TO SELL OR NOT TO SELL

6 Replies

I have a rental property that we bought new in 2017, its a little over 1800 sqft, we bought it for about $235k. We lived in it the first year, then bought a house to do a live in flip. 

We now owe $185k on the house. Our tenants pay $1600 a month and have been on time every month for the past year. We are getting close to the end on the lease and they asked if we would be willing to sell.

The neighborhood and house should appreciate in value significantly over the next few years, so ideally I would like to keep the house as rental. 

The kicker is that our property taxes/escrow went up so we from cashflowing 350/month to breaking even everymonth. So we either have to try to raise rents, keep breaking even, or sell.

Did you run the numbers factoring all expenses? What was the ROI before the property tax increase? You could offer a creative financing deal to the tenants. Lease-to-own, seller financing, etc. Houston is booming but you're no where near that city. I wouldn't bank on big appreciation. In my opinion a rent increase won't go well if the tenant is interested in buying. They could be offended and move out.

I'd like to dig into your numbers a bit more. Your investment doesn't hit the 1% rule which already seems like an issue

Whats your PITI? And expense set-a-sides for CAPEX, maintenance, utilities, etc.?

So the reason I think the value will go up in the next few years is because the builders for this neighborhood just finished another neighborhood on the other side of town and all that those houses have done is go up in value especially since they stopped building new houses at that location.  So I have a feeling that this house will do the same once they are done building in this neighborhood.

The escrow is way off because when they did the first appraisal when we bought the house they only had the land accounted for on the taxes. Then they threw in the updated taxes plus the current years estimated taxes. So basically 2 years of taxes on one escrow until we are caught up.

Corie,

I'm in Houston and I can tell you what you described is very common. This is something builders don't always clearly tell homeowners when they buy new construction. Your first year property taxes are simply based on the land value. Then for year two, BOOM. You get hit with land + improvements (the home) which are usually assessed at a value close to your purchase price + land with maybe even then some if the area has been rapidly appreciating. Happens in areas around Houston in the suburbs all the time. I've talked to a few people that got in tough situations because of this. 

I'd love to talk to you more about this property - I will send you a message. I can't imagine you're cash flowing anything once you account for PITI (Principal, Interest, Taxes & Insurance), CapEx, OpEx, Vacancy, Etc.. Not at less than 1% of your appraised value unless you put a huge down payment on the house and have a ton of equity where your mortgage is significantly lower. The question now becomes can you afford to hold this property when it does not cash flow if there was an issue (roof repair, A/C, etc.)? If yes, some investors would still keep it and hold it while it goes up in value. Some buy for cash flow only, some buy for appreciation only and a tax shelter, it's recommended you buy for both.

Hope this helps. I'll send you a message to discuss.