Should I keep or sell my property?
Hello,
I am still fairly new to the property investment business. I own two homes in Goldsboro NC. The house I am currently wondering about is one I bought about 5 yrs ago for its actual market value (which I know not to do now). One year ago I refinanced from a 30yr to a 15yr fixed 2.5%. It's worth about $145,000 and I owe $117,000. The property is in a great part of Goldsboro and I believe it will increase in value a bit due to a new highway being built nearby and the shopping area improving nearby as well (but that's a gamble). I have tenants in there now and I make maybe $100 dollars a month profit to my mortgage.
I am wondering what you think my best option would be? Should I keep the property long term and just continue renting it out or should I sell the property as soon as possible and use that money to find a foreclosure in the Goldsboro or Raleigh area? should I use what little money I gain from a sell to pay off the other property I have a bit faster which is also on a 15yr?
Hey @Dain Boelter welcome to BiggerPockets!
Couple of questions:
1) Are these two properties you own both rentals or is one your primary residence?
2) Are you wanting to build a portfolio of rental properties for the monthly cash flow?
3) What do you owe on the other property?
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Real Estate Agent NC (#281288)
- Jobe Realty Group
A couple of quick thoughts/questions...
When you say you make $100/month, is that $100 more than your mortgage PITI or $100 after all expenses are covered?
You only have $28k equity in the property. Once you pay closing costs, will you make enough to make a sale worth it? Don't forget, if you buy another property with the money, you'll pay closing costs on your purchase.
Paying off a property a little faster doesn't seem to really do much for you. Let's say you take 5 years off the back end of your mortgage. You have to wait 10 years before you recognize any cash flow gains. If you're at a 2.5% (or similar) interest rate on the other loan, paying down doesn't make sense. You'd have to pay off.
You could refinance to lower your payment and increase cash flow, but in general, I'm a fan of leverage to increase properties owned. I think you can achieve a similar cash flow and much greater long-term wealth.
@Michael Jobe thank you and to answer to your questions
1) The one I am asking about is a rental while the other is my primary residence but I rent out two rooms for $425 each. I plan to turn it into a rental after I have it fixed up the way I want it (it was a foreclosure) then move onto the next.
2) yes, I wish to have as many properties as possible in the long term with potentially getting into apartments later on down the road. whatever is the most profitable.
3) I owe 77K on my other property and its worth 120-130. 30yr fixed but will be payed off in 15 with the extra payments I make.
Why are you spending 2014 dollars that could buy investments today to pay down 2029 debt? If you are debt adverse maybe add the rent increases to the mortgage payments but paying extra on low debt will hinder your acquisitions.
@Will Johnston That $100 dollars is after PITI only, so I have to pay out of pocket for any real repairs. Also in probably about a year or so I am guessing I will have to move for work and will then have to hire a property manager and so will probably start going negative a bit on the monthly rent to mortgage ratio.
The reason I would like to pay the mortgage off as soon as possible is to save as much in interest as possible (thousands) or is it more profitable to use that money towards the purchase of another property?
If your long term goal is to acquire more properties ; i would hold off on paying down the 2.5% debt, and use that cash flow to build towards another deposit for your next rental . As Bob said your using present day money to pay down future debt, and think it would work better to buy another rental that the interest savings you will realize later on .
I am not actually paying any extra right now on the 2.5% property. I pretty much break even on it now and will probably have a negative income from it once I have to hire a property manager. I can stop paying extra on my other property which is at 4.5% and can see why that would be a good idea. I need to know if it would be best to sell the 2.5% property and reinvest the money (what's left after taxes etc) into a property where I can profit more monthly which in turn I can use towards another home.?
Thank you for all the input by the way.
Originally posted by @Dain Boelter:
The reason I would like to pay the mortgage off as soon as possible is to save as much in interest as possible (thousands) or is it more profitable to use that money towards the purchase of another property?
What would you rather have? $50,000 to invest TODAY or the guaranteed promise of 360 monthly payments of $238.71 at 4%? You should probably get a 30 year loan on your current property while you can get favorable owner occupied rates. Let you tenants pay the interest.
Originally posted by @Account Closed:What would you rather have? $50,000 to invest TODAY or the guaranteed promise of 360 monthly payments of $238.71 at 4%? You should probably get a 30 year loan on your current property while you can get favorable owner occupied rates. Let you tenants pay the interest.
I already have a 30yr on my owner occupied property. I just started paying $200 (which pays it off 15yrs early) more a month to pay it off faster so I could profit the 34k+ in interest down the road. I do see your logic there by using the money for another property. What do you recommend I do with the tenant occupied property I owe 117k (worth 140-145) 15yr fixed 2.5% that I break even on without any additional monthly payments?
If I were you, I'd do very accurate assessment of the true cashflow for the rental. Include ALL expenses. You will find that you are running seriously negative, just based on what you have shared so far. If so, I'd seriously consider selling it off now, unless you think there is upside to increase rent.
Hey @Dain Boelter when you want to mention someone, make sure their name is highlighted in blue after you type the '@' symbol or they won't receive a notification.
As far as your original question, there's been some great advice given. I'll echo Andrew's sentiment that if you can increase the rent on the 2.5% property then hang on to it. Otherwise, I'd say sell it and try to acquire two properties with the proceeds. However, there are a lot of unknowns for us on the outside looking in to your situation. Have you done much research into the Raleigh market? What about Durham?
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Real Estate Agent NC (#281288)
- Jobe Realty Group
Sell!
Sounds like a long term money loser.
I would sell you are losing buddy. I am not far from you I am in Smithfield. Take Care
Dain,
Leveraging (to your comfort level) is a real estate investors best friend. Why use extra money to pay off a 2.5% loan when that money could be making you 10%+ depending on the property. Hey you should be able to make more than that in a low risk stock.
This means you are losing out on 7.5% or more.
I would always try to take the longest term with the lowest payment. This helps increase cash flow per month. You can always make big principle payments when you want too.
Try not to look at the overall you are paying for the property after the interest.
A very popular book on here and pretty much everywhere is called "Rich Dad, Poor Dad" I would suggest reading that if you haven't already and it will help you too understand much better.
@Michael Jobe Thank you for telling me about highlighting the name. I have actually done some limited research in to the Raleigh Durham area and everything I have seen looks very promising. I would love to get into that market. I may actually be getting some funds to do so in the next 1-3 months any suggestions?
@Shaun Carl Thank you for the book suggestion I just purchased it and have read half of it already and am looking at investing a bit differently already.
Everyone thank you for the advise, I think I will end up selling the property unless I can think of a way to make some good cash flow from it. It's just difficult to do because I have put so much time and money into it. I am admittedly a bit emotionally attached to it, but its all part of the learning process from what I suppose.
I'm still learning about Raleigh day by day but I am becoming more pro-Durham every time I hear about the multiple offers and bidding wars going on regularly for properties that truly aren't worth the prices they're commanding. I guess a property is worth what someone is willing to pay for it but to have a house selling for $10-15k over asking bc of a multiple offer scenario is insane to me from an investor standpoint.
If you're not in the anti-Durham crowd there are lots of options there. The downtown area where all of the revitalization and gentrification efforts are underway seems to be a winning situation. There are plenty of properties under $100K that will undoubtedly become prime real estate in the next few years once all of the low-income housing and its occupants are replaced with townhouses, condos, young professionals, and hipsters. If a chunk of change fell in my lap to invest that's where I'd be purchasing. And of course, you can't go wrong with any property near Duke as you'll have an endless pool of renters with the student populace.
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Real Estate Agent NC (#281288)
- Jobe Realty Group
@Michael Jobe Thank you for the input I will start looking into those areas.