Should I dump this rental property?

16 Replies

I need some help on this one.

In September 2014, I moved from Washington, D.C. to Charlottesville, Virginia. In DC, I lived in a smallish 2 BR, 1 bath, 1 den Rowhouse from the 1850s, right in the heart of the city. Consistent with DC prices, I paid $735k for it in 2007, and put about 50k in renovations into it over my eight years in DC, so my cost basis is about 785k. It is financed with a 30-year fixed rate mortgage at 3.75%, and I owe 530k on it, and PITI is $3100/month.

When I moved to Charlottesville, I found some wonderful tenants for my house in DC, and I became a landlord.  The tenants have been, and continue to be wonderful.  They just told me that they would like to renew for another one-year leas, but I expect that, after the next year, they will likely move from DC, so I will have to make a decision on whether to sell or to find new tenants.  The house is in a very desirable location, walking distance to bars, restaurants, public transit, etc -- so I do not expect vacancies or finding great, reliable tenants to be an issue.  The issue is whether the numbers justify keeping this as a rental. 

And with that, Here are the numbers.

The property currently rents for 3550/month, and -- because I am not local and I do not have a reliable handyman -- I cough up the $50/month for American Home Shield's home warranty (I'm ashamed, I know).  So, with 3550 - 3100 - 50, I cash flow about $400 per month.  During my first year of being a landlord, I feel like everything broke, and I either fixed it or replaced it knew, including a $5,500 hit for a new HVAC, so I'm finally starting to build a decent reserve and haven't received a phone call in months (fingers crossed).  For every month that the tenants live there, they pay down the mortgage about $1,000. The house is now worth about 850k.

So, my bottom line question is -- when these tenants leave, should I dump this property and find others to reinvest?  I have a lot of equity tied up in this, and I don't really know if my return is all that great.  On hand, after the next year's lease is up, I'd like to sell it and use that money to buy a few properties here in Charlottesville, which is closer to home.  On the other hand, this is my only rental property, and I must confess I'm not entirely skilled at finding new deals (which is why I'm trying to learn) and I'm not really seeing any in Charlottesville that I'm dying to jump on at the moment.

Any thoughts? Advice?  What would you do in my shoes?  Dump it?  Keep it?

I would dump it, use your equity and buy more rentals locally. You have a lot of money tied up in this. If the return was amazing, I would say keep it, but you could do more with your money on multiple properties.

Thanks Simon.   If I sell it, do you have any suggestions on what type of return I should be looking for?  Sometimes, I see people discussing properties that rent for $1000/month that can be bought for 60 or 70k.  If I had those opportunities, I would've sold it months ago, but but those properties just don't exist in the Charlottesville market. 

What are the cross streets of your property? The cash flow may be a secondary consideration to the appreciation here. The area in question may still have a chance to go up...or maybe not.

People try to follow the 2% rule, but I find it hard to do in most markets. The 2% rule states that the rent on your property should be 2% of your purchase price or more.

Look into foreclosures. Go to local REI meetings and meet wholesalers. Have them bring you deals. Try and find an investor friendly real estate agent and let them know what you're looking for.

I am closing on a house next week. I am buying it for 15K and it will need 35K in rehab. I should be able to rent it out for 1000-1200, but I also mailed 1000 postcards to absentee owners to get that deal. It was the only call I got from my mailing. A lot of it is timing.

Browse the MLS daily. Look for cheap properties in areas that you are interested in buying. Go to Zillow and fond out how long they have been on the market. If its over 100 days, low ball an offer. The worst they can say is no.

@Chris K. You can possibly pull equity out. If you can then I would keep the property, pull some equity out and use it to purchase another one. If you want to upgrade i.e. purchase a multi unit, then I'd probably sell.

Simon, thank you for the advice.  I had seen the 2% rule, and if I ever came across anything close to that I'd hop on that fast.  I'll grind it out to see what I can find . . .

Yes, my mortgage is with Wells Fargo, and they said they would give me an ELOC (not a HELOC, since I don't live in it) where the rates would be about 1% higher than traditional HELOC since I don't live in the property anymore. That was another option I was kicking around . . .

Originally posted by @Chris K. :

Thank you for responding.  The cross-streets are 15th and T, and 16th and T, NW.

 So based on the limited amount of information I have from your few posts I would be inclined to sell. It's a bit late, and I'm typing on my cell, but if you want to know my reasoning feel free to shoot me an email and I can give you my thoughts tomorrow.

@Aaron Howell:  I really hope you are right.  That's where I have been looking, but I haven't seen anything appealing yet.  There was one 3-4 unit multi-family near UVA earlier this year for near 800, but I didn't want my first attempt in the Charlottesville scene to be quite so big.

As someone who manage/repair his own and clients properties here in DC , I can tell you that your cashflow is not great if you focus only on your cashflow, but that is reality for most of DC market as home prices are high,  but you have very low mortgage rate ( read free money ), also your rental property attracts best tenants = easy to manage, small vacancy rate..also it is probably all brick home, with small yard so it is low maintenance. where roof and AC are the biggest expenses, and you already paid for HVAC.( I dont know why did you pay $5K for HVAC if you have America Shied Insurance...) Also you are cashing on steady appreciation in DC market as @Mark Holencik   already did calculation for you.

When you get those cheaper suburban houses, you will probably have bigger cashflow, but also higher maintenance cost, probably lower income tenants, and I dont know about appreciation as I dont know that market. So depending on what are your plans/goal make sure to include other factors in your analysis when getting your new rental and not just cash flow numbers.

I would go with ELOC as @Damien Hall  said and test your new area first, and if you are doing well and making more money , then dump DC property, but until then I would keep it and enjoy easy appreciation in your DC house.

Hope that helps.

@Vasa G.

Thank you for your thoughtful reply.  You clearly know the area as well, and it's good to know that is the reality with the DC area.  Yes, the house is brick, with a small yard, and very easy maintenance.  My only thought on appreciation was -- prices are already so high -- could they really go much higher?  But, as you seem to suggest, that's just one thing to consider in the entire package with cashflow and paying down the mortgage.

Originally posted by @Chris K. :
@Vasa G.: 

Thank you for your thoughtful reply.  You clearly know the area as well, and it's good to know that is the reality with the DC area.  Yes, the house is brick, with a small yard, and very easy maintenance.  My only thought on appreciation was -- prices are already so high -- could they really go much higher?  But, as you seem to suggest, that's just one thing to consider in the entire package with cashflow and paying down the mortgage.

If I can predict any future oscillation of the market I would be next Warren Buffet ;) , but as long as you have fixed rate on your property and decent cash reserve, you are going to be fine. Good luck and keep  me posted on what have you decided, maybe I can learn something new about your new rental area too. Cheers!

I would keep it.  It's in a great area for future tenant prospects, it's already been "de-bugged", it's going to be worth somewhere close to 1.75 - 2.0 million by the time tenants have paid it off for you, and you're in good shape cash flow wise.  As far as the home warranty plan, I commend you for being wise enough to get one.  I have had one on every property I have ever owned and they have all paid for themselves.  Additionally,tenants love the convenience and they pay the entire costs of them for me.  The money I don't spend repairing or replacing things that are covered by these plans that I don't pay for give me more money to invest and more peace of mind and happier tenants with less headaches all around.