Rental Property Investor · Atlantic Beach, FL · Member since 2014 · 15 posts · 2 votes
Hello,
I'm new to the investor world and I want to get started on the right foot. I've lived in my 2BR/1.5B town home near the beach for 5 years. I owe 135K and my mortgage is 1100.00 per month. Through some research I've determind that it would rent between 1200-1400. However, the real estate market in my area has really heated up and it's become a sellers market. As I stated above I owe approx 135K and the Zillow value is $181(although I believe it would sell for more based off other recent sales in my area) I believe the area will continue to go up in value so I'M considering renting the property for lower cash flow or break even to realize more gains in the future. My long term goal is to create a passive income that could eventually supplement my primary income.
Should I sell the current property and use the gains to invest elsewhere (less expensive rentals) or hold on for potentially greater gains down the road?
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
11y
@Jonathan Buehler your decision really depends on if you think you can find something else to invest in. Since it is your primary residence you get to keep all of the capital gains tax free! This is a huge benefit of "house hacking". If you are confident that you can find something else, I would personally sell the property and invest in a duplex or some other small multifamily property. The tax free cash will far out benefit the little cash flow you will be receiving by holding the town house. Also by selling the town house you get yourself away from the potential downsides of a HOA!
Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
11y
it really depends on your goals. Our houses have appreciated but long term the cash flow is our goal so short term gains only help if you have some where else to invest it.
The question is what's your goal? What would you do with the profits if you sold it? Do you want to be a landlord?
Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
11y
@Jonathan Buehler what are your goals? As some people have mentioned, that's the key to your question. I personally would hang onto the property and then use capital from other ways to buy another property but that's me. Your plan depends on your goals and time commitment.
it really depends on your goals. Our houses have appreciated but long term the cash flow is our goal so short term gains only help if you have some where else to invest it.
The question is what's your goal? What would you do with the profits if you sold it? Do you want to be a landlord?
My long term goal is to create a passive income to supplement my primary income. I thought about purchasing two less expensive property's with better cash flow opportunities and living in one of them until I could afford to make another purchase. I don't think I would be a great landlord. So I would want to use a property manager.
Rent it out. Do not sell. That would make a great rental.
With what little info we've been given, I'm not sure what you're basing that on. A rent of $1200 and a mortgage of $1100 makes for an ABYSMAL rental.
That said, the mortgage seems to be awfully high for the amount of money you owe. If you want to consider this as a rental, OP, I think step 1 is speaking with a few banks/lenders about a refi (ask about one without a closing, so you don't have to absorb the soft costs). If you get a mortgage on 135k @ 4.25% for 30 years, your mortgage payment is $664. Now you have a potentially attractive rental property, though depending on your area and equity it may still make more sense to sell and do some house-hacking (aka, buy yourself a duplex/tri/quad with Owner Occupant financing and live in one unit while renting the others out.
Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
11y
@Jonathan Buehler - I was in your shoes when I first got started. I decided to keep my first house as a rental. It wasn't going to appreciate, but I made a nice cashflow every month from renting out it. The most important thing I learned from the process was to take a step back and look at the fundamentals and ask myself, "Would I buy this property at a slight discount to market value today?" If the answer is no, then you might want to look more seriously at selling it. If the answer is yes, then I'd say you might want to stick with it.
@Jonathan Buehler - I was in your shoes when I first got started. I decided to keep my first house as a rental. It wasn't going to appreciate, but I made a nice cashflow every month from renting out it. The most important thing I learned from the process was to take a step back and look at the fundamentals and ask myself, "Would I buy this property at a slight discount to market value today?" If the answer is no, then you might want to look more seriously at selling it. If the answer is yes, then I'd say you might want to stick with it.
From the info you provided, I'd say sell.
Thank you for your post. Could you explain your fundamental concept of "would I buy this property at a discount to market value today? I just want to fully understand. Thanks
@Jonathan Buehler - I was in your shoes when I first got started. I decided to keep my first house as a rental. It wasn't going to appreciate, but I made a nice cashflow every month from renting out it. The most important thing I learned from the process was to take a step back and look at the fundamentals and ask myself, "Would I buy this property at a slight discount to market value today?" If the answer is no, then you might want to look more seriously at selling it. If the answer is yes, then I'd say you might want to stick with it.
From the info you provided, I'd say sell.
Thank you for your post. Could you explain your fundamental concept of "would I buy this property at a discount to market value today? I just want to fully understand. Thanks
Slight discount is the key. If you'd be willing to pay market value minus 10% or so (costs you'll incur in selling it: ~6% commission and 3-5% other costs), then the property probably is worth keeping. If you wouldn't be willing to pay that much for it today, then you should probably sell and reinvest the proceeds elsewhere.
As others have said its your decision based on what you want to do and what you're goals are.
For me I've kept my personal residence TWICE as a rental property. The first one, which I talked about in the Bigger Pockets Podcast # 82, I kept and rented for years, finally selling for almost 4 times what I paid for it. It was positive cash flow from day one of renting, and required very little maintenance.
The 2nd personal residence worked out even better as it was on an over sized property and I was able to acquire additional adjoining property and was able to do a 17 home subdivision in my back yard.
Investor interest rates are much higher than personal propeties. Management companies charge 10% on the fees. While I certainly didn't plan on starting to self manage all over the country, I ended up realizing that I could do as good or better of a job self-managing so that part of our business plan is born.
Before you sell your good property for a lower income property (often time more headaches). Have you thought about leaving this property alone and self managing. Our higher income houses are actually great once installed (I work full + time, run 9 houses and am launching a blog/webstite, + have a husband so I know busy) Than buying another personal property with 5% down conventional. It takes a little investment but now you get two properties, and don't have to lose any of your equity to selling the home! If you rented out rooms you could live for free saving up for a pure rental.
If you later decide you no longer are interested in renting the higher income house. You can sell and still buy two house as rentals (if you have 20% down) and not pay capital gains through 1031. Basically it is a deferment.
Everyone has there own thought/plan. We have done very well with higher income homes and using both personal properties and "pure rentals". Let me know if I can help.
Rental Property Investor · Atlantic Beach, FL · Member since 2014 · 15 posts · 2 votes
11y
@Michael Siekerka
Thank you for clarifying. I understand now. Based of this analysis, if my home was worth $185,000 at a 10% discount it would sell for $166,500. I believe that would be a good good buy in this market. This definitely helps to understand my position better. Thanks
Thank you for your insight! You make some great points. I hadn't thought about the higher interest rates and fees involved with purchasing pure investment property. Not to mention the quality of the tenants with lower income properties. I like the idea of using 5% conventional financing for my next property and possible looking into refinancing my current property to improve the cash flow position. Also, which could be the biggest benefit of all, realizing more profits (Tax Free!) in the future when I more experienced and have a better understanding for investing. Thanks again!
Thank you for clarifying. I understand now. Based of this analysis, if my home was worth $185,000 at a 10% discount it would sell for $166,500. I believe that would be a good good buy in this market. This definitely helps to understand my position better. Thanks
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
11y
@Jonathan Buehler you write "I believe that would be a good good buy in this market." I believe the question is not if it is a good buy, but if you would buy it as a rental property at this price (as opposed to buying something else). That should be the deciding question I believe.
Thank you for your comment. Yes, I think you are right. I need to look into a refinance for my property. This could definitely make my decision a lot easier. I will definitely ask about a no closing refinance. I didn't realize you could refinance without all the closing cost.
I was referring to a refinancing the property while I still live here. Before it's a rental. Perhaps lowering my monthly payment and making it more attractive to rent.
I see. I was definitely not thinking in those terms. In that case, it probably would not be a good rental investment. Is the point of that analysis to determine if a property would be a "steal" to purchase and rent out? Is the exercise aimed at getting a person to think about only purchasing property they could get at a bargain price and rent for a nice 1% or higher rule? What if the property could have large future gains in value because it's in a great area? Or do you only look at cash flow?
Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
11y
Basically, the simple line of reasoning goes you have two choices:
1) "Buy" your existing property as a rental. In this case you are effectively buying it by not selling it.
2) Buy another property. In this case you are buying this other property by selling your existing home.
If your existing home at a purchase price of $166.5K is better then your other options, keep it. If another property you can buy with the money is better, sell it.
I'll take that money at those terms, interest rates are probably going higher, and depending on how long you have owned and how much the property has appreciated, the 20% equity left in the property could be less than you would have to pay in income taxes, possibly 23% LTCG, real estate commissions 6-7%, and in some places transfer tax. In some cases it could cost more than 20% to sell, meaning the net after a refi would be more than the net after a sale.
Of course a IRC Section 1031 would alleviate the Federal tax, but state and local taxes as well as all the other costs of selling would remain.
Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
11y
@Jonathan Buehler I'm a believer in thinking about your own personal residence differently than investment property. You have to live somewhere, right? Again, it depends on what your goals are. If you rent your current home out or you sell it, where are you going to live? How will your current lifestyle affect your decision? Your place is 5 blocks from the beach? Sounds like a nice place to live! Do you want to sacrifice that lifestyle for a little bit of cash flow? Only you can answer that question and there's no right or wrong answer.
I live in a nice townhome in a really nice neighborhood with my wife and three kids and we love the quality of life that we enjoy. Our mortgage will make it harder to get out of the rat race but my wife is really, really happy that we live here (me, too admittedly). Happy wife equals happy life. If I were 20 years younger without the wife and kids and I were in your shoes, the answer would be easy. I would sell that townhome and buy a four plex (better financing than 5+ units) in a decent neighborhood (great neighborhood equals lower cap rate, crappy neighborhood equals higher return but more headaches). I would live in one bedroom in one of the units and get roommates for the other rooms.
Yes it was 1/2 % but I don't think that significant. I've heard other investors talk about 6%, either variable or only fixed for 5 year then adjustable.
I'm willing to pay the 1/2 % higher to get the 80% LTV and fixed for either 15 or 30 years with no balloon.