Starting small -- or big (keep my rental or sell it)

9 Replies

This is my "dillema". Not really a dilemma, more just my thought pattern. 

I have 1 rental property, which I inherited. It is worth about $100k and has a $25k HELOC on it -- therefore, after closing and paying off the HELOC I'm thinking I would walk away with about $65k.

The HELOC is $120 per month with $400 in taxes per month and $80 in insurance per month. Renter pays everything else. $600 total expenses and it rents for $1100, resulting in a $500 cash flow per month.

I could:

1) Keep this property (it's in a suburb with the city pushing in on it a bit), and save up $20k in the next year to purchase another 100k rental property. And go that route every couple of years or as soon as I could save another $20k.

OR

2) Sell my rental property, take the $65k and attempt to purchase THREE 100k rental properties, each with $20k down.

OR

3) Sell my rental property, take the $65k from it and a little savings and purchase a 10 unit apartment building carrying a $300k mortgage with a supposed $35k cash flow.

Thoughts?

So if my math is correct each unit of the 10 unit apartment only rents for around $300 per month?  It must be in an absolutely terrible area and I could not imagine paying $300k for something in the hood. All units will have a hard time staying occupied, maybe 6-7 at best. 

What will a home that you buy for $100k rent for?  Your making $500 on the one you currently have and I doubt you will get that on another one. 

Maybe option 1.

Curt Davis, Real Estate Agent in TN (#00321765)
605-310-7929
Originally posted by @Curt Davis:

So if my math is correct each unit of the 10 unit apartment only rents for around $300 per month?  It must be in an absolutely terrible area and I could not imagine paying $300k for something in the hood. All units will have a hard time staying occupied, maybe 6-7 at best. 

What will a home that you buy for $100k rent for?  Your making $500 on the one you currently have and I doubt you will get that on another one. 

Maybe option 1.

 The 10 unit rents for $600 each I believe ... It is in the outer edge of the "hood". Not a great area but right outside the really bad area. No go then? I'm here to learn so give it to me haha.

As far as your 2nd question - it depends on who you ask. Some say a $100k home in my area (which gets you in a decent suburb), will net you around $250 per month after mortgage, insurance, etc. However, I would be purchasing THREE of those with the $65k rather than the 1. 

To give you an idea of what you can purchase for $100k in my area.

http://www.nothnagle.com/Properties/Details.aspx?MLS=19&M=R252955

"Don't wash your socks for a year". That was the advise someone gave to a relative after their spouse died.

The point is not so much about the emotional shock, which you have not discussed, but the adjustment period of learning to think like an investor. 

I got zero education about investing from my family and I'm fine with that. At least I didn't have to unlearn as much as others sometimes do.  Your biggest opportunity, IMHO, is to focus on the educational aspects of investing, including different real estate types, advantages and disadvantages of each, as well as paper (notes) and other instruments for cash flow. This process will largely answer your question for you.

Many people have become rich buying SFR's as they're much more liquid than bigger projects, and probably more forgiving if you make a big blunder. Personally, I like paper, however most notes don't appreciate (unless you bought at a discount and can realize the gain from the spread).

Originally posted by @Rick Harmon:

"Don't wash your socks for a year". That was the advise someone gave to a relative after their spouse died.

The point is not so much about the emotional shock, which you have not discussed, but the adjustment period of learning to think like an investor. 

I got zero education about investing from my family and I'm fine with that. At least I didn't have to unlearn as much as others sometimes do.  Your biggest opportunity, IMHO, is to focus on the educational aspects of investing, including different real estate types, advantages and disadvantages of each, as well as paper (notes) and other instruments for cash flow. This process will largely answer your question for you.

Many people have become rich buying SFR's as they're much more liquid than bigger projects, and probably more forgiving if you make a big blunder. Personally, I like paper, however most notes don't appreciate (unless you bought at a discount and can realize the gain from the spread).

 Good stuff.

I probably should have listed my goals so people could help me better.

My goal is to build wealth through real estate so when I am in retirement age I won't have to worry about whether social security will be in existence or if my 401k is enough.

And if I could make a couple grand a month along the way that would be great as well. But its more for my future. 

Anyone else have an opinion?

The taxes really kill the cashflow on your rental. Nearly 40% of the rent is going to taxes. Are you really paying $4,400/ year in taxes on a $100k property? That's high even by my standards and I live in New Jersey.  Read about the 50% rule talked about on here.

Your $500/month cashflow does not account for a single repair. I think your true cashflow after accounting for reserves is minimal. I would not keep 65k in equity locked into this deal nor would I purchase more of the same.

Maybe try looking out of the area if you are fixed on rentals.

Originally posted by @Mike D.:

The taxes really kill the cashflow on your rental. Nearly 40% of the rent is going to taxes. Are you really paying $4,400/ year in taxes on a $100k property? That's high even by my standards and I live in New Jersey.  Read about the 50% rule talked about on here.

Your $500/month cashflow does not account for a single repair. I think your true cashflow after accounting for reserves is minimal. I would not keep 65k in equity locked into this deal nor would I purchase more of the same.

Maybe try looking out of the area if you are fixed on rentals.

 Welcome to Upstatr NY lol.

My 180k primary home has close to $700 a month in taxes.

As far as the 50% rule ... We've had the property for 5 years and have put about $50 in repairs in it. And that was for a new dehumidifier in the basement. Maybe were lucky? Lol.

All the more reason to expect higher than average repairs in the future. You are 5 years closer to having to replace the roof, the furnace, water heater, etc. When those items need replacing it will come out the $500/month cashflow right?

Have you had the same tenant for 5 years?

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