What should I do?

17 Replies

I have a gorgeous duplex in a nice neighborhood in Rochester, NY.  It was the first house I ever bought (note: sentimental value) and it has been a great property to own.  

Some of the specs: Two family, Boston style. 1 bedroom downstairs rented at $800/month and upstairs with a 2/3 bedrooms rented at $915 (under-rented as the tenants have been there 6+ years and my rent hikes have been slow in coming). The house is in good condition with the only major improvement looming ahead is a new roof. I have around $40k in equity in the property (Market approx. $135k and loan bal. $95k) and 20 years left on an FHA mortgage. There are a variety of things I could do....but I'm not sure what is best. I'm curious what other people would do. Here are my ideas.

>Sell.  Hopefully for the full market value (minus noted pending roof repair) and cash out.

>Refi. Problem is the house will most likely appraise around $130k-$140k and the few lenders I've spoken to need a lower LTV for the investment refi's. Understandable. Not definitely an option right now.

>Keep it. Get the rent up where it needs to be. Get the roof done. Refi in a few years to a 15yr conventional and keep it rollin'.

If I cash out (option 1) I would like to turn around and reinvest in additional property.  So the thought isn't to bail on the investment, but to use it as a catalyst....the questions are for what and when.

Other options?  Any input is greatly appreciated.

My first answer is option 3. But this was just a gut response.

Maybe what you need to do is analyze this house as if it were a new acquisition and do what the numbers tell you. Since this was your first house maybe you bought it as a home and didn't do any analysis at the time. Since you've learnt a lot of about REI and deal analysis since then, analyze with a fresh pair of eyes. Would you buy the property today if it was presented to you as a deal? If the answer is yes, get the rents up and keep it rolling. If no, sell and focus on the next deal.

I think one lesson learnt here (and thanks for reminding me of this) is the importance of including CapEx in your analysis.

Let us know what you decide.

What are your goals? Why are you thinking about selling it?

I would "definitely" being your rents up to market level! I am not a fan of letting values slip below market as it can be hard to raise them later. So I  would fix that first.

Personally I would leave it alone. As I talk about on my website/blog. We are also buy and hold investors. We have done very well by turning primary residents into rentals. We do not touch the existing equity but use the cash flow for future investments. My husband is active duty military so our goal is to retire off the cash flow in 15 years. While we buy the houses with as little equity down as possible we want the equity to build over time!

I agree with the other posters. I lean more towards buy and hold as well but agree that you should re-examine the numbers and see if you would still buy. I'm curious why you are considering selling at all? Are you wanting better cash flow? More, cheaper properties? Do you have your eye on a good deal and need the cash? I don't know what you originally paid for the house (you only mention current ARV) but improving the rents could get you to where you want to be. Regardless, the rents need to go up. You know that. :)

 @Michael Beinetti  

1. I'd put the Tenants on a 2 year plan to bring their Rents up to market by then. Your Selling price for income property is based on your Rental Income.

2. Get the roof replaced. You may spend $3-5k but if I buy it, I'll deduct $10k+ from your sales price and get it done for $3-5k.

3. Does your FHA include PMI? Shouldn't with $40k equity. If it does refi ASAP

4. Get your next deal.


Why not refi now?  If you of a 15 year loan at 4.5%  Your payment is only $726.74  and a 10 year would be $984.56.

Then start saving cash for your next purchase.  

Excellent input all the way around - @Mike Hurney  @Bob E.  @Shannon Sadik  Elizabeth Colegrove 

My inclination has been to hold it and make the improvement as well as get the rents where they need to be.  Selling it would net me the most cash therefore giving me the ability to move on another deal or two.  There are other ways to do that so selling it is not mandated in this scenario.  

A refi to the 15 or 20 year term will be a part of the near future as it makes sound sense.

I really appreciate the input and will update down the road!!

Hi @Michael Beinetti I'm curious why you need/want to refi, was it to take cash out? 20 yrs on an FHA loan should be cheap money and refi costs to get a 15 yr mortgage vs the 20 yr you have aren't making sense to me.


@Jeff Valentino Hey! Thanks...I have a 30yr FHA at 5.875 on the property. Selling would be my cash out option. I'm not looking to cash out with a refi. It was more of a "should I stay or should I go" (sell vs. hold) scenario.

If you sell you will have $11-13K in selling costs.  Plus the roof.  So, you might net $20K or a little more.  That doesn't seem like a good plan unless you can use that to buy something new that's more profitable.  Have to be a really good deal to overcome the costs of the sale.

Refi seems impractical given the values.  I don't see you getting more than a few grand.  And why bother?  What's the rate on your existing loan?

Holding seems fine.  You're getting $1715 out of a property worth $135K.  That's a pretty good deal.

note: sentimental value

Well, there is NO room in an investors vocabulary for "sentimental value".  Forget such words.  Investments are a numbers decision.

Originally posted by @Michael Beinetti:

@Jeff Valentino Hey! Thanks...I have a 30yr FHA at 5.875 on the property. Selling would be my cash out option. I'm not looking to cash out with a refi. It was more of a "should I stay or should I go" (sell vs. hold) scenario.

Sounds like you have a pretty good building there. I would keep my current loan, get the rents up over time fix the roof when you need to and hold it for now.

@Jon Holdman  @Jeff Valentino  

I appreciate it.  Frankly.  The clearest message I wanted to hear was to hold it.  It really is a great place and the values in the area are continuing to creep up (one of the few areas of this city) which adds value down the road.

If you plan on holding for the long term I would consider a refi to a lower rate. I'm sure you can get down to 4.5-4.75%. I think that over time even with the closing costs it will add to your bottom line.

I definitely agree with the buy/hold model, and getting your tenants on a slow plan to get them up to market rent.  After six years, I assume you have very good rapport with them.  So just level with them-explain that you have a very large expense coming up, and while you value them as tenants, and don't want to shock them with a huge rent increase, you will start having to raise their rent to get it up to market.  

Just curious, as another Rochester investor, what area is the property on?  Wondering if it's in an area that's more up and coming (more of a reason to hold!).  For an $800/month 1 BR I'm guessing you're in Monroe/Park or South Wedge area....?

@Rebecca Lebowitz  Upper Monroe.  The backyard is Pinnacle Hill.  :-)  

The 1 br is in a good place rent-wise...it's the upstairs that needs to go up.  I'll get it there!

@Barry Cohen  I agree.  I think the most important thing to do is run the numbers and see what makes the most sense.  If the numbers don't work...I'll keep it as is with the rent increase.  Thanks for your input.

@Michael Beinetti  I think @Jon Holdman  is right.  There is not a compelling reason to sell.  Consider you'll have selling closing costs and then buying closing costs when you re-invest.  That could all get very steep factoring in realtor commission on the sell side and mortgage closing costs on the buy side.  Not to mention that not having the roof done and having slightly lower rents than you could have will negatively affect your sale price.  You wouldn't come out much ahead.

As for refi, if you can get the interest down significantly, say to 4.5% or lower, and the closing costs were not too high, then it MIGHT be worth it.

But I think you are probably fine where you are.  Great house, great location, sounds like it is cash flowing well and easy to keep rented.

By the way, I have 8 brothers and sisters, as well.  But only two girls myself.  :)

@Larry T.  One of 9!  I love it!  Thanks for the continued evaluation.  I'm in complete agreement.  It has solidified what my gut was telling me.  Being my first property it has been a little harder to look through the objective lens.  This has helped immensely.

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