Looking for Opinions: Hold or Sell?

Question

So I purchased a home in Philadelphia, PA in August 2011 for $199k with a FHA loan at 3.75%.  The mortgage payment was $1265 initially and now since it's my rental property, I am renting it for $1400/month, but have $0 cash flow due to a property tax increase in 2014, so for 2015, my escrow payment is catching up for 2014.  Once 2015 is over, I should make $50-$100/month, but the neighborhood is appreciating rapidly.

All of the vacant lots are being purchased and rehabbed and there are new condos selling for $350-$500k.  I think my property is valued at $210-$215k at the moment, so I am trying to ride the appreciation out, but am paying PMI at $200/month.  Should I hold the property since I know the appreciation should help over time?

I appreciate any feedback.

Thanks,

Mark

Joshua Nudell · Answer

@Mark P.,

I think you actually have negative cash flow for this property because there are other considerations besides just the mortgage payment and the taxes (insurance, vacancy, maintenance, capital expenditures, etc).  If you haven't started going into your pocket to keep the expenses paid, I have a feeling you might be soon.  You have had this property since Aug. 2011, but has it been a rental that whole time, or was it your residence at some point?

On the other hand, you purchased a property for $199K, but after closing costs and the upfront PMI fees associated with FHA that would be closer to $210K - $215K which is what you say the property is worth.  Which means if you sell now, and pay a realtor and pay closing costs you won't even break even, you will have to come of pocket to close in the area of $15K - $20K.

Is there something I am missing here?  If not, it looks like you bought wrong, and you might be learning an expensive real estate lesson in the near future.

Michael R. · Answer

@Mark,

I have a learning property (as I like to call them) also. I go back and forth on selling also, but this was before I intended to be an investor and at worst someone else is paying my mortgage.....today. Meaning I needed to analyze, add value and raise rents.

If values are increasing and rents increase as well, this could keep up with the costs somewhat. From a pure investor stand point sell. From a long term, see if you can make it work.

I hope that helps.

Lisa Ann Spencer · Answer

Yes hold out.

Lisa Spencer/ No Cal

Jesse T. · Answer

Is your tenant in a position to buy the property?  Would you owe a commission if you sell to the tenant?  If you give a small discount, it could be a great deal for everyone.

Mark P. · Answer

Ilya,

My property is located in Pennsport in South Philly.  That area is on a steady increase in appreciation and I believe will continue to rise over time.

Fay Chen · Answer

I would approach it as a math problem:

1). Outline your options and plans. Hold: how long do you plan to hold? If it keeps appreciating, are you going to keep holding on the property? Then what are you doing to do with the equity? Sell: What are you going to do with the money? Are you going to re-invest it? In what kind of investment? What is your goal in real estate?

2). Research: estimated appreciation for your property, realistic expected return on the potential new investment, local inflation, growth...

3). Put everything on a spreadsheet: income, expenses, appreciation, depreciation, amortization... Don't forget to account for re-investment of your equity (if that's what you plan to do).

4). Compare different options. What's going to give you the most ROI, ROE? What's the most efficient use of your asset/equity? How about projected out to 2 years, 3 years, 5 years or 10 years?

Since I don't have a bunch experience, I usually do extensive research and just let the numbers talk. Hope this helps.

Ben Leybovich · Answer

Haha - well, if that's not indicative of a bubble, I don't know what is...I remember how this worked in 2007!

Ilya Hvostikov · Answer

Mark - where is you property located?  You can always refi out of PMI, which will bring your cash flow substantially higher.  I did it myself just a few weeks ago.  When I started the process I thought that my house would appraise for 215-220K the appraisal came back at 250K.

Aaron Montague · Answer

@Mark P.

The most you could possibly make on this place is $135/month.

Rent - PITI(principal, interest, taxes, insurance)... you are missing a fair number of other expenses that you have thus far been lucky to avoid.  Vacancy and Cap Ex being the big ones.

1 month of vacancy will wipe out a year's worth of "profit" for you.  1 busted furnace will put you back $5500+ and you've got no Cap Ex reserve to cover that.  You may have the cash, but you'll be losing that money from your own pocket.

I would sell this place now.  If you think it will get 215k get it on the market.  You'll probably put 10k in your pocket.  You shouldn't have to pay any closing costs in a nicely rising market, but I don't know about the Philly "standard."

If you are dead set on playing the appreciation game, don't.  Sell it.  @Joshua Nudell isn't right about the expensive lesson yet, but he could be at any water leak now.

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