Author Topic: to re-fi or not to re-fi to fund another house purchase  (Read 7533 times)

clarkfan1979

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to re-fi or not to re-fi to fund another house purchase
« on: December 19, 2014, 07:36:39 PM »
Rental #1 in Colorado. 4 bed/2 bath/2200 sq. ft. Purchased in 2007 for 182K. Owe 122K. Worth about 240K. Mortgage is 950 and rent is 1450. College Rental. Spent 10K on fixing it up, mostly sweat equity.

Current House in Florida: 3 bed/2 bath. 1750 sq. ft. Purchased in Jan 2012 for 95K. Worth about 160K. Owe 82K. 30 year loan at 4%. Spent 16K on fixing it up, mostly sweat equity.   

We have 50K combined student loan debt at about 5%. I have 48K and she has 2K. I went to grad school full-time for 7 years to get a PhD. My income isn't great now, but it should improve over the course of my career. I work 8 months a year.

There is a small percentage of foreclosures left in our neighborhood from the housing market collapse. The current plan is to buy one more house similar to the one we have now. We will move into the new house and rent out our current house. Current house would rent for about $1300. Our current mortgage is $665 including $42 in mortgage insurance.

We currently have 21K in cash and will have 30k in cash by May 1st in which my wife will no longer work full-time at 60K, but will switch to part-time at 25K/year. I make 50k/year. We currently live on about 60K/year, but could probably live on 50K/year. Even though we will have 30K in cash, I think only 20K will be available because I like to have a 5K emergency fund for each rental.

If we buy a similar house as our current house, it would be around 120K and would need about 5K-15K worth of work. Current mortgage rate is 3.875% for a 30 year and 3% for a 15 year.

Our credit union will only let us re-fi with 20% equity. If the house appraises out at 160K, we could pull out about 45K. Do we re-fi and have plenty of cushion for the next purchase or do we try to make it work with 30K? We would need about 6K for a down payment and 3K for closing costs. We would need an extra 2K for closing if we didn't put 20% down because we would need 18 months of pre-paid taxes and insurance instead of 6 months. Repairs would most likely be in the 5K - 15k range.   

I feel really confident about the next purchase but I wanted to weight the pros and cons of the re-fi. I feel like doing the re-fi because it would be less stressful with a little bit of extra cash cushion.



Georgiaboy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #1 on: December 19, 2014, 08:19:37 PM »
I'd do the refi.  It's nice to have a cushion, and gives you more flexibility on what you can buy, whether it's a little higher purchaser price or something that needs more work. After the dust settles I assume you could always pay back the excess, either on the refi loan or on whatever your highest rate debt is.

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #2 on: December 20, 2014, 06:31:41 AM »
You are cutting your household income to $75k and you are currently spending $60k.  You think it might be possible to reduce the spending, but you haven't done that yet, so you can't be sure that would work.  You have a rental 2,000 miles a way that over time is likely to be cash flow negative, once you include vacancy and capital improvements.  You have college student tenants, so your maintenance and repairs will likely be higher than average.  Your house in Florida will at best be cash flow neutral over time.

You have $50k in student loan debt.  You don't indicate whether you have car loans or other debt, so I will assume you do not.  You are only going to put 5 percent down on the new house, so you will have PMI on that loan as well.

In your shoes, I would not consider doing what you plan because of the risk you are taking on for very little reward.  You will not have enough in reserves to cover the fix up on the new house, any gaps in income from the properties, or a personal emergency.  Also, if you refi your house as owner-occupied, you may have trouble purchasing another owner-occupied house in the same area for a year because of Fannie/Freddie restrictions on buying those loans.  You should discuss this with your lender before you do anything.

I would pass on the purchase for now and I would get rid of the student loans ASAP.  After a year or two of living on $50k and with the student loans paid off, I would reconsider.

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #3 on: December 20, 2014, 01:28:26 PM »
Good point about cutting expenses. I think I can convince my wife that we should practice living on 50K before she cuts down on work. If things got tight working 3 days a week at 25k/year she could easily work 5 days a week for 40K (40 hours). However, her current manager position of 60k/year at about 50-60 hours/week is bit too much to be sustainable.

Good point about the one year timeline for the re-fi and new purchase. I do need to call my lender.

I do respectfully disagree with rentals not being cash flow positive. I have averaged $400/month cash flow positive the last 3.5 years for the Colorado house. For my current house, my mortgage is $665/month and the current rental rate is around $1300/month. I think I could make a lot of mistakes and still be cash flow positive.

I put myself out there and asked for it. So please keep the comments coming. 
   


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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #4 on: December 20, 2014, 02:02:27 PM »
Read up on the 1 percent and 50 percent rules on this site.  Check out the Bigger Pockets site.  Read this blog:  http://www.nononsenselandlord.com/

Over time, your operating expenses, including your capital improvements, will average 50 percent.  If you have newer properties, you may keep it at 40 percent or a little less for the first 10 or 15 years, but older properties need more work.  You will have vacancy and collection losses.  You will have to put on roofs, replace furnaces, and do other expensive, major improvements to your properties.  One bad set of college students in Colorado could mean another $10k in rehab costs.  You need to allow a percentage for management, even if you are doing the management job yourself.  Because it is a job...

Your Colorado rental rents for $1,450.  That means over time on average $725 is available to pay the P&I and PMI of the mortgage and any excess is your cash flow.  You estimate of the current rent on the Florida house is $1,300.  On average over time, $650 will be available to pay the P&I and the PMI on that house and provide cash flow.  What's your cash flow and your ROI under those scenarios?

I really do not think you are ready to buy another house yet, based on what you say.  Your risk exposure is very high.  Lower your risk by killing the student loans and proving you can live well below your means before you take on another large illiquid asset and the mortgage that goes with it.  That's what I would do.




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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #5 on: December 20, 2014, 02:07:29 PM »
Agreed - your CO home is cash flow negative over the the long run.  Compounded by the fact that it's a student rental and wear & tear is generally higher, as mentioned above.

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #6 on: December 20, 2014, 04:32:46 PM »
Thank you for the comments. I agree with the exposure to risk. That was kind of the answer I was expecting. However, I am having a hard time thinking of my Colorado rental as cash flow negative. Over the past 3.5 years, I am $16,800 in the black and part of the reason why I am considering buying another house. Yes, things will go wrong. However, I don't see losing $16,800 in the future when rents will continue to rise and my mortgage will stay the same. I understand the general rule. However, I think reality trumps a general rule. New roof in 2004 and I paid for a new furnace in 2007 which cost $2500.

Have any experienced landlords gone against the 50% rule? 

sammybiker

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #7 on: December 20, 2014, 04:48:19 PM »
@clarkfan re: going against the 50% rule - I think you can beat this based on a short term basis ONLY (5yrs?)  by 1) in-house (YOU) management 2) in-house (YOU) basic repairs/maintenance and 3) recently renovated (you renovate the property, ensuring you'll have no major repairs to the roof, furnace, hot water, etc. in the next 5yrs).

After the 5yrs, you sell.  Boom - you beat the 50% rule. 

Long term, however, you're rarely going to get away from the 50% rule.  Most here would argue that you must pay yourself for the management of the properties, time performing repairs, etc...whether or not you count that as part of the "50% or not" is your call...but it certainly doesn't make for a very passive investment.  It's a second job.

For my out of state rentals, I'm working with a 38-42% rule and this is AFTER renovation and on low turnover, single family homes in a quality school district - certainly not college rentals.  Out of state management is expensive, period.  But that 38-42% is quite passive once the tenant is installed.

My opinion only.  I know that I was shocked when I first began to understand the 50% rule.  I was further shocked that even though I'm investing in one of the highest cashflow cities in the US (buying 30k homes that rent for 700/mo), I'm still not seeing 50%...40% is a good average.  But it's the truth and should be your base number to start with.

From there, you can start working to squeeze a % here or there via best management practices, better insurance rates, longer term tenants, etc.
« Last Edit: December 20, 2014, 04:50:24 PM by sammybiker »

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #8 on: December 20, 2014, 08:06:28 PM »
@clarkfan re: going against the 50% rule - I think you can beat this based on a short term basis ONLY (5yrs?)  by 1) in-house (YOU) management 2) in-house (YOU) basic repairs/maintenance and 3) recently renovated (you renovate the property, ensuring you'll have no major repairs to the roof, furnace, hot water, etc. in the next 5yrs).

After the 5yrs, you sell.  Boom - you beat the 50% rule. 

Long term, however, you're rarely going to get away from the 50% rule.  Most here would argue that you must pay yourself for the management of the properties, time performing repairs, etc...whether or not you count that as part of the "50% or not" is your call...but it certainly doesn't make for a very passive investment.  It's a second job.

For my out of state rentals, I'm working with a 38-42% rule and this is AFTER renovation and on low turnover, single family homes in a quality school district - certainly not college rentals.  Out of state management is expensive, period.  But that 38-42% is quite passive once the tenant is installed.

My opinion only.  I know that I was shocked when I first began to understand the 50% rule.  I was further shocked that even though I'm investing in one of the highest cashflow cities in the US (buying 30k homes that rent for 700/mo), I'm still not seeing 50%...40% is a good average.  But it's the truth and should be your base number to start with.

From there, you can start working to squeeze a % here or there via best management practices, better insurance rates, longer term tenants, etc.


Thank you for the clarification. Yes, I did renovate myself after buying and do not anticipate anything major for 5-10 years. I guess I'm not allowed to count some of the money in my bank account because I have been managing myself. I'm ok with that.

I'm also glad to hear that you are not getting 50% but still buying properties. It sounds extreme to only do 50% or nothing. In my opinion you have to start somewhere. You are not going to be able to get those great returns without some practice. As you suggested, over time you can get closer to 50%. I don't think coming up a little short is not a failure.

arebelspy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #9 on: December 20, 2014, 10:51:21 PM »
I'm also glad to hear that you are not getting 50% but still buying properties. It sounds extreme to only do 50% or nothing. In my opinion you have to start somewhere. You are not going to be able to get those great returns without some practice. As you suggested, over time you can get closer to 50%. I don't think coming up a little short is not a failure.

I think you need to read more about the 50% rule, because this paragraph shows you don't understand it (I think you have it backwards, like it's something to strive for?).

Someone doesn't "get" the 50% rule or not (as per your first sentence).  What sammy is saying is he's beating it due to a combination of factors he described, but over the long run, in general, that's what your expenses will equal.

You don't want to over time get closer to it, but because of the law of large numbers and regression to the mean, you likely will (save if you aren't counting something, like self managing or doing your own repairs).

A lot of times you may see higher than the 50% rule - I know several people with multiplexes who run closer to 70% of gross going to expenses (but still make a nice profit, as they bought it right, and were well over the 2% rule when they bought).

And 50% is just a long term average.  My Vegas property expenses average to about 41% (not 50%) pro forma because Vegas is quite cheap for property taxes and insurance (some of my 1000 sqft homes in Michigan have taxes that are 2-3x my 2000 sqft homes in Vegas).  My Michigan properties average to about 54%, though I may adjust up my maintenance costs (and possibly adjust down my vacancy expectations, but I'm holding on that for now).  It may end up closer to 60% (which would put my overall portfolio around 50%).

Figure out what yours is, with realistic numbers, not fluff.
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clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #10 on: December 21, 2014, 07:09:48 AM »
Your Colorado rental rents for $1,450.  That means over time on average $725 is available to pay the P&I and PMI of the mortgage and any excess is your cash flow.  You estimate of the current rent on the Florida house is $1,300.  On average over time, $650 will be available to pay the P&I and the PMI on that house and provide cash flow.  What's your cash flow and your ROI under those scenarios?


On the Colorado house my P&I is $760. If you add taxes and insurance, my total is $950. Is the percent rule calculated as 760/1450 or 950/1450?

My P&I on the Florida house is 430 and PMI is 42. If you include taxes and insurance my total is $665.

Yes, I think I originally had it backwards.   

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #11 on: December 21, 2014, 09:06:45 AM »
Expenses are the operating expenses of the property, not of the owner.  Vacancy and collection loss, property management, property tax, insurance, HOA fees, repairs and maintenance are the bulk of the operating expenses.  Capital improvements are included to get to the 50 percent rule, often the costs are accrued through reserves for replacement.  On average, single family residences can be expected to have operating expenses of 50 percent of the income.  As Arebelspy points out, they can vary based on taxes and insurance in different areas.  As Sammybiker said, age and condition make a difference, but over time you will likely average near 50 percent.

Once you subtract operating expenses, the remaining net income can pay the principal and interest portion of your mortgage, the PMI, and (finally) you.  If you don't mind a second job, you can manage the property and do a lot of repairs yourself.  That's what the author of http://www.nononsenselandlord.com/ does.  You can say he has lower expenses, but really he has a job. 

The concern of the long-time landlords here is that you are not being realistic about your properties.  Your positive experiences in Colorado so far have convinced you that you can beat the market.  However, one bad set of tenants plus a new roof in Colorado will cost you far more than the $16k you have stashed from the rent.  A hurricane in Florida could cost you 6 months or more in rent loss if the house is not habitable and you have to do major repairs.  Long term real estate investors have experienced losses of one kind or another and do not put themselves at high risk.  They estimate expenses fairly accurately over time and reserve for the uneven nature of the cash flow.  They are still in business after 20 years and don't lose properties in a down market. 

Talk to some of the battered and bruised investors that bought at the peak on completely unrealistic assumptions.  Ask them how it worked out and how important realistic numbers are to them now.  That more than anything should convince you that you will take on too much risk if you continue with your current plan.


sammybiker

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #12 on: December 21, 2014, 11:21:44 AM »
@clarkfan & @arebelspy, my apologies, I may have presented that backwards.

To clarify, I'm seeing net profits of 38-42% of gross rents...or 58% to 62% expenses, whichever way you want to look at it.  So I'm running expenses a good 8%-12% above 50%...as I said, for me, out of state landlording is expensive.  But once rented, the properties are very hands-off.

I have no mortgage on my rental properties, so the 38%-42% of gross is my true net, cash in pocket.  If I had mortgages in place, my cash flow would be very little, near $100/per property (but then my annual cash on cash return would be North of 50%)

Sorry for any confusion!
« Last Edit: December 21, 2014, 11:23:21 AM by sammybiker »

sammybiker

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #13 on: December 21, 2014, 11:27:29 AM »
@anotherreader, thanks for the nononsenselandlord link, great reading.

arebelspy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #14 on: December 21, 2014, 12:00:26 PM »
@clarkfan & @arebelspy, my apologies, I may have presented that backwards.

To clarify, I'm seeing net profits of 38-42% of gross rents...or 58% to 62% expenses, whichever way you want to look at it.  So I'm running expenses a good 8%-12% above 50%...as I said, for me, out of state landlording is expensive.  But once rented, the properties are very hands-off.

I have no mortgage on my rental properties, so the 38%-42% of gross is my true net, cash in pocket.  If I had mortgages in place, my cash flow would be very little, near $100/per property (but then my annual cash on cash return would be North of 50%)

Sorry for any confusion!

Got it; thanks for the clarification!

My out of state ones have higher expenses too, but still well worth it. 
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arebelspy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #15 on: December 21, 2014, 12:02:46 PM »
clarkfan, it's not that we are anti-real estate.  All of us posting hold significant amounts of RE.

I personally love to see people get more involved in real estate, especially as a path for early FIRE. 

But we've seen too many people make mistakes due to not knowing, so making bad investments, and/or getting in over their heads, and we hate to see that.  We don't want you to make a bad investment.

I would reread this, it's gold:
You are cutting your household income to $75k and you are currently spending $60k.  You think it might be possible to reduce the spending, but you haven't done that yet, so you can't be sure that would work.  You have a rental 2,000 miles a way that over time is likely to be cash flow negative, once you include vacancy and capital improvements.  You have college student tenants, so your maintenance and repairs will likely be higher than average.  Your house in Florida will at best be cash flow neutral over time.

You have $50k in student loan debt.  You don't indicate whether you have car loans or other debt, so I will assume you do not.  You are only going to put 5 percent down on the new house, so you will have PMI on that loan as well.

In your shoes, I would not consider doing what you plan because of the risk you are taking on for very little reward.  You will not have enough in reserves to cover the fix up on the new house, any gaps in income from the properties, or a personal emergency.  Also, if you refi your house as owner-occupied, you may have trouble purchasing another owner-occupied house in the same area for a year because of Fannie/Freddie restrictions on buying those loans.  You should discuss this with your lender before you do anything.

I would pass on the purchase for now and I would get rid of the student loans ASAP.  After a year or two of living on $50k and with the student loans paid off, I would reconsider.
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waltworks

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #16 on: December 21, 2014, 09:27:19 PM »
Let me try to rephrase what Arebelspy is telling OP. We do not want to win this argument. We don't want you to lose money, or not make as much money as you could. We want you to thrive and enjoy your life and be happy.

But if you are buying a house, or a condo, or a commercial property that is going to be something you will probably regret in 5/10/30 years, we will tell you all about it. It's not because we're anonymous internet jerks who want to win the argument just because we like to argue. It's because we actually want you to succeed.

So when someone on this forum tells you you should sell your house, or not buy that rental - it's really, actually, honest-to-god because we have your best interests at heart. I'd pay a LOT of money to have the advice available here as of 5-10 years ago. It would have saved me a lot of headaches and made me a lot of money.

We love you. We just might not love the house you want to buy. Take the advice you get here with that in mind.

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clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #17 on: December 22, 2014, 06:34:57 AM »
It's all good. I have thick skin. My original timeline was 6-12 months from now. However, I can wait a little longer. I will try to come back with better numbers in 1 year.

On a side note, I could easily make 50%-75% more salary by living in a different state. However, Florida is still #1 in foreclosures. As a result, I could make the low salary work, if I am able to buy real estate. If I'm not buying real estate, I don't think it's worth it for me to stay in Florida. This is why I have a little bit of urgency to buy more real estate.

arebelspy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #18 on: December 22, 2014, 09:07:01 AM »

It's all good. I have thick skin. My original timeline was 6-12 months from now. However, I can wait a little longer. I will try to come back with better numbers in 1 year.

On a side note, I could easily make 50%-75% more salary by living in a different state. However, Florida is still #1 in foreclosures. As a result, I could make the low salary work, if I am able to buy real estate. If I'm not buying real estate, I don't think it's worth it for me to stay in Florida. This is why I have a little bit of urgency to buy more real estate.

You can live elsewhere and still buy Florida real estate.

I have three friends/fellow investors here in Vegas who have been buying in Florida for the last few months.  (Two did it together, the third independently.)

If you can make 50%+ more money and have no other reason to stay... Move.  Staying for slightly cheaper real estate that you can still buy as a non-Florida resident is silly.
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clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #19 on: December 23, 2014, 05:57:54 AM »
I think there would be two advantages. One, I can get an owner occupied interest rate, which is currently 3.875% through my credit union. I called for a rental mortgage and my credit union only offers variable rate mortgages (no fixed-rate). I have heard that 5% is the best you can do for rental mortgages. Is that correct? I would live in each house every 2-3 years and then move onto the next one.

When I was looking to buy my current house, most foreclosures gave first dibs to owner occupied buyers. During the first two weeks banks would only accept offers from owner occupied buyers.


arebelspy

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #20 on: December 23, 2014, 09:19:19 AM »
I have heard that 5% is the best you can do for rental mortgages. Is that correct?

No.

Rates are generally higher on investment properties, but a hard and fast number is never correct.
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waltworks

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #21 on: December 23, 2014, 09:42:51 AM »
Occupying for 2 years or more is a fix/flip strategy to avoid capital gains. For rentals it makes no sense at all, you're just spending a fortune and a ton of your time moving around constantly (and perhaps living places that aren't convenient/pleasant to you) and there are no particular tax benefits since you're not aiming to sell the houses inside the 5 year no-capital-gains timeframe.

Rates are a little higher for investment properties but not enough that moving around all the time is worth it, IMO. I suppose in some cases it will also be easier to qualify for a mortgage for owner-occupied but if you're on the margins on qualifying for loans for these places, you shouldn't be doing it at all.

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #22 on: December 23, 2014, 11:21:48 AM »
I have heard that 5% is the best you can do for rental mortgages.

Generally, you add 0.5% to the rate for investment properties so you could likely find a loan for 4.125%.

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #23 on: December 23, 2014, 12:53:26 PM »
Would anyone like to check my work?

Colorado house is $1450. I have to assume $725 goes toward expenses and $725 goes toward P&I. My current P&I is $760, so I am technically $35/month negative cash flow. I made 10K worth of improvement when I bought. This might be why I am not experiencing many additional expenses right now. However, expenses might pick up again in another 2 years. 

Lastly, I think a few people have admitted to taking 5-10% less rent for better tenants, maybe $50-$100/month less. Shouldn't we be allowed to then estimate $50-$100/month less expenses of repairs and vacancy or is that still unrealistic? I think the market rent is around $1600/month even though I only charge $1450. I will be increasing to $1500 in August 2015. 


waltworks

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #24 on: December 23, 2014, 01:08:11 PM »
You can choose whether you want to lose money slowly and fix things as they break, or if you want to (as you have already) lose it in bigger chunks as you do $10k worth of stuff at once.

Sell the damn house. It's a horrible rental at that market value. It's a horrible rental at quite a bit lower market value, or quite a bit higher rent.

I have 2 houses bought several years ago that have appreciated way beyond where they make sense (MV $340k/290k, both rent for $1600-1700). They are getting sold this spring. You have to be ruthless with yourself about this. Your equity is doing nothing for you in that CO property. In fact on a risk adjusted basis you are losing money. Better to stick it under the mattress!

-W

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #25 on: December 23, 2014, 01:55:14 PM »
I agree that it makes sense in some situations to sell appreciated properties.  However, there are two problems with this.  First are the transaction costs, which can easily be 7 to 10 percent of the selling price.  That's a heavy penalty, unless you can justify taking the hit because you are buying a much better (higher yield) income stream.  Second is finding something to replace the sold property.  If you don't replace the property, you have to deal with the consequences of taxation of the capital gain and the recaptured depreciation.  If you do a tax deferred exchange, lining up a replacement property (or more than one) can be very challenging.  If the general real estate market has lower cash yields, where do you go to make the exchange worthwhile?

As a cash-flowing rental, the OP's house is likely not to perform well.  Because of the Colorado location, it may outperform in appreciation.  It's speculative, but it's something to consider.  If he decides to sell, where should the money go?  Unless there's a well-thought out answer to that question, I would be hesitant to sell.

Real estate is a business.  It's a cyclical business.  Some years your cash flow will knock it out of the park.  Other years, your cash flow will be hit.  And in a wildly appreciating market, your rent as a percentage of value will drop dramatically.  However, if you are a long term investor and you bought well-located, quality assets in a stronger than average market, over time the rents and your income will catch up. 

I'm a huge believer in buy right and hold, a la Warren Buffett.  He doesn't sell good businesses, including his income properties, because the value is up or down or there is a temporary decline in the income.  The business has to go bad or there has to be a much better opportunity to convince him to sell.  There may come a time like 2005-2006, where trimming the real estate portfolio makes sense, if only to store up cash for the buying opportunity that's coming.  If I have a plan for the harvested capital, I'm good with selling.  Otherwise, I'm content to deposit the rent checks.

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #26 on: December 23, 2014, 02:29:30 PM »
In an ironic twist of fate I agree with everything said by another reader :) However, that doesn't necessary mean that I disagree with waltworks. Both sides have great points that I must consider.

I have a strong belief in the locations of both my properties. There are several macro-level factors that would indicate to hold. My numbers could have been better with buying different properties, but would have been a sacrifice on location, IMO.

I do not currently have a plan for any profits. As a result, I'm looking at holding right now.

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #27 on: December 23, 2014, 03:17:02 PM »
I also have to disagree a little with Waltworks.  If you buy correctly with owner-occupied financing, you can slowly build a decent portfolio of rentals.  Buy a discounted house that needs some work, live in it for a year.  Buy a second discounted house to occupy and lease the first.  Rinse and repeat.  This works well if you can get good deals, keep the renovation costs down and only remodel to rental standards.  It may take 6 years to assemble a small portfolio, but you will have better financing in place for the long haul.

I think the OP is going to have some drag on his income and portfolio growth because of the way he has structured his financing.  No matter how strong the properties are, bad financing choices will hurt performance.  And I'm never going to agree that buying anything with 5 percent down and PMI in the face of $50k of student debt and a declining income is a wise choice. 

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #28 on: December 23, 2014, 03:35:54 PM »
I guess, for me, the idea of leaving $100k (or whatever amount) of appreciated value there while earning mediocre/negative returns is silly. I'd rather just stick that money in the market and be done with the rental (or sell and buy other 2 or 3 rentals that cash flow). But that's just me.

I mean, where do you draw the line? If you have a million dollar house that you paid $100k for, and you're getting $2k/mo in rent, do you have a terrible rental or a great one? If you just want to look at your initial investment, you're doing great. But that money would return WAY more, with less hassle, in other places.

Sure, you have to look at capital gains and transaction costs. I agree there. In OP's situation, I'd still say it's a good idea to sell. And it's certainly not a good idea to refi the house to buy more mediocre rentals while having a bunch of non-mortgage debt.

Appreciation is historically in line with inflation. I think over the last 10-15 years of bubble/crash/recovery people have forgotten that. You might have bought a house in the up and coming neighborhood. But you also might have done the opposite.

So just different ways of looking at it, I guess.

-W

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #29 on: December 23, 2014, 06:17:54 PM »
I also have to disagree a little with Waltworks.  If you buy correctly with owner-occupied financing, you can slowly build a decent portfolio of rentals.  Buy a discounted house that needs some work, live in it for a year.  Buy a second discounted house to occupy and lease the first.  Rinse and repeat.  This works well if you can get good deals, keep the renovation costs down and only remodel to rental standards.  It may take 6 years to assemble a small portfolio, but you will have better financing in place for the long haul.

I think the OP is going to have some drag on his income and portfolio growth because of the way he has structured his financing.  No matter how strong the properties are, bad financing choices will hurt performance.  And I'm never going to agree that buying anything with 5 percent down and PMI in the face of $50k of student debt and a declining income is a wise choice.


Yes, that is my plan. However, every two years is probably more realistic.

My long term plan has always been around  5-10 rentals. I think this is on the smaller scale based on what other people have said. I have no interest in doing real estate full-time. I love my full-time job and will never retire. With that said, I guess I can afford to wait. 
 

clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #30 on: December 24, 2014, 05:38:53 PM »
I found this article this morning. Rents increased by 17% last year for my rental house. Vacancy rate for my neighborhood is less than 1% according to the article. I'm going increase to $1600/month in August and not $1500/month. It looks like market value is around $1700/month for a 4 bed/2 bath near campus.

Do I get any points for picking a good location or is it still a below average rental? 


http://www.coloradoan.com/story/money/2014/06/11/vacancy-rates-hit-new-lows/10326831/

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #31 on: December 24, 2014, 06:01:01 PM »
A rising tide raises all boats....

Come back after you have owned this property for 15 years and show us the complete set of numbers over that time.  If the house appreciates 3 percent compounded over that time and you net 5 percent annually over your holding period, you will have pretty much matched the stock market.  You will have sheltered the income to some extent, which is helpful.

My opinion is still that you are taking on a lot of risk to buy mediocre investments.  Dial down the risk and be careful with your purchases, and you may be ok.  You won't make millions, but if you also fund your retirement accounts, you will have multiple sources of unearned (at least in the tax sense) income.

While you are waiting, join your local REIA and browse the forums at Bigger Pockets.  Read a few of the books on Arebelspy's reading list.  Make friends with other investors in your area that are income oriented and see what they do that is different.  The education is cheap, and if you avoid an expensive mistake or two, well worth the investment. 


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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #32 on: December 24, 2014, 06:55:18 PM »
Do I get any points for picking a good location or is it still a below average rental? 

The latter.  I don't give points for luck, or coincidence.  (Honestly, did you do an extensive analysis of the area versus other areas?  Or did you just "feel" like it was a good area?)

And as AR points out with the rising tide comment, pretty much anyone buying over the last few years has done well.  That doesn't make them be able to duplicate it, or even make it a good investment compared to other opportunities.

None of that changes the answer: the latter remains true.
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clarkfan1979

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Re: to re-fi or not to re-fi to fund another house purchase
« Reply #33 on: December 26, 2014, 08:22:29 AM »
A rising tide raises all boats....

Come back after you have owned this property for 15 years and show us the complete set of numbers over that time.  If the house appreciates 3 percent compounded over that time and you net 5 percent annually over your holding period, you will have pretty much matched the stock market.  You will have sheltered the income to some extent, which is helpful.

My opinion is still that you are taking on a lot of risk to buy mediocre investments.  Dial down the risk and be careful with your purchases, and you may be ok.  You won't make millions, but if you also fund your retirement accounts, you will have multiple sources of unearned (at least in the tax sense) income.

While you are waiting, join your local REIA and browse the forums at Bigger Pockets.  Read a few of the books on Arebelspy's reading list.  Make friends with other investors in your area that are income oriented and see what they do that is different.  The education is cheap, and if you avoid an expensive mistake or two, well worth the investment.


I will accept mediocre and move on. I will just have to post my numbers as they come in. My timeline was always at least 10 years.

I am not trying to win the argument either, but trying to share information that may be helpful to others. My main argument for this discussion is that people should try to find value in what they already know. I have lived in a college town or near a University for pretty much my whole adult life. Based on this life experience, I gained knowledge on college rentals. There could be better ways to make money, I am comfortable and understand college rentals. I have some room for improvement and have already gain a lot of things to consider from the MMM website and forum, including book recommendations.

I would argue that I did a long analysis before buying. I was accept to 5 different PhD programs and picked the school with the best opportunity for a college rental. However, some of this analysis might be unconventional. Every college is a little different, so I think it's important to learn about the local culture. I spent a little less than a year talking to people on where they lived, why they liked it and how much they paid. I then compared the different neighborhoods around campus based on purchase price, likely rental price and long term neighborhood development. I guess long term development is called speculation. However, most colleges print a 10-year master development plan every 3-5 years. I believe this provides valuable information for college rentals.

One example is that the school is having a hard time paying the bills with state money. As a result, the school is trying to recruit more out of state students that would pay the higher out of state tuition costs (26K). The total number of out of state students was around 15-20% in 2007 and now it's 25%. This has resulted with a small and steady influx of higher income students. Enrollment was predicted to go up and the University is unable to build more housing on campus.

I learned that most students want to live within biking distance. The number of bikes on campus is mind blowing. I also learned that the typical path for most students at this University is dorm for the first year, apartment for the second year and a house their 3rd and 4th year if they are lucky. Not all students get the experience of living in a house due to the limited supply of single family homes within biking distance. A few parents buy condos for their kids, but often want to sell when their kid graduates. This typically results in a large number of condos for sale every year. The initial numbers look good, but there is very little appreciation because there are always a large number of parents competing against one another to dump their condos.

I decided on looking for a single family home within 1 mile of the west side of campus. The neighborhood doesn't have large price fluctuations. However, there was a small dip in price in 2007 due to funny financing and a few people lost their homes. I bought the 4 bed/2 bath foreclosure in 2007 for 182K that was only .6 miles away from campus and ridiculously close to a campus bus stop. Based on comps the bank first listed at 218K. But because it was ugly on the inside they didn't have any takers and dropped the price 10K every 3 months. When listed at 188K, I got it for 182K. Based on public records for similar sized houses, I would say only maybe 10% of people bought lower than me. However, its not really all that impressive to brag about buying near the bottom, because the bottom wasn't that much of a discount. There is currently a housing squeeze near campus that was somewhat obvious based on current trends.

For my current Florida house, I have many points, but I will only list 4. One, there is no affordable housing near campus, but students don't ride their bike, they drive. I am 4.5 miles away from campus, but that is not a problem.

Two, most neighborhoods near campus are gated with occupancy limits and ridiculous rules. I live in the only non-grated community near campus. Each year more students move into our neighborhood because their is no gate, no HOA or ridiculous rules. The school is growing with increasing numbers and also a shift from commuter students to more traditional students wanting to live near campus. The percentage of college houses is around 10% right now. I anticipate this being around 25% in 10 years. As more students choose to live here, it will slowly become the place were everyone wants to live and college bars will start popping up on the outskirts of the neighborhood because retail is also very close. The 10 year master plan of the school specifically says that my neighborhood will experience the largest impact for housing demand from students and employers at the university.

Three, because my neighborhood is non-gated and non-HOA, the neighborhood looked really bad with the high grass and weeds from many lawns of empty houses about 3 years ago. All neighborhoods seemed to have about the same percentage of foreclosures. However, HOA neighborhoods didn't look as bad because they had money to clean up and cut the grass. When you look at the housing data for my neighborhood, the median house price has typically been about 10% above the median. After the crash, it was 20% below the median. I predicted that when things recover and the houses are no longer empty, my neighborhood will recover faster. Three years after my purchase, my neighborhood is now 1% above the median.

Four, the headquarters for Hertz is relocating from New Jersey to 8 miles south of my house. This is a multi-phase project with a lot of jobs coming to town over the next 10 years. This will also put a squeeze on local housing. They are about 6 months into building phase 1, which I think will take 2 years. This was announced 1 year after I bought. I strongly believe that the Hertz relocation was 100% luck. However, I would argue that the rest of it was not.