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!