Strategy to get the ball rolling - Rent or Sell?

Question

Hi Biggerpockets community!

I'm new to REI and biggerpockets, I've read many posts on this subject but I'd still love to hear everyones' thoughts on my particular circumstances!

Some numbers: I own a 1200 sq/ft 2/1.5 property in Greensboro, NC that I bought for 130k (appraised 132k). I've recently refinanced 125k @ 3.25% and my PITI is now $740. My market has grown since purchase and the property is in a great area, so the value has increased to ~160k in current condition (this figure is from fannie mae, I was able to waive appraisal during refinance at this value). The house could use some work - conservatively 10k for minor renovations. I've done a lot myself since purchase and it has not been appraised since. There's a bonus room where I could also add a closet and convert to an additional bedroom. Based on my neighborhood I believe the home would be valued around 170k-180k after updates. I think the home would rent for $1200 in current condition but likely closer to $1400 after updates.

So my question is..what is the best strategy with this property? I'm not sure If I should rent or sell as-is, or rent/sell after financing updates? OR stay longer, force as much equity as possible over a year or so through income, and pray for more apprecition. I wasn't thinking of investing when I purchased the home, but I purchased it knowing it needed a little work in hopes that I could build sweat equity. Now I'd like to acquire additional property sooner rather than later. I could likely get an 90%+ LTV HELOC to finance the updates, but If I chose to finance them and rent I'm concerned about the interest eating into my monthly cashflow from rental income, and how this impacts my outlook for acquiring a second property.

What do the smart folks at biggerpockets think? Any suggestions or insights are much appreciated, and thank you for taking the time to read!

Shiloh Lundahl · Answer

@Zach Rook I just posted a video about this exact topic entitled “should I keep or sell my rental?” I also posted a video about using credit cards to invest in real estate. Both videos my be helpful to answer some of the questions you mentioned in your posts.

I currently own 8 properties in the Triad area and I think it is a good area to buy real estate. As far as selling it, keeping it, or refinancing it, it depends on your goals and the numbers. If I were in a similar situation, I would look into the costs of refinancing because they have gone up recently and I would like to know if the cost to add the third bedroom and do the repairs would be worth it. Then I would look at the cash flow that a rental would make and I would compare it to what I could get with it as a lease option. Then I would probably go the lease option rout. In the Triad area I would expect to get about $300 a month in cash flow per property.

Then my next plan would be to buy another property, but this time I would buy it under market value from a wholesaler. If I were single I would do what  @Nathan Faucett suggests and I would house hack by buying a 3 or preferably a 4 bedroom home with at least 2 bathrooms and I would fix it up and then rent out the other 2 or 3 rooms to roommates. Their rents would likely cover all the costs associated with the property and it would allow me to live there for free. Plus if I bought it correctly, then I would be able to refinance it and leave no money in the property at the end of the refinance.

Nathan Faucett · Answer

Hey @Zach Rook - not an expert by any means but doing real estate in Greensboro, NC. Just a few thoughts after reading your post.

Sounds like you know some of your numbers, but not all of them.

• Do you know what your cashflow would be if your rented as-is?
• Do you know what your profit would be if you sold as-is? What would you do with your profit if you sold it?
• What would you do with your profit if you sold it?
• Do you know what your cashflow if you updated and rented?
• Do you know what your profit would be if you updated and sold? What would you do with your profit if you sold it?
• What would you do with your profit if you sold it?

• What would you do with your profit if you sold it?

Some other questions:

• Is this a house hack?
• What do the market trends say? Do we expect to your area to keep appreciating?
• Is the house giving you any other trouble that would force you to want to sell?
• Would you have to finance the updates (do you have the cash to finance the updates without borrowing)?If yes, could you do so with an interest free credit card and pay off the bill before the interest comes do?If no, what is opportunity cost of using cash?
• If yes, could you do so with an interest free credit card and pay off the bill before the interest comes do?
• If no, what is opportunity cost of using cash?

• If yes, could you do so with an interest free credit card and pay off the bill before the interest comes do?
• If no, what is opportunity cost of using cash?

Sean Rooks · Answer

I agree with the above, go with whichever strategy gets you to your goals. If acquiring more rentals is the goal, then selling one seems to take you farther from that goal.

If you goal cashflow $ and ROI % are met, then keep it! if you can increase your cashflow, and pull out more cash with a higher ARV, then that would give you cash to buy another rental shortly. Last thing to consider is ROE, return-on-equity. So your cashflow yearly divided by equity in the property, keep looking at that to make sure its not too low. When it gets low, either refinace or sell. However, this depends on your goals as well, some prefer a fully paid of property.

If I were you, I would analyze the best I could and probably do the upgrades, this would increase cashflow and ARV, then pull out some cash in a HELOC or Refi to while saving $ to buy the next house hack!

Zach Rook · Answer

@Shiloh Lundahl Thanks for the response!

I watched your recent video on selling or renting, it was packed full of useful information and has certainly given me some additonal points to consider regarding the decision. Thanks for that!

When you say you'd like to know the costs of refinancing and if the updates would be worth it, do you mean that you'd be concerned that the increased costs of refinancing could erase the additional equity created by doing said updates?  Are you suggesting refinance as a means to take cash out and pay off the financed updates?

I love the idea of purchasing another property below market value from a wholesaler! That is something I've yet to dip my feet in but the idea is very attractive to me.

Nathan Faucett · Answer

@Zach Rook - Just to repeat for transparency - I have an owner occupied house hack that is my only investment, so take everything I say with grain of salt and definitely do more research and ask other people BUT I think I have some more questions that came to mind. I'm going to send you a PM

Zach Rook · Answer

@Nathan Faucett I forgot to add, I have calculated in water and power remaining on during vacancy. But I don't know if this is something I would need to maintain? I figured I would be safe and factor this in.

Zach Rook · Answer

@Nathan Faucett Thanks for your reply!

I'm trying my best to be conservative with my numbers and consider all of the important factors, but I am still a total beginner with REI. So please let me know if I am overlooking anything!

I estimate monthly cash flow as-is to be ~$160, this includes maintenance/repairs, capital expenditures, vacancy & fixed expenses. If updated then I would need to deduct the cost of the money for renovations as well. If it were interest only on an HELOC, probably around $75/m during draw period, so a cashflow of ~$245, including the same figues.

If I sold as-is, for, lets say 150k, I would expect profit to be ~20k after paying closing. If I sold after updates for 175k then profit would be ~35k after closing - interest from the financed money. If I factor the 4k I put down down on purchase, then I deduct from those margins leaving me 16k & 31k, respectively. If I sold the home, I'd like to make a down payment on an owner occupied fix and flip. I still don't know if this is the best solution though. My goal is to grow my capital so that I can eventually hold a few rentals, so I am thinking this would allow me to do so more quickly.

I do rent to a roommate to help lower my expenses, and my next property would likely be a house hack as well.

The market in my area has been steadily rising - It is lawndale homes area. While I do expect the area to continue appreciating, I don't want to count on it. I am trying to think of the appreciation as a bonus as opposed to a guarantee. The house could use an improved drainage solution to help protect the foundation; a new sump system would give me peace of mind, but it's not forcing me to sell. As of inspection in 2018 it's in good shape.

I would need to finance the updates - I could maybe borrow 5k interest-free from family, but no more. I don't currently have any lines of interest-free credit, but it could be an option to acquire more.

Strategy to get the ball rolling - Rent or Sell?

Most Popular Reply