Should I Buy or Hold? Seems complex!

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Should I Buy or Hold? Seems complex!

Kevin Z.
Ipswich, MA · Member since 2016 · 15 posts · 3 votes

I consider myself a numbers guy, but I'm not sure what numbers to use to help me decide whether to buy or sell. I'll try to be as specific as possible. I'll answer any questions if it helps you...to help me!

I own a SFR and a 3-family. I am very limited with capital right now due to a long rehab project on my 3-family. I only have a couple of months of reserves for each property. Here are the basics of each:


SFR

Value-$325K. Rent covers mortgage +$400 each month. Awesome tenants who take stellar care of the property. It was my home until 2 years ago. I am hearing the clock ticking on my chance to pay no tax if I sell. I could make about $80K-$90K if I sold. Mortgage is 2 years into a 30-year mortgage and pays down about $365/month. I could get about $25K-$30K out if I chose to get a HELOC.

3-Family

Value $700K. Currently empty. Should rent for mortgage + $1700/month. Could convert to condos and make about $100K. Mortgage is 2 years into a 30-year mortgage and pays off $480/month. 

My Goals

My goal is to BRRRR and enjoy a little cash flow with the advantage of not having to save a ton of capital (I'm *only* a teacher by day). I live in Massachusetts where things are pricey (multi is in MA, SFR is in NH). I want to get over my fear and look in different markets and no longer self-manage.


My question, other than, "what would you do?" is one of how to do the math. I feel in some ways as though I have a bit of what I want, namely some cash flow, so selling feels a bit like it would defeat the purpose. On the other hand I don't have the capital I need to grow. 

If I look at the $765/month that I make on the SFR between $400 cash flow and $365 mortgage pay down and divide that into the $80K I could make from selling, that shows me that it would take 8.5 years for the renting to equal the amount I could get from selling. Not to mention the taxes on a $325K sale that will not be forgiven if I wait more than 1 more year.

If I were to sell the 3-family as condos and keep $100K, or $75K after taxes, that would equal almost 3 years of rental income plus mortgage paydown on the multi. 

I realize that I am excluding tax advantages like depreciation, but my head is ready to explode as it is!

I'm feeling inclined to sell the SFR and keep the multi. But maybe there's a better way to analyze the numbers that I'm not getting. So, would you sell one or both to gain capital, or would you save up the cash before looking to invest in a cheaper market?

THANK YOU!

Kevin

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  • Eric D.
    Rental Property Investor · Boston, MA · Member since 2015 · 19 posts · 23 votes
    7y
    @Kevin Z. Hey Kevin, My suggestion may be different from some but I would say look into selling your SFR. Use that capital gains loop hole to your advantage and either pay down your 3 family or even better yet try and find another 3 family to purchase and move into. Reading your post reminded me of a blog article I read a while back. It may help you out. https://www.biggerpockets.com/renewsblog/2016/07/08/secret-building-wealth-real-estate-successful-understand-and-newbies/
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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    I recommend the following:

    • Sell the SFR to take advantage of the capital gain exclusion
    • Run the 3-family property figures through a rental property calculator and include all expenses, management, vacancy, cap ex reserves...many of which are excluded above
    • You could use an IRR calculation to properly include predictable appreciation but let's start with the first two bullets
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  • Shahriar Khan
    Investor · Houston, TX · Member since 2010 · 234 posts · 145 votes
    7y

    @Kevin Z. I would look at them backwards since i operate based on risk and my comfort level 

    Note:

    1) All of calculations assume that life is perfect and tenant will be there every month 

    2) 3 family would help to derisk #1 above. 1 family for tax+ insurance + 1 family for mortgage payment and 1 family is cash flow. If manage right , its likely that you may not have cash flow for a month or so but PITI will be taking care of . This may not be possible for SFR

    3) Difference between selling/keeping either one is marginal (after tax) so it needs to tie with your "comfort zone"

    Decision categories: 

    1) If you are comfortable  with a squeeze for next 6 months: Bite the bullet and keep both

    2) If you want to feel relaxed: keep 3 family one 

    Wish you the best and keep up posted. 

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y

    Keep both. Why is the triplex empty? Fill Asap. 

    Refi cash out if there is extra equity to be had. Otherwise keep both as is and only sell if the cash proceeds would allow you to buy something bigger. 

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  • Kevin Z.
    OP
    Ipswich, MA · Member since 2016 · 15 posts · 3 votes
    7y

    @Eric D. Thanks for the advice and for the article! Salem is a great city-I lived there for a couple years. Do you invest there?

    @Mike Dymski Thanks for your input!

    After putting the numbers into the BP calculator, I ended up with about $650 cash flow per month, and by self managing I am saving an additional $600.

    I agree about selling the SFR. It's unfortunate-I still actually keep my boat there all summer as it's close to lakes where I take my dad fishing, but I don't see any way that the convenience is worth paying the capital gains from selling. I also feel as though I will be missing out on increasing wealth from mortgage pay down. I reluctantly agree-take the money from the sale and re-invest.

    @Shahriar Khan Interesting way of looking at it (in terms of comfort level). I am pretty comfortable being EXTREMELY uncomfortable. Honestly in this case I'd be more comfortable keeping both for the reasons above-just want to make sure that isn't a bad move financially.

    @Cody L.  3 family is empty because when I went to do some electrical work to install a dishwasher, I found knob and tube wiring. Worse, I discovered that the previous owner had blown in insulation. I decided to gut the entire building and change floor plans, add washer/dryer to each unit, remove all the horsehair plaster, add closet space, and upgrade EVERYTHING. Should be back up and running again in a couple months. While it may not have been the best thing for my bottom line, I know it was the right thing to do for people's safety and so that I could offer not just an apartment, but an AWESOME place to live. At the end of the day, that is way more important to me than saving some money and halfway wondering what was inside those walls. I'm so glad I did it. I found other things in the house that appeared very unsafe as well. Now I know exactly what is there and what isn't. I take pride in every thing I do, and my new endeavor as landlord will be no different.

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  • Account Closed
    Rental Property Investor · Beverly, MA · Member since 2018 · 41 posts · 16 votes
    7y


    Originally posted by @Kevin Z.:

    While it may not have been the best thing for my bottom line, I know it was the right thing to do for people's safety and so that I could offer not just an apartment, but an AWESOME place to live. At the end of the day, that is way more important to me than saving some money and halfway wondering what was inside those walls. I'm so glad I did it. I found other things in the house that appeared very unsafe as well. Now I know exactly what is there and what isn't. I take pride in every thing I do, and my new endeavor as landlord will be no different. 

    Some people will think you just blew a bunch of money, some people will congratulate you on being a good property owner for doing this.  I think in the end you'll be happy you did it.  Plus, you're improving the quality of housing and quality of life for the area (even if it's just a wee bit) which will help your property value in the longer term as well.

    Where's the SFR at? Lakes region NH? Triplex is on the Northshore?

    Depending on location, I'd probably HELOC the SFR if cash is needed, and keep em both.

    Also, are you saying time is ticking for paying taxes selling the SFR because soon you won't have lived there for 2 of the past 5 years?

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    I would be looking to sell them both before you end up with negative cash flow. Both will go negative cash flow in the future. You have obviously not calculated your long term expenses on either property. 

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  • Matt Lefebvre
    Real Estate Broker · Manchester, NH · Member since 2014 · 630 posts · 420 votes
    7y

    @Kevin Z. I don't know the specifics numbers, but based on what you're describing... your margins are razor thin on that SFR. I'm doing some back of the envelope math here without all the facts... but based on the picture you paint, this doesn't look great.

    I very rarely see single family properties make positive cashflow in NH and if you have a 325K property... I can't imagine there being positive cash flow if you're only making $400/mo after paying your mortgage. A single month of vacancy wipes out an entire year of profit. A blown hot water heater eats away three months rent. If you can make $80K in profit on the investment run the quick numbers. Even if you assume your positive cash flow is truly $400/mo after expenses... $400/mo x 12 months = $4800/yr. To make up the difference in positive cash flow between what you're making right now annually and what your potential sale profit would be... you'd have to own this SFR for 16.66 years before you breakeven and compare to the profit from a sale. The numbers don't lie on that one... you'd make way more money selling that property and reinvesting into something with a stronger cash flow.

    Regarding the three family... I hate to be the bearer of bad news, but I think you're over-rehabbing that property if you're planning on hanging onto it for a long term rental.  A cash flow of $650/mo (because yes... you have to count management as an expense because you're either working for free if you don't or you're hiring someone else to do it) on a $700,000 property is a really low rate of return.  I don't know what type of loan you used to purchase it... but assuming you paid ~$500K and have 25% down, you've probably invested about $125K + $75K in rehab.  $650/mo cash flow x 12 months = $7,800/yr.  If you only consider your $125K downpayment, your payback period is 16 years.  If you consider the rehab costs, that payback period is almost 25 years.  

    Honestly, you might want to consider selling both and investing in something with better cash flow and run a better analysis when looking at acquiring a property.  Just my two cents...

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