I bought a property 9 years ago for 52k that has long been payed off. 3 years ago I refinance the house and took out 87k to buy a 2nd house which I am currently living in. The payment on that 87k loan is rounded up to $600/month. The 1st house has been rented out and generate $630/month after all expenses including the $600 monthly payment for the 2nd house; now, my thought is that I am getting $630/month plus a free house!
The 1st house is now worth 160k and I can expect around 80k after commission, closing cost and 87k loan if I sell the house. I am trying to calculate the ROE of the 1st house to decide if I should sell the house to finance other rental properties with better cash flow.
My question is, when calculating ROE, should I consider $630 as the only source of income or should I include the $600/month payment which will make $630+$600 = $1230 as the income?
Using $680 as income, ROE is then 630*12/80,000 = 9.45%, which is ok but I am sure I can find something better.
Including the $600 I am paying for 2nd house, ROE is then 1,230*12/80,000 = 18.45% which is great and I should keep the house.
Lastly I think value of the 1st house has reach its peeks and will not go up for much longer
Thanks for reading, your input are appreciated.
Your monthly income from the property is $1230 = $630 + $600. Use that for your calculation.
If you want to keep the property, have you thought about doing another cash out refinance to purchase the additional rental properties?
For single family investment properties you can get an LTV of 75%.
You bought a house for $52,000 and it's now making $1200 a month after all expenses, including the refinanced mortgage?
Forget your question, I'm trying to figure out why you'd want to offload the goose's golden egg.
Refi is your answer.
Hi Tarun, thanks for the respond.
Initially I also thought $1230 would be the correct number to use. However when considering the cash flow if I sell the 1st house and pay back the remaining loan, $630/month would be the threshold I need to achieve to obtain a higher cash flow with that 80k from the sales. Am I wrong trying to use ROE to decide if I should sell in this situation?
Updated almost 2 years ago
Just realize my mistake. You guys are correct that 1230 is the right number to use as income. What I missed was the equity I should be using when calculating ROE. I should include the equity in the 2nd house(92k) as well. So ROE is then: 1230 *12 / (80k + 92k) = 8.58%