To Be, or Not to Be (An 'Accidental' Landlord)?
Hi, I am fairly new to BP and haven’t posted too much. So, in order to avoid full on lurker status I thought I would ask you guys (and gals) what you might do in my situation. (Sorry for the long post).
Scenario:
I bought my first property (primary residence) which closed about 1 year ago today. Now I am married and my wife and I would like to start having kids and buy a small SFH in the next 2-4 years. I am very interested in real estate investing but I am still a newbie and don't own any rental property. Buy and hold or BRRR strategies appeal to me the most. I work in Finance and make a pretty good income and we live below our means, making a monthly savings of $500 - $1,000 pretty doable.
The question is - what do I do with this condo when moving to a SFH? Should I rent it out, locking in my low fixed rate? Should I sell it and use the proceeds as a down payment on our next home (and start my RE investing career with a different purchase on more favorable terms)? I have enough $ saved in IRAs that I could pay off the condo (after taking the tax and penalty hit), making it easily cash flow, however, my projections suggest that this might not be the most advisable route when account for the TVM. Maybe I could sell it via seller financing to someone self-employed with good credit at a higher rate and pocket the % difference? Other ideas? What would you do?
Relevant details:
-2/1 Condo in an up and coming B-C area of Denver, built in 1978, bought as a primary residence, end unit, top floor. Some cosmetic updates were made before I bought it (new carpet, paint, minor updates) – the unit can be rented immediately.
-Purchased for 117k, it appraised for 112k, I put 20% down for a loan of ~90k @ 4.375% fixed (30 yrs) – (yes I paid over what the appraisal came in at, but the savings when compared to renting for the first year easily covered the difference). After more recent sales in the complex, I am certain that the unit would currently appraise for $117k at least.
-The HOA has strong reserves with a good management team in place for the whole complex. I am on the HOA board and it is overall a very solid and fiscally conservative team. I plan on remaining on the board for as long as I own the unit.
-Income: If I rented the condo right now, as is, I think I could get somewhere from $1,100 to 1,300 per month (a similar 2/2 unit on the bottom floor (not an end unit) just rented for 1,350). Historically vacancy has been pretty low in Denver, but to be conservative I would like to estimate ~10%. I am estimating $1,200 for rent, which after vacancy is $1,080 per month.
-Expenses (per month): Insurance: $76, HOA: $194, Taxes: $66, Mortgage: $449, Property Management (@10%): $120, Maintenance (1% of 117k/12): $98 (not sure if this might be too high for a condo, but I might take it as a reserve anyway in case of a special assessment). Total Expenses = $1,003.
-Net Monthly Cash Flow = $1,080 - $1,003 = $77
-Monthly Equity Gain (from principal pay down) ~$125 (increasing, of course, over the life of the loan)
-Tax savings from depreciation ($117k/27.5/12)*.28 = $100
-Yearly COC Return ($77*12)/($117k-90k) = 3.5% (with AT cash flow this is more like 7.4%)
-Total Return (Includes equity and tax savings, but no appreciation) = (($125*12)+($100*12)+($77*12))/($117k-90k) = 12.7%
So, BP, can you help a newbie out and let me know what you would do? I am happy to add any numbers I might have forgotten. Thanks!
ditch it, why investment in a property you can't control 100%? Being on the board helps but its not the same. Buy something you can have full oversight.
@Chris Wierman I would keep it for now. A condo that rents for $1,300 is worth more than $117,000 in this market. Your cost of money is so low that with a 30 year fixed you are basically getting free money. Rents are increasing as well.
NO, NO, NO to paying it off with your IRA. Taxes and penalties make that a non-starter.
Unless you absolutely need the money from it to buy your next home then don't sell unless you can find a better (higher rate of return) place to use your money.
I echo @Account Closed's comment about self management. It's not hard with a little learning.
Keep in mind that when you sell you will have transaction costs as well which eats into your net proceeds so all of your equity is not available to you when you sell. You have commission costs as well as buyer assist funds as well as title and closing costs. Figure a 10% hit there and you should not be disappointed.
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Real Estate Agent Colorado (#IR044146)
- Reliant Real Estate, Inc.
Welcome to Bigger Pockets!
I echo Bill S's response 100%, so I won't elaborate on most of that any further.
You should consider coming to our local meetups in Denver. Just do a search in the upper right hand corner for Denver meetup and you should get hits for the meeting announcements.
If you really do have a condo that's worth only $117,000 and rents for $1300, that's amazing and there are several people in the area (me included) that would buy it from you all day long. However, I suspect as Bill said that it's probably worth quite a bit more than $117,000 by now. I've watched 2/1 or 2/2 condos in one complex go from $80,000 to $130,000 over the course of the last year or 18 months and that's been the trend for that price point all over town. Some areas haven't appreciated quite as much as others, but in general, I'd be shocked if you had zero growth in a year in this market.
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CPA Colorado (#23225)
- Clue Business Services, Inc.
- Podcast Guest on Show #244
@Account Closed Thanks for the thought and I would love to come to the meetup! In fact, barring a minor family emergency, I would have come to the meetup last Monday (at the Bike Cafe, right?). I am planning on going to the next one. I agree with your valuations as well - I suspect this place is worth quite a bit more now. A unit in the complex that was a 2/2, fully renovated, bottom floor, not an end unit, just sold for about $175k - so there is definitely some hope for mine.
A condo that did not appreciate in a hot Denver market and only nets $77 per month seems like a lot of effort for a little gain. money is still very cheap move on
@Chris Wierman
I guess I am a little more inclined to take the risk, a better investment notwithstanding, because I feel like even owning a condo offers me substantially more control over my investments than the stock market, which is where I have the majority of my savings currently.
I get where your coming from. I initially invested very similar to you. I too played the markets. I actually did well selling my stocks options. I also purchased a condo. By the time I sold that I made a nice little sum there too. I don't want to give the BP members the wrong impression. I also had my ups and down with both of those.
What I came to realize was the same money and effort I put into those deals could have put me in SFR and Multifamily (50+ units) investing some time ago. I would even say at less risk than stock market and condo investing.
Whatever you decide you must be comfortable with. I'd still jump into a condo deal if it fell into my lap. Just it would be a flip rather than a buy and hold.
@Account Closed I appreciate your feedback and I agree with you that there truly might be better options out there were the effort is the same (or less without an HOA), but the returns are much greater. I like the stock market and my returns have been very solid, but the appeal of generating a solid stream of AT cash flow (and potentially becoming an investor full time) is very tempting.