First Rental – Should I Keep It or Let It Go?

Question

Hey BP,

Looking for some guidance. I bought my first house in Port Wentworth, GA (near Savannah) last summer with a VA loan. Loan balance is around $225K, rate is 5.225%, and my PITI runs about $1,600/month.

I’m moving out of state in January and was planning to keep this as my first rental. Market rent looks to be about $1,800, so it technically covers the mortgage, but once you add management, maintenance, reserves, etc. the numbers get real thin.

So here’s my question: do I hang onto it for a few years, maybe lose a little each month and hope rates drop so I can refi and cash flow better down the road? Or am I missing another strategy here?

This would be my first rental, so I’m just trying to make a smart call. Appreciate any advice from those who’ve been in this spot.

Thanks,
Cameron

Kerlous Tadres · Answer

If you’re fine covering a small loss for long-term appreciation and a future refi, hold it. If not, selling now and freeing your VA loan for a better cash-flow deal is probably the smarter move.

Nadeem Alamgir · Answer

@Cameron Bakeryou’re basically betting on appreciation or rates dropping. If covering a small loss each month doesn’t hurt you, holding could work long term. But if you’d rather put that equity into something that cash flows better right now, selling and reinvesting might be the smarter play.

Dave Foster · Answer

@Cameron Baker, it really depends on your personal situation, and if you can tolerate the time it could take for the property to perform or appreciate.

If you decide to just sell the property as your primary residence, you could qualify for a partial exemption of the tax due to your employment situation,  even though you  haven't lived in the property for two out of the previous five years of owning it.  I doubt if it has appreciated significantly to the point where you would have a taxable gain.  Your accountant can tell you for sure.

If you decide to convert the property to an investment and you decide you want to sell later on, you could do a 1031 exchange, which allows you to defer all of the tax and appreciation and reinvest it into another investment property. Either way, you might have some options to reinvest into markets with better cash flow and appreciation potential.

My issue is that if you're just going to lose a little money each month, why not sell if you can take the gain tax-free.  And put that money into a HY yield market account where you make a little bit of money each month and wait for a better opportunity to come along.  Your interest rate isn't that exciting to think about holding on to for the long term.  But if that property will appreciate quickly, then that's a reason to consider holding on.

Dan H. · Answer

On moderate rent units like this expenses/vacancy typically run near 50% of rent (the 50% rule).   Expenses/vacancy include PM, maintenance/cap ex, vacancy, insurance, taxes, miscellaneous (asset protection, book keeping, taxes, etc).   Basically all expense other than mortgage payment.  I calculate your mortgage as ~$1k

1800 (rent) - $900 (expenses/vacancy) - $1000 (P&i) = negative $100

This is actually a fairly good cash flow at typical VA high leverage (even though it is negative).   I suspect those cheap Midwest units would be optimistic to have expenses/vacancy at 59% of rent.

I am assuming your do not have much equity because 1) typically VA loans have high leverage 2) not much time if ownership (1 year) 3) the property is in a market that has not historically appreciated much 4) the last year in most markets has not had much appreciation.

To me the keep or sell is not obvious from the numbers.  Questions: 1) do you want a rental?  Residential RE is not passive even with the use of a pm 2) do you have any issue supplementing this “investment” potentially for quite a while.  What if rents are flat with no appreciation for 5 or 10 years?

I suspect I would roll the dice and keep this if I were starting out but I would not rely on being able to refinance out in the near term.   The likely worse case is that it is a relatively cheap learning experience.   With the high leverage (low equity), the returns are magnified.   Even small amount o& appreciation can produce good retun(at 90% LTV, 2% appreciation provides a 20% return brim the appreciation).  I certainly would not expect this purchase to be an outstanding investment in the near term.  Sometimes a base hit suffices.  With time, it may be a home run.

good luck

Andrew Postell · Answer

@Cameron Baker thanks for the post!  I wish more of us would use the VA loan to start our investing career.  It's a great way to acquire properties for as little out of pocket as possible.

Now, what you are facing is pretty common but there is something we are missing - if you did NOT keep the property, what would you do with it?  Would you sell it?  And if you would sell it, how much would you sell it for?

I'm asking this because if the home is worth $225,000...then that means you would lose $18,000 by selling the property. But if it's worth $250,000...you wouldn't profit much but you wouldn't lose anything either.  So, the "other choice" would need to be measured to really compare what the better option would be.

This same scenario occurred to me in 2008. I purchased a home and I could not sell it - for over a decade!  Because values went DOWN during that time.  Now, I never purchased the property (with my VA loan) to sell it.  I always had it in mind to rent it.  And after renting it for 15 year, I sold it for $125,000 of profit.  So, the property did rebound.  I probably spent about $75 per month on the property over that time.  So, would you give me $75 per month to get $125,000 after 15 years?  Of course you would!  Real estate is forgiving.

Again, we can't see what the alternative is though.  So, if your house is currently worth $1million...then our discussion is different.

Hope all of that makes sense but feel free to call me directly if you want to go over any math or anything.  Here to help!

Caleb Brown · Answer

Can you afford to float the property if it goes vacant or there is a expensive repair? First financially you have to make sure you have enough reserves and income to cover when things hit the fan. After that it comes to how is the area? If you think it'll continue to appreciate, in a good area where you attract good/long term tenants then it can be worth keeping. The other side is can you sell and reinvest into something locally where you are? Many things to consider. I watched a YT video on the "Money Guy Show" where they interviewed a military family. They would use VA and hold them when they left. It can be done but you need a good financial base.

First Rental – Should I Keep It or Let It Go?

Most Popular Reply