My rental property is worth 120K. Profit?

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My rental property is worth 120K. Profit?

Kassie Carrell
New Braunfels, TX · Member since 2017 · 39 posts · 29 votes

I have a house I rent out for 1300 a month. I owe 60K. It's worth 120K. How much should I be making annually on this income property. I feel my numbers are very low, but I am new at this so I am not sure. After taxes, insurance, mortgage, and property management fees I am left with very little.  I would appreciate any advice. 

Warmly, K

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Austin Fruechting
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y

@Kassie Carrell

Here's what I would do: talk to a bank about refinancing (and see if you'd qualify). At 75% LTV you could get a 90k loan with lower payments than you have now (30yr 4.5% is $456/month, $5,472 a year). This would give you more cash flow than you have now, pay off your $18k debt, and put $12k in the bank.

Take that $12k and use it to buy a duplex and live in one side using an FHA owner occupier loan. Then your monthly living costs will be next to zero. That combined with Dave Ramsey budgeting and you'll be saving very fast to continue to acquire.

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  • Arissa Pedroza
    Real Estate Agent · San Antonio, TX · Member since 2013 · 153 posts · 132 votes
    9y

    I live in San Antonio and when I am looking for a cash flow property and I start with the 1% rule. That means the rents should be 1% of the purchase price. Given that the ARV is $120k and the rents are $1300, that is above the 1% rule and would be appealing for a cash flow investor. As far as cash flow, I am able to cash flow at least $300 a month after mortgage, taxes, insurance, maintenance, PM fees, etc. What are you cash flowing?

    2Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y
    278.75 is my cash flow. That's if nothing goes wrong. I had to replace a hot water heater recently and pay for some lawn maintenance. So you think this is good? Again, I just don't know. I thought I should get at least 5-8 percent back in order for this to be a good investment.
    1Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    What are your loan terms and how much cash did you put down?  

    1Reply
  • Account Closed
    Investor · Clifton, NJ · Member since 2017 · 53 posts · 54 votes
    9y
    If your 'cash flow' is $278.75 with nothing going wrong, does that mean you're not accounting for maintenance such as the lawn care you mentioned? Or was it over the top, such as tree removal or putting down sod? If not, that's not cash flow and you may be doing something wrong.
    0Reply
  • Ian R.
    Real Estate Investor · San Antonio, TX · Member since 2016 · 143 posts · 167 votes
    9y
    Kassie Carrell Keep in mind that you're also reaping the benefits of building equity by having your tenants pay down the mortgage every month. And you're also enjoying the tax benefits. Actually, an SFR with an ARV of $120k that rents for $1300 sounds like a solid deal. I'd take that any day.
    5Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Kassie Carrell Part of the whole equation is hard to generalize, namely, what will you do with the money?  You might have a 3.8% 30 year fixed rate mortgage right now if you bought (or refinanced) a few years ago.  If you were to sell and buy another property (even if you 1031'd to avoid capital gains and depreciation recapture) it's probably going to be at a 5% rate.  And you don't get to "keep" the $60K.  It's probably going to cost you 10% to sell when you factor in holding costs, getting it sale-ready, and realtor fees.  If you just want your money out it will be subject to either short or long-term capital gains.  

    $120K - 10% = $108K - $60 debt = $48K

    $48K - 25% STCG = $36K

    $48K - 15% LTCG = $41K

    You'll get dinged (additionally) for some level of depreciation recapture.  So that profit may not be as juicy in reality (read: after taxes) as it does right now.  And, again, if you're reinvesting that $48K in a 1031 you should look at the impact of a likely higher interest rate on your cash-flow.

    3Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    Robert, yes I suppose I have not accounted for those expenses. So my cash flow is probably closer to 245 a month to be on the safe side.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Considering the fact that you have 60K in equity your ROI is only 5%.

    If you consider the opportunity value of cash at a standard 10% your true cash flow is Zero. You would be farther ahead to pull out the equity and invest in one or more other properties. This would increase your true cash flow on the property and have the equity generating more cash flow on other properties.

    1Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    Austin I didn't put cash down. My husband and I bought this house 6 years ago,  flipped it and then decided to keep it and rent it out. We had just got back from South America and had lived with no credit cards etc. and therefore we had no credit in the United States. It is a 1950's home we totally renovated. New roof, AC, insulation etc. We borrowed 75K from a private lender.  It was a 5 year loan amortized over 30 years. We were going to take out another loan with lower interest within 5 years. Fast forward 5 years...we are divorced now and I am left with the house and not sure what to do. I am trying to get out of 18K in debt and I am going through Financial Peace University to learn more about money and investing. I want to keep the house, but I think I should sell it and pay off my debt and use that money to reinvest and do it the right way. The fear I have of selling is that I have been a stay at home mom for all these years. Last summer was the first time I have had my name on anything besides the one credit card I had. I am afraid I won't be able to buy another income property because I have very little credit.  I want to invest in real estate and I am new at this and learning. If I sell the house I could instantly be debt free, and put money into savings and then be on baby step number 4 which is investing. So I am not where you guys are in real estate at this moment, but I would like to be and I want to learn. 

    The house rents for 1300 a month

    which is 15,600 minus

    7,200 mortgage

    1,482 property management

    3,000 Taxes

    1,527 Insurance

    So maybe this is a good investment, but not if I am in 18K debt right? I am trying to figure this out and make a good decision for myself and my three daughters. 

    Thanks for the input.

    2Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    @Kassie Carrell - do you rent or own where you live?

    1Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    I rent the house we currently live in.

    1Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    @Kassie Carrell

    Here's what I would do: talk to a bank about refinancing (and see if you'd qualify). At 75% LTV you could get a 90k loan with lower payments than you have now (30yr 4.5% is $456/month, $5,472 a year). This would give you more cash flow than you have now, pay off your $18k debt, and put $12k in the bank.

    Take that $12k and use it to buy a duplex and live in one side using an FHA owner occupier loan. Then your monthly living costs will be next to zero. That combined with Dave Ramsey budgeting and you'll be saving very fast to continue to acquire.

    18Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    So the bank would give me 30K and I would have a new loan for 90K at 456 a month for 30 yr. I have never heard of this. I am also a veteran and have never used my VA, but I hear that it's a bad idea. The idea would be to pay the house off before 30 years right? Because in the end this would not be a good idea right? Sorry, I am slow. I really am a true beginner at all of this.

    0Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y
    Originally posted by @Kassie Carrell:

    So the bank would give me 30K and I would have a new loan for 90K at 456 a month for 30 yr. I have never heard of this. I am also a veteran and have never used my VA, but I hear that it's a bad idea. The idea would be to pay the house off before 30 years right? Because in the end this would not be a good idea right? Sorry, I am slow. I really am a true beginner at all of this.

    Yes, banks will typically lend around 75% LTV (loan to value) on a cash out refinance.

    I'm just assuming a 4.5% on 30 year for a single family.  It may be different.  It could be a 5% on 20-yr. Even then you are looking at $594 a month, or practically the same you are now.  

    Using a VA/FHA loan lets you buy a 2-4 unit with just 3-5% down if you are going to live in one of the units.

    Use the cash flow from the first property and additional monthly savings to save up for the next property. That one you would have to buy traditionally with 20-25% down. 

    4Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    Ok. Great! I am going to talk to the bank about this.  This was so helpful. Thank you so much!

    1Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    9y

    @Kassie Carrell who told you a VA loan was a bad idea?? Don't listen to them. Also if you live in the area dump the property management and learn how to do that yourself. You'll save a lot of money and learn a lot.

    The suggestion to refinance is a good one with today's rates. Not to get too personal but what kind of debt do you have?

    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    3Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    9y

    @Kassie Carrell btw I think the advice to use your VA loan to buy a small multifamily and live in one side for free is a great idea! Good advice @Austin Fruechting

    That way you can cut your expenses significantly and learn even more about property management.

    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    3Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    Jordan, I have credit card debt of 18K. I doesn't seem like much, but I am not making much either so I am paying the bare minimum. 

    1Reply
  • Account Closed
    Investor · Clifton, NJ · Member since 2017 · 53 posts · 54 votes
    9y
    Kassie it looks to me like @Austin Fruechting has it pretty well laid out for you. You're going to increase cash flow and pay off your debt and then some. Then buy that multi with a VA and BOOM. You're in a super position. Best of luck!
    4Reply
  • Kassie Carrell
    OP
    New Braunfels, TX · Member since 2017 · 39 posts · 29 votes
    9y

    Thanks Robert. I am going to seriously look into this. Thanks a lot everyone!

    2Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    9y
    Kassie Carrell cut those living expenses through a house hack small multi family and you'll be able to pay more!
    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    3Reply
  • Brian PinckardPro Member
    Rental Property Investor · Atlantic Beach, NC · Member since 2016 · 34 posts · 18 votes
    9y

    @Kassie Carrell. In some instances you can get a VA loan with no money down. Also there is no PMI so it's a great deal. I love the house hack idea and the refinance idea. I'd seriously think about using some of the money you get back to pay down that credit card first. VA loans haven't always had the most competitive rates so maybe that's why you heard not to go that route but nowadays they are one of the best deals going, especially with the no money down benefit. The only problem I see is your ability to qualify if you don't have much income. They follow many of the same guidelines and qualifications as regular conventional loans. Best of luck.

    Brian

    2Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y

    @Kassie Carrell

    Please please breathe a minute before you do proceed with any of these suggestions.  You have indicated this is an older property and with that(even though you renovated) comes higher maintenance costs.  Do you have reserves for big ticket repairs such as roofs, water lines, sewer lines and such ?

    If you are committed to getting out of debt and you do not have the reserves, I would suggest selling.  I am just not a leverage everything to the hilt guy which maybe is part of the reason I have been doing this 28+ years

    @Austin Fruechting- Rent to own agreements in excess of 180 days are not valid in Texas

    Get out of debt and build your reserves and move in to investing in a more secure way.  You will feel more comfortable and that sudden middle of the night repair will not send you into a free fall

    1Reply
  • Austin Fruechting
    Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
    9y

    @Greg H. - I never mentioned rent to own agreement. 

    2Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @Austin Fruechting:

    @Greg H. - I never mentioned rent to own agreement. 

     My mistake on the "or" instead of the "to"

    0Reply
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