Dilemma... what would you do?

Question

Scenario 1: 2 houses with mortgages, very minimal but positive return on both ($4k annual net profit)

Scenario 2: sell 1 house, use equity to pay off other house ($14k annual net profit)

Which one would you do? And why?

Mark A. · Answer

@Thomas S. Both properties were initially bout years ago..  not as investments but as primary residents. Now I have the opportunity to use them as rentalninvestnents.

These income figures are lower because I'm getting a property manager. Charging me 7%/mo and 40% of first months income on new tenants.

It's my first time doing this and I'd feel more comfortable having a property manager. Plus I still have a full time job working 50hrs a week so don't really see how I can fun this effectively... for now at least.

I personally don't see the harm in getting positive cash flow even if it's smaller because at the end of the day it's still paying down the mortgage. Do you?

Theresa Harris · Answer

@Mark Ambatali

Then go with scenario 1 and look at the long term income.  There is nothing wrong with that.

Tanner Marsey · Answer

@Mark Ambatali

Then hold both and slowly pay them off....

Mark A. · Answer

@Theresa Harris I'd like to hold both. Slowly payoff both

Theresa Harris · Answer

In scenario 1 is that $4K total or per house?  Having two places means that if one is vacant you are still making money on the second, but there are more costs due to having two houses.  Tough choice.  What are your long term plans?

Mark A. · Answer

@Steve Hall I guess I did leave out the fact that the reason these properties are cash flowing lower is because I'm factoring in cost for a property management company.

What other info do you need to make a suggestion?

Mark A. · Answer

@Greg Scott in theory that would be great idea. But I bought these properties in 2009 and 2014 when the market was good. I'm afraid if I sell these now I'm going to have a difficult time finding a comparable deal.

Scott Mac · Answer

Hi Mark,

I'd Net the 14K and use it as a cash cow for the foreseeable future.

Just a nice reliable very low risk little cash flow source.

Scott...

Greg Scott · Answer

Mark:

Interesting thought experiment.   I choose "none of the above" as I believe you have left off the best option.

If you have a cashflowing property, typically more leverage (to a point) is better. In this case, you are deleveraging.  Let's assume your mortgage is 5%.   Reducing costs by $10K implies you have $200K of equity in the house you sold.  $200K in equity is a ton on a rent property and your return on equity is terrible in either scenario.

If you have $200K of equity but aren't cashflowing, you must own a house in a very high priced market.  (e.g. California) Based on your example, each property is only cashflowing $166 per month, so I'm guessing the property value must be $500K or more for you to have such little cashflow.

Thus, you have left off a much better option.

Scenario 3 - Sell both houses to free up $400K in equity.   Take that equity and buy several houses in a lower priced market to make 10 - 20% cash on cash returns.   Assuming you get 15%, that is $60K per year in cashflow, much better than what you could get in either scenario you propose.