I'm trying to understand if my SFR is worth holding or selling. I'm in Binghamton, Broome County, New York. My goals are to buy and hold high cash flowing property and manage flips for cash for down payments. In order to buy more properties, I need more cash. Should I sell my SFR to get more cash for another, higher cash flowing property? Should I leverage a refi?
Here are the circumstances: 10yrs left on 15 yr mortgage. Rented for $1400, monthly PITI payment is $1200, good tenant who pays on time and covers all utilities and maintenance. I paid $130k in 2007, property could be sold fast for $110k, maybe $120. I owe $85k. Cash flow, on the surface, doesn't appear good, but ~$500 of the monthly payment goes to equity. I pay tax on $1400 per month, of course. Pretty low maintenance over last 2 years (I put about ~$1000 in repairs)
Pros and Cons of holding:
Pros: Good tenant, 15 yr loan means high equity payments, little worries, tenant may want to buy the house.
Cons?: Low cash flow. Cash out refi would only give me ~$25k. Selling might leave me with ~$30k and I can use that on a dp for a new property in the 50-75k range meeting 2.5-3% rule. House needs a new roof.
I'm torn. Please let me know what you think.
How long is the tenant's lease? If you sell it, the new buyer will most likely honor that lease. Which in turn affect your buyer pool.
Ask your tenant if they will be interested to buy sooner - before the lease ends. Make it a win/win situation. If you do sell it without a realtor, you will save the realtor fees.
You definitely needs to get that roof fixed asap - whether you decide to sell it or keep it as a rental.
Why do you say you pay taxes on the $1,400? You don't sound like you are cash flowing on the property and I would assume depreciation would wipe out the remaining taxes. You refinance into a 30 year loan, possibly pull some additional cash out and your cash flow would improve with the lower payment.
Hi @Scott McMillan . You live in my hometown. Awesome.
On the tax comment..,I calculated depreciation basis on $130k at $79k, over 27 years. That's in the neighborhood of $2900 bucks per year. Throw mortgage insurance in there and I'm writing down about $6k per year. Taxable income is $12k for which I pay 28% on... When I started doing REI analysis I thought I'd only pay taxes on the money received above my payment. Not the case.
Again, it doesn't appear to cash flow well but if you count the money that goes to equity, it still makes money. I am thinking Cash Out refi is the right course. Just not sold yet.
You definitely do not pay taxes based on gross income. You can also write off Mortgage Interest Payments, Property Taxes, Insurance, Utilities, Accounting expenses, travel expenses, and repairs. Depreciation is 27.5 years. How did you arrive at your depreciation basis? $51,000 seems pretty high land value, does your property tax bill list land value?
@Scott McMillan thanks for this. Last year's expenses lowered my taxable income, almost entirely. Maybe that in itself gives me my answer. Also, I used the entire assessed value to get to depreciation. Maybe I'm not doing that right, though I'm mostly sure my accountant is. I realize I pay tax on the things that are left in gross - expenses etc... I did not realize almost all my expenses, including utilities and insurance were included in that deductible though. That's what you're saying right? That's great news for my calculations. Thanks again.
Still, the main question is whether or not $500 per month to principal + $200 per month rent with low/no cash flow is better than the refi for cash and the lower payment option? I guess it just comes down to what I want to do.
@Chris T. Thanks for this. The tenant's lease expires in December. The roof isn't in dire shape and selling to the tenant has crossed my mind. I've already advised them to try and leverage their VA loan options and I'm pretty open to selling.
@David Drew , a few quick thoughts on your situation. Are local values coming up or going down? If you bought in 2007 just before the big crash did it drop a lot in value and is now coming back, or is real estate just flat? Do not discount appreciation. You are using a 15 year note. This means your payments are higher but you pay down quickly. You will make more money per month if you get a 30 year mortgage, but I prefer 15 year loans. If you are paying $500 per month in principal you are probably paying $400 per month in interest. Interest is tax deductible as an expense.
At $200 per month left over to take care of maintenance and cap ex and vacancy you are not making much. Normally it would be best to sale and get something that cash flows better. How sure are you that you can make better cash flow on other properties if you use a 15 year note? Will you have to move into lower level housing areas to make the higher rate of return? If so you will find higher expenses in upkeep and repair. After recapture of depreciation will you really make much money to use to buy new properties. Last but not least most tenants will want to move out if they learn the rental they live in is for sale. Make sure you house really will market well before you put it for sale or you could have an empty rental unit.
I'm not sure when you bought your property and if you have a copy of the appraisal from the closing process, if you do it should list the land value separate from the total appraisal value. If not look at the tax assessment records from the year you purchased the property it will list land separate from improvements.
Depreciation is [Purchase Price + Some closing costs (Fee's and such but not any prepaid expenses)] - Land Value / 27.5.
I disagree with Jerry, on a home valued only around $130,000, $200 doesn't seem to bad per month. That being said using a simple excel amortization calculator I came up with the following scenarios.
If you solely refinance your current $85,000 loan into a 30yr loan, 3.75% interest rate, $1500 closing cost estimate. $86,500 at 3.75% for 30yrs is about $400 P&I payment, leaving plenty of money left for cash flow.
Now if you want a cash out refi at 80% LTV, that would give you immediate cash to replace the roof (which would either be considered a repair (an expense) or replacement(depreciated)). Any money left over could be used to invest in another property. $104,000 at 3.75% for 30 years is about $480mo P&I. Again leaving you plenty of room for cash flow.
In my opinion cash flow is most important. Amortization is great, and appreciation a bonus, but cash flow is the most important while depreciation helps keep your taxes low.
@Jerry W. There is no appreciation here and consequently, there was no impact to the RE market in 2007. Values stay the same...forever. I'm in NY so it's more like $250 interest, the rest is property tax/ins. I would likely move into lower income levels too, yes. For this area, $200 is low. We're more like a '3% rule' market for rentals here. I can get $1400-$1700 on a $50k house.
@David Drew , based on that I would say it's time to sale and see if you can turn it into 3 houses instead of one. Good luck bud.
Could you point me in the direction of the $50K house that rents for $1400-$1700?
I would move on getting the tenant to buy the property. Considering he is already in place and with a VA loan you should be able to leverage him into paying top dollar for the property. Take advantage of his situation and sell if you can. The VA loan is a opportunity for you to get a higher price. This could also help you avoid the cost of a new roof.
It is never a good idea to have equity sitting dead in a rental property as it will decrease your cash flow. Since all the profit from your rent is going to create more equity every dollar you pay down is costing you money.
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