What should I do?

Question

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.

Jon Holdman · Answer

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.

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

Account Closed · Answer

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.

Michael Beinetti · Answer

@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.

Michael Beinetti · Answer

Excellent input all the way around - @Mike Hurney @Bob Estler @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!!

Michael Beinetti · Answer

@Larry Turowski 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.

Larry Turowski · Answer

@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.  :)

Rebecca Lebowitz · Answer

Nice area-definitely a keeper!

Michael Beinetti · Answer

@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.

Rebecca Lebowitz · Answer

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....?

Barry Cohen · Answer

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.

What should I do?

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