relevant but) desirable finishes.
| Purchase date | Oct 2012 |
| Purchase price | $150,000 |
| Original loan | $145,500 |
| Interest Rate | 4% |
| Principal Balance | $138,200 |
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| Monthly P&I | $694 |
| Monthly PMI | $139 |
| Monthly Other | $136 |
| Monthly HOA | $90 |
| Monthly PM | $85 |
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| Monthly Rent | $1,100 |
| Rented since | Jan 2014 |
| Lease renewed | July 2015 for 12 months |
Here's some subjective data. My tenant (I've only had one) is good; never missed a payment. My property manager provides good, if a bit pricey, service.
On a related note, upon moving, I bought another property for us to live in. Aaaand, moved again. I am selling this most recent property now and hoping to make a profit.
So, keep the Arizona house?
- If so, try to pay down some of the principle to bring the loan-to-value below 80% or 78% hoping the PMI goes away?
- OR, refinance the loan to less than 75% LTV (because it is now a rental/investment property) and get rid of the PMI? (Would probably cost $5,000-$8,000)
Or sell the house?
- Possibly high transactional costs in the form of realtor fees, closing costs, capital gains tax on the profit, and reclaimed depreciation. Zestimate is $180,000 and is probably slightly higher than market value.
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I'd keep it. But I'm a buy and hold investor. It is not cash flowing at this time but the principle is being paid down and rents are going up. If you count the amount being paid towards principle, appreciation, and tax benefits, then I would bet you are doing ok on this one. If you can reasonably get rid of the PMI that would obviously be great. I wouldn't spend too much doing that. Check with the mortgage lender to see when you can get it removed. This usually requires an appraisal. But find out what LTV it needs to be to drop off and work on getting it there if you can.
You are 3 years in and the amount going towards principle will start increasing. I'd hate to refinance and start that process over. I do a lot of mine on a 15 year. I know this costs me on cash flow but the long term savings is worth it to me. Gilbert is a good area and you were smart to hire a property manager. It looks like they charge you 8%. This is very reasonable if they found you a great tenant and keep sending the rent checks. Especially since you are out of town.
I play the long game and would actually buy properties close to this. I know many disagree but I'm doing fine.
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Side note: Buy and hold investor doesn't mean you have to buy bad investments and hold them. You buy *good* investments and keep them. I'm a buy and hold investor-- each of my properties is a *minimum* of $200 a month in cash flow after having figured in mortgage, taxes, insurance, vacancy, tenant placement, short and long term maintenance, etc.
Objectively, this is a terrible investment. You are $44 out of pocket every month, and that's presumably not including the inevitable vacancy, eviction, or roof replacement that you need to average in over time. Even if you get rid of PMI, it's still going to be a dog. This amount financed could be cash flowing $600 or more every month with fairly minimal effort. And you'd still be a buy and hold investor. ;)
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Raise the rent $90 this year to cover HOA, and $90 more next year to cover PM.
Continue raising the rent every year - market values are increasing, as well as inflation, and you can rent it out for more than you're getting today.
If your renter balks, sell.
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If things continue to work out for you then you are making like 5% on your investment. I have rental analysis spreadsheet I put your numbers in. It's attached if you want to play with it.
Here's my thoughts.
- You might not be so lucky with your next tenant
- You aren't saving much for Capital Improvements
- You're not paying yourself as a property manager
- You've got very little wiggle room
Here's what I'd think about.
- "Could I be making more money with a different investment without the same risk?
- What am I forgetting to include in my expenses? Repair costs, my time, administrative costs, taxes, vacancy, turnover...
I too am a buy and hold investor with 11 units. Over the long haul things break, tenants have issues, and statistics work out. On average I spend at least 100 per month per unit on "stuff," not including labor, travel, my time, taxes, loss or property management.
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Not even close, sell because you are losing money every month on it.
Monthly Rent - Month Expenses (listed) = -44/month
You also have to factor in maintenance and vacancy costs which are variable and area dependent. Given your good tenant and in a decent area I would factor maintenance at 10% of rent and vacancy at 5% of rent.
-44 - 110 - 55 = -209/month
One reason that people keep negative cash flow rentals is because they are upside down on their mortgage. This is not case for you so you should sell. Good luck.