To Sit Still or To Expand?

My business partner and I bought our first deal about 1.5 years ago. We had to rent it at a slight negative cash flow, with the rent paying for the mortgage payments, but not covering the tax payments totally. The renters have been fantastic, but are moving out of the country, so we need to fill the place again by August 15.

That's not the total point though. We have tried to refinance twice, and although we have good credit, the reason for not being able to do so was that we had not been landlords long enough: This was in February, at the 6 month mark since the house had been on the market (by us) 6 months previous.

We would like to refinance, pull out some equity in cash, and make our next investment, but are currently stuck because of no liquid cash, yet now is one of the best times to buy.

Any creative solutions you can think of? Or is now the best time to hold and be patient?

Edited: 06/26/2010 at 08:28AM

J Scott

Real Estate Investor · Atlanta, Georgia

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Jun 07 '09, 01:07 AM

Now is definitely a GREAT time to be buying...

But maybe not for you, if you plan to pull cash out of this property...

Here's the deal:

According to you, the rent from the property you're holding covers the mortgage but not all of the tax payments. And you consider this "slight negative cash flow."

Personally, I would consider this "major negative cash flow," as you haven't even factored in the costs of insurance, maintenance, vacancy, administrative costs (like evictions, etc), any utility costs during vacancies, lawn care, etc.

After you figure all those things in, you're likely much more negative in your cash flow than you think. And while you may say to yourself, "I haven't had any vacancies and maintenance has been non-existent, these things *WILL* change.

Many around here talk about "The 50% Rule," which basically states that on-average across a large cross-section of the investor population, about 50% of the income from a rental unit goes towards expenses. This leaves the other 50% to pay the mortgage.

It sounds to me like you are assuming expenses to be a very tiny percentage of the income, which will come back to bite you in the long-run.

So, before you take money out of this property, consider that it may take what is currently a negative cash flow situation and turn it into a disaster. Do you have cash to cover several months of a vacancy? How about to cover a major maintenance issue?

That said, now is a GREAT time to be buying more property...just make sure you're in a position to buy, and make sure you're buying right.

Edited: 06/26/2010 at 08:28AM

J Scott, Lish Properties, LLC
Telephone: 770-906-6358
Website: http://www.123flip.com
http://www.123flip.com

Norm Chrostowski

Real Estate Investor · Lakeview, New York

284 posts
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Jun 07 '09, 03:40 AM

I concur with Mr. Scott. Before you buy anything else I would correct "the problem " you think you don't have. Maybe put slight up-grades, or rehab it a bit to try to command more rent (this depends on your area and market).

Just my 2 cents

Edited: 06/26/2010 at 08:28AM

NC Mark

Real Estate Investor · North Carolina

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Jun 07 '09, 09:19 AM

Sounds like you're holding a loser.

Sell it and buy something better at a discount and/or where you can force appreciation.

Edited: 06/26/2010 at 08:28AM

Steve Borgman

Real Estate Investor · Des Plaines, Illinois

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Jun 16 '09, 03:21 AM

Thanks, each and every one for your responses. I will definitely take these items into consideration.

Edited: 06/26/2010 at 08:36AM

Steve Borgman

Real Estate Investor · Des Plaines, Illinois

5 posts
2 awards
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Oct 15 '09, 08:46 AM

Thanks for the feedback. So far, I have continued to hold on to the property. We have it rented still. Cash flow still is not happening. I have two questions. First, what do y'all see as the potential for interest rates to go up in the next year. Second, how do you sell a home that has renters in it? Do you just advise the renters?

Edited: 06/26/2010 at 10:05AM