Should I unload this SFR for something better?

9 Replies

I own one SFR rental that cash flows in B+ location which used to be my primary residence. By the numbers it doesn't meet 50% or 1% rules but is a very desirable area by young professionals. I believe the best value in the house is it's ability to appreciate over the next few years. I don't have enough equity (about 15%) to refinance and the PITI is about 75% of the gross monthly income which I think is the main problem. Basically the house itself is too expensive.

Assuming I am financially capable, should I sell this property to buy another SFR or multi family which meets the BP rental guidelines? I would like to achieve cash flow and not necessarily appreciation.

@Cory Land  If the house currently cash flows, then why are you selling it?  How much does it cash flow.  Not what %, actual dollars.

If the house doesn't have enough equity to refi, then selling it may not help since you would be tapping into that same equity, but losing some of it to closing costs/fees, etc...

I don't see any gain selling, and depending on what the actual CF is on the house, I see a potential loss selling.

Buy and hold is a long term strategy, sounds like you're impatient wanting to move on quicker. If it doesn't eat any hay, pays for itself, you don't expect any big repairs, vacancy is low, not a pain to manage, in other words, it carries itself, leave it alone and move on to another property. When you have equity built up, then come back to it and assess the situation.  Don't forget taxes in your assessment.

If you're low on cash, look for tiered landlords, seller financing, use a second on your SFR to leverage another deal. Don't get in a hurry thinking you have to move on something for the sake of some deal in buy & holds. :)

Bill meant to say tired instead of tiered

I would venture most people posting here are very little cash to work with so my recommendation is that you look for houses that I've been trying to sell traditionally with an agent and the listing goes expired or they rented out there's the problem the solution as help them so on terms instead of for cash Lease to own

Word to the wise about buying no money down with Sub 2 if you can't afford to pay the seller on time even if the tenant but your rented out to doesn't pay you don't buy subject to its a promise to pay that mortgage

Same thing with the sandwich lease option if you can't afford to pay the seller in case the tenant buyer your subleasing and so optioning to don't do it you'll end up in hot water

Get your license and offer two solutions to low equity sellers

number one you we saw sign the deal

number two list the house and get the commission

either way you are successful and get the house sold and make some money

This post has been removed.

@Cory Land  

I'm not usually an advocate of getting rid of an asset, but you have to run the numbers.  

Your current property doesn't seem like it is meeting your cash flow needs. I recommend you look at 2 factors when evaluating a property: cash flow AND ROI (Cash on Cash). Looking at both of these factors will tell you whether or not the property is worth investing in. I don't even bother to look at places unless they have $100/month/door AND 15% Cash on Cash return.

Appreciation is great if you can get it.  But it is a patient investor's game.  Getting your realtor's license is a good way to help out with your current situation.  If don't, a $25k increase in value on a $375k property only nets you $1000 for your patient after you pay the realtor 6%.

Equity in a property does not equal potential profitability:

House appraises for $200k
Your mortgage has $170k left (15% equity)
Comps are $250k
You think it needs $5k to come up the rest of the places in the neighborhood
If you sold it at 250 after repairs you'd have $60k in your pocket. 250-5(repairs)-15(commission)-170(mortgage). 

If you followed @Brian Gibbons advice you'd put another 7.5-9k in your pocket from your split of the commission check.

If you lived at this place for 24 of the last 60 months any money you made from the deal would be tax free.  Another advantage of selling your primary residence.

Lots of options, lots of things to consider.  Bring some numbers here to BP and we'll help you out.

Thanks for all the thorough responses. I am in this for the long term but I am just weighing my options now. I would like to buy another property, I just don't see that happening within the next two years without selling this one and starting over. We bought our primary residence after moving out of this property and my DTI is too high as this property's mortgage isn't being offset by the income so I cannot qualify for anymore financing until I have two years lease on taxes. I agree with getting my license in the near future. Here are the numbers on the rental (FYI , this used to be our primary residence and did not acquire this as income property):

Mortgage: $200k
Comps: $250k
Appraises for maybe $235k-250k
Gross rent: $1750
PITI: $1300
HOA: $100
CF: $350

It's probably not the right cash flow amount because I don't factor cap ex or vacancy. However, the hoa covers garbage, lawn, snow removal, and outside the wall maintenance. Also, tenants cover all utilities.

I am not interested in listing on MLS and I am in contact with some investors in the area who we may be able to FSBO or have one agent so commission would potentially be 3%.

A scenario of a house I think would be better option:

Type: homepath duplex
Price: $100k with 10% down
Gross rent: $1400
PITI: $700

So not sure what CF would be but maybe $400 or $500 and also this helps my DTI for acquiring another rental in the future.

The sfr used to be your primary residence.  If it has been your residence for two out of the last five years you may sell it and still take advantage of the Sec 121 primary residence exclusion even if you are not living in it now.  

The fact that this gain would be tax free (250K of gain if your single and 500K if married) might tip the scales if deciding to sell or hold.

Since you're allowed to use this exclusion once every two years it can be a powerful way to periodically remove cash from your investment portfolio without paying tax.  That's pretty powerful.

@Cory Land   You have a cash flowing asset that's likely to appreciate. You're looking to get out of it?

In the next year or two, you have the opportunity to gain some appreciation, build rent history and landlord experience, and save for another purchase. If you cash flow about $300/mo for 24 months, that's $7200. 

Is your renter on an annual lease? If they renew, you'd have no vacancy.

I'm not sure why an investor would pay $250k for $1750 rent. You'll get a higher sales price from an owner occupant. Transaction fees to sell and buy another place will eat into your return.

You're doing well to own a home and also an income property. Don't forget there's a fair amount of risk with a $100k duplex. Where would it be and who would rent it? That's a different demographic than the young professional renter you have now.

@Susan Gillespie

Yes the property does cash flow and the current tenants are excellent who are on an annual lease. My main concern is I will not qualify for financing on another rental property for at least 2 more years. If I can find a house for half the price and the same cash flow, then I should be able to qualify for another rental in the short term. The cap rate in my area is like 11-12 which is why investors are willing to pay that much. Yes, I could sell to owner occupant but I am trying to avoid listing on MLS and it probably won't work since my tenants are currently occupying the property. I would first look to buy a fixer/upper in the same area but the inventory is low right now. I am okay with doing renovations as my company is rehabbing our first flip right now. If I look outside of the area then yes there would be a different demographic with more risk. However, thank you for your questions Susan, as it helps me think about this with a different perspective. My situation is good, I will just not be able to acquire another rental

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here