Am I on the right track?

Question

Upon moving to St. Louis last year, I converted my small, one-family home in GA into a rental. Since it's paid off, it brings in about $400.00/mo. in free cash flow. Including renovation costs, I paid $50K for it, and that's about what it's worth now. Should I keep it as my first rental in a portfolio?

I moved to St. Louis last year to marry my wife, who also owns a rental. She recently refinanced the mortgage on it and owes about 60K on a 30-yr. She brings in just enough rent to cover all expenses. A few years ago, she tried to sell it, but with no luck. Should we keep this house as a rental and increase the rent?

Thanks in advance for your suggestions.

Thomas S. · Answer

It is highly unlikely that you are including all long term expenses on the rental and therefor are not likely netting $400/month.

However:

Since you have $50K lying dead in the property and cash is valued at a minimum 10% by investors the equity should be earning $416/month from your cash flow placing the property itself at negative $16/month. If as I suspect you have not included all expenses the property is likely deep into negative cash flow and you would be miles ahead to sell and take advantage of the opportunity value of cash.

If you could pull out the equity and still cash flow (unlikely) it may be worth keeping otherwise it is a loser.

Brandon Sturgill · Answer

@Matthew Morgan General rule of thumb...never sell a rental property...unless it makes more sense to cash out then to continue to gain the benefits of rental real estate...

The only complication I see on your end is the distance...but that isn't necessarily a bad thing. Remember why we invest in real estate:

1) Debt pay-down (your tenant will eventually pay off your mortgage...and you can accelerate this by paying more toward principal)

2) Equity buildup (you are the benefactor of the equity in the property and can use it to buy more property)

3) Tax (the IRS is pretty good to us as property owners :)

4) Because we love to provide safe, clean, and reasonably affordable places for folks to live.

Matthew Morgan · Answer

Thanks!

Peter Aziz · Answer

It depends on the circumstances and the details surrounding not only your existing property, but also the details surrounding what you intend to do with the proceeds of the sale. What's your ROI/Cash on Cash Return on your existing property and how does that compare to what you intend to with the proceeds? If existing returns > potential returns, then it doesn't make sense selling.

Am I on the right track?

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