Buying & Selling Real Estate Discussion

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Mike Lynch
  • Shallotte, NC
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Running the numbers again on my vacant property... Still Confused

Mike Lynch
  • Shallotte, NC
Posted May 7 2022, 05:25

Hi,

I have been sitting here running the numbers again for the 4th time and I'm still confused.

Years ago, we took out a mortgage to buy a home for $107,000. We owe $39,000 on it now. Our interest rate is 3.6%. The sale price estimate today is around $250,000 maybe. Since we lived in it 2 of the last 5 years, we would not have to pay around $25,000 of Capital Gains Tax.

I have been making repairs to it, new shingles were $8,500. New appliances were $5000.00, but it will need new windows and HVAC unit pretty soon as they are timed out. ( $ 20,000 )

Monthly Rents in this area for a 1,385 sq. ft. home is around $1000.00 to maybe $1500.00 per month.

Yes, I could sell it and put 20% down and maybe get DSCR loans to buy more properties, but there is no inventory. Junk homes are listed for $90,000. Decent double wide mobile homes with land are selling for $180,000, which means I would have to try and get $1,500 to $1,800 rent each month for a mobile home and I think that would be very hard to do here. Decent 3 / 2 homes here are selling for $350,000 plus, and it would be very hard to get $3,000.00 plus rent here unless it is a beach rental or VRBO. Homes near the beach are now over $500,000. Homes on the beach are $800,000 plus.

So, my home has been sitting and waiting empty for months as I can't figure out what to do. If I don't sell soon, I will have to pay capital gains. So, if I sell and put down 20% buy more properties, I am worried that the homes cost so much that people are not going to be able to pay the high rents. They might only be able to pay half of what I need them to pay.

What do I do? ..... I feel like I am between a rock and a hard place. What am I missing?

Southeast NC, North Carolina

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Greg Scott#2 Buying & Selling Real Estate Discussion Contributor
  • Rental Property Investor
  • SE Michigan
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Greg Scott#2 Buying & Selling Real Estate Discussion Contributor
  • Rental Property Investor
  • SE Michigan
Replied May 7 2022, 05:40

Fortunately, you are not between a rock and a hard place.  You have two good options in front of you and one bad one, and you are just letting fear get in your way.  Fear is costing you time and money.  In any event, if you don't make a decision, one of the two good options will be eliminated.  I just hope that you wont let fear push you to select the worst possible option.

My take...

Option 1)  Sell now.  Avoid the capital gains.  Pocket $200K and you now can search for a rental.  Yes, the market is tight.  Yes, prices are high.  Yes, there isn't much inventory.....right now.  Things will change.  Just keep looking and you will find something.  Good deals are out there now.  The rise in interest rates is already cooling the market.  I predict you will see a lot more opportunities in just a few months.

Option 2) Turn your property into a rental.  Do a cash out refi to pay for the upgrades and turn it into a rental. Yes, you lose the $25K capital gains deduction, but if the price in a few years has gone up $50K or more, you won't care.  Based on the numbers you shared, it looks like it will have positive cashflow which is also great.

Option 3) The only bad option is to continue stalling, then getting cold feet and sell anyway.  That will cost you $25K with no upside.

Don't let fear beat you.  Make a decision and take action.

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Jon Kelly
  • Investor
  • Bethlehem, PA
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Jon Kelly
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  • Bethlehem, PA
Replied May 7 2022, 05:54

@Mike Lynch why don't you actually run the numbers and post what you're seeing? What are the numbers if you turn your property into a rental? What are the numbers on a BRRRR property in your market? Run the numbers through a calculator don't just make this theoretical. Compare the monthly cashflow, COC return and/or IRR between turning this into a rental and purchasing new rentals.

As @Greg Scott said, both options 1 and 2 are great. Option 2 is your easiest path forward.

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Cole Simpson
  • Real Estate Agent
  • Charlotte, NC
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Cole Simpson
  • Real Estate Agent
  • Charlotte, NC
Replied May 7 2022, 19:05

Have you tried running the numbers with a local agent or investor to see what you're missing? Either way, if the numbers hit your goals, I would do it. It's better to get started.

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Mike Lynch
  • Shallotte, NC
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Mike Lynch
  • Shallotte, NC
Replied May 8 2022, 06:31
Quote from @Jon Kelly:

@Mike Lynch why don't you actually run the numbers and post what you're seeing? What are the numbers if you turn your property into a rental? What are the numbers on a BRRRR property in your market? Run the numbers through a calculator don't just make this theoretical. Compare the monthly cashflow, COC return and/or IRR between turning this into a rental and purchasing new rentals.

As @Greg Scott said, both options 1 and 2 are great. Option 2 is your easiest path forward.

Thanks for your reply! :)


In order to make the home rent worthy, we would need to repair these items soon.

New windows - $12,000
New Septic Lines - $ 5,000
New HVAC and Ducts Soon - $8,000
Trim some overhanging trees - $4,000
Replace Floor In Sun Room - $6,500

Total = $35,000

I am sure that we can get no more than $1,500 per month in rent as the home is pretty dated looking. It has the same layout as it did in 1978, but new paint, new roof, plumbing fixtures, and appliances. Pay Off Mortgage is $39,000.

After doing the 4 square method I come up with Cash on Cash return on investment at 4.5%..... We will have to pay off the $35,000 rehab costs and $39,000 mortgage = $74,000. ....... Unless I am missing something, it does not look good at all. So, Cash Flow each month would be around $300.00, but we need to pay off $74,000. ....... What would you do?

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Mike Lynch
  • Shallotte, NC
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Mike Lynch
  • Shallotte, NC
Replied May 8 2022, 06:32
Quote from @Cole Simpson:

Have you tried running the numbers with a local agent or investor to see what you're missing? Either way, if the numbers hit your goals, I would do it. It's better to get started.




Thanks for your reply! :)


In order to make the home rent worthy, we would need to repair these items soon.

New windows - $12,000
New Septic Lines - $ 5,000
New HVAC and Ducts Soon - $8,000
Trim some overhanging trees - $4,000
Replace Floor In Sun Room - $6,500

Total = $35,000

I am sure that we can get no more than $1,500 per month in rent as the home is pretty dated looking. It has the same layout as it did in 1978, but new paint, new roof, plumbing fixtures, and appliances. Pay Off Mortgage is $39,000.

After doing the 4 square method I come up with Cash on Cash return on investment at 4.5%..... We will have to pay off the $35,000 rehab costs and $39,000 mortgage = $74,000. ....... Unless I am missing something, it does not look good at all. So, Cash Flow each month would be around $300.00, but we need to pay off $74,000. ....... What would you do?


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Mike Lynch
  • Shallotte, NC
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Mike Lynch
  • Shallotte, NC
Replied May 8 2022, 06:33
Quote from @Greg Scott:

Fortunately, you are not between a rock and a hard place.  You have two good options in front of you and one bad one, and you are just letting fear get in your way.  Fear is costing you time and money.  In any event, if you don't make a decision, one of the two good options will be eliminated.  I just hope that you wont let fear push you to select the worst possible option.

My take...

Option 1)  Sell now.  Avoid the capital gains.  Pocket $200K and you now can search for a rental.  Yes, the market is tight.  Yes, prices are high.  Yes, there isn't much inventory.....right now.  Things will change.  Just keep looking and you will find something.  Good deals are out there now.  The rise in interest rates is already cooling the market.  I predict you will see a lot more opportunities in just a few months.

Option 2) Turn your property into a rental.  Do a cash out refi to pay for the upgrades and turn it into a rental. Yes, you lose the $25K capital gains deduction, but if the price in a few years has gone up $50K or more, you won't care.  Based on the numbers you shared, it looks like it will have positive cashflow which is also great.

Option 3) The only bad option is to continue stalling, then getting cold feet and sell anyway.  That will cost you $25K with no upside.

Don't let fear beat you.  Make a decision and take action.


 Thank You for your reply. I appreciate it. :)

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Sheena R Roth
  • Rental Property Investor
  • Canton, OH
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Sheena R Roth
  • Rental Property Investor
  • Canton, OH
Replied May 8 2022, 14:58

@Mike Lynch Mike would you have to pay off the mortgage if you kept it as a rental? If you need to pay off the mortgage for reasons related to acquiring your next primary residence, have you looked into refinancing this home info a new mortgage and even possibly getting some of your equity out of it to put to work elsewhere?

Just based on the market value of $250,000 and rent potential of $1,500 or less, it sounds to me like it would be pretty easy to find somewhere else to make the same or better return and possibly with a lot less hassle. Even though you’d be cash flowing with a renter in there, once you consider your return on equity the deal is probably not going to look very attractive.

In short, based on the info you’ve provided, I would really think about selling… especially considering you can avoid cap gains.

If you don’t have a lot of experience analyzing rentals send me a message and I’ll gladly walk through the analysis with you. I am an engineer by trade, this kind of stuff is right up my alley :)

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Replied May 8 2022, 15:44

Greg nicely laid it out.  Why the range for the rental of $1000-1500?  That is a big range.  

If it would cost $35K to get it into condition to rent and down the road (assuming the price of the home doesn't change) another $25K in capital gains.  Not all of those repairs need to be done now.

I would not pay off the mortgage if you keep it as a rental.  Look at the upfront costs/gains and where you would be 5 years down the road if you sold it or rented it.

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Greg Scott#2 Buying & Selling Real Estate Discussion Contributor
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Greg Scott#2 Buying & Selling Real Estate Discussion Contributor
  • Rental Property Investor
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Replied May 8 2022, 16:04
Quote from @Mike Lyn

After doing the 4 square method I come up with Cash on Cash return on investment at 4.5%..... We will have to pay off the $35,000 rehab costs and $39,000 mortgage = $74,000. ....... Unless I am missing something, it does not look good at all. So, Cash Flow each month would be around $300.00, but we need to pay off $74,000. ....... What would you do?


Mike: 

You destroyed your return by paying off the mortgage. 

With $250K in valuation and a $39K mortgage, you should be able to pull out $125K in equity.  Pay for whatever repairs you need with that and then hold onto the rest for security or your next deal.

I'm not sure how you are calculating cash flow.  With no mortgage, your cash flow should be roughly $1K per month.  With a mortgage it should be about half that, but you get $125K to do other things with. Your cash on cash returns should skyrocket.  This not because your cash flow went up but because you took out much of your equity so your denominator is much smaller.

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Paul Camuto
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Paul Camuto
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Replied May 9 2022, 05:49

There is so much hypothetical in your statements. What have the actual sold properties and sold rentals gone for? Base your decision on what is actually happening not what you think is going to happen.

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Mike Lynch
  • Shallotte, NC
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Mike Lynch
  • Shallotte, NC
Replied May 10 2022, 04:55

Thanks Everyone!

I could put a doublewide on the parcel beside of the house. There is a .5 acre lot. Would it make sense to do a cash out refinance on the home, fix it up, and maybe buy a repo or foreclosed doublewide? .... We could double down on the monthly mortgage payments. We would then have two rentals sitting side by side. One would bring in around $1500.00 per month and the other would bring in around $ 1000.00 per month.

I can't take out a HELOC since it is not my primary residence, but maybe a cash out refinance?

This way I used the equity from the brick ranch 3 / 2, fixed it up, and purchased an additional home. Since rates are going up, is a cash out refi okay right now if we double down on monthly payments?