Advice with business model please? Keep renting or Sell

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Advice with business model please? Keep renting or Sell

Joshua D.Pro Member
Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes

my wife and I got into real estate investing about two years ago. I am going to put below the RE deals that we have made, thus far. We are both 28 and looking to really create a good business model and i think we have and will let everyone be the judge of that.

1. Duplex- have 21k into-Worth 35k- Generating $1,280/month in rent

2. SFH- have 30k into-Worth 75k- Generating $925/month in rent

3. SFH- have 39k into-worth 75k- Generating $1250/month in rent

4-5 SFH's- have 55k into both homes on same property- Worth 90k- generating $1747/month in rent

6. SFH- have 50k into- Worth 100k- generating $950/month in rent

7. SFH- have 50k into -Worth 100k- generaing $1250/month in rent

8. SFH Just purchased for $23,500, will have maybe $50k into it- will generate $900-$1200 rent or I'm thinking of selling for maybe 100k-130k. What determines if i should rent or sell?

NOW, granted, these numbers don't include our utilities costs/lines of credit costs, etc.

(However, we are in $138,500 debt total with the properties above .)

With us growing, we get nervous every now and again that we are doing the right thing. Sure, we've gained tons in equity, but then you get nervous wondering, "well what if i couldn't sell it?" I honestly put the properties worth lower then what i think they could sell for to play it save. Any realtor would list for a lot more.

Do you ever get nervous about sinking so much money into real estate? Do you think that it's 100% worth it? Feeling victorious but a little fearful, is it jusitified? Is it normal to ever feel apprehensive at times, hoping and praying that you're doing the right thing? The main question is property number 8 should i rent or sell. What determines that? Please help with advice. We have not sold a property yet we just rent should we sell anything?

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Junior Salters
Rental Property Investor · Spartanburg, SC · Member since 2013 · 253 posts · 56 votes
9y

I would keep going, again my goals are different, but if I was in the position you're in and cashflowing well, than I would be ecstatic!

If selling would ease your nerves though, I suggest doing that.

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  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Bump
    0Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Looks like you are doing a good job.  Keep doing it.  If you are looking for growing a business long term start paying cash from your cash flow and you won't need to worry about selling.  If the market softens up buy more.  You're doing great.

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Bob B. Thanks a lot that's exactly what we are doing is taking the cash and putting rift back into it. Would your advice be to sell any properties or keep renting and doing what we are doing? What makes a good rental or flip property?
    0Reply
  • Junior Salters
    Rental Property Investor · Spartanburg, SC · Member since 2013 · 253 posts · 56 votes
    9y

    Hey Joshua,

    For what its worth I think you guys are doing a solid job to have only been in the game for two years. I think it all depends on y'alls goals and comfort level but aside from that I think with the equity you guys have, you're in a good position against a downturn. Also,  I think it boils down to what kind of cashflow you are getting!

    But all in all, Keep rocking it! Sell one if it will make you feel better! :-)

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Junior Salters at this pace would you sell anything or keep renting?
    0Reply
  • Junior Salters
    Rental Property Investor · Spartanburg, SC · Member since 2013 · 253 posts · 56 votes
    9y

    I would keep going, again my goals are different, but if I was in the position you're in and cashflowing well, than I would be ecstatic!

    If selling would ease your nerves though, I suggest doing that.

    2Reply
  • Bob B.
    Investor · Jasper GA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Joshua D.

    If you purchased them for cash flow and they are performing well, then I would keep them.  However, I would always be on the look out for getting rid of ones that are causing the most problems.  Also, what would you do if you sell one?  Could you replace it and have better cash flow.  Remember that while you can sometimes buy at a discount, also there are costs associated with an exchange and then the expenses of getting it rented.   

    Not all homeowners lost their homes to foreclosure in the housing bust, but the ones that did had mortgages and were usually leveraged.  Paid for houses are great. When I have turn over and don't have to worry about a mortgage payment, I can take my time and look for a better tenant.  

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y

    again @Bob B. @Junior Salters

    What are the things that make a rental house or a flipper house in your eyes? From what you see should i try and sell something or what? Any advice on this topic would be great.

    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y

    It appears this is what you are saying?


    Property Paid Worth Equity Yearly Gross Rent
    1 $21,000.00 $35,000.00 $14,000.00 $15,360.00
    2 $30,000.00 $75,000.00 $45,000.00 $11,100.00
    3 $39,000.00 $75,000.00 $36,000.00 $15,000.00
    4 & 5 $55,000.00 $90,000.00 $35,000.00 $20,964.00
    6 $50,000.00 $100,000.00 $50,000.00 $11,400.00
    7 $50,000.00 $100,000.00 $50,000.00 $15,000.00
    8 $23,500.00 $50,000.00 $26,500.00 $12,600.00
    Total $268,500.00 $525,000.00 $256,500.00 $101,424.00

    More details would be required to answer some of your questions. An example would be what the average debt service is per rental, average total expense and average net operating income per rental.

    By the way, if the information is correct, you acquire most of the properties at about 50% their worth. Where are you buying these at (city, auctions etc.) and what is the condition of the properties when you acquire them? 

    If you are only $138,500 in debt on the properties, that would mean you spent another $130,000 in cash on the buys? Info on the average cap would help clarify things.

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

    When you know what you are doing and have the security of multiple rental income properties I can not understand how you would ever be nervous. Sorry I do not understand your concerns.

    $138,500 in debt....that is a drop in the bucket especially based on your equity. You need to access that equity some how and purchase 8 more properties. Right now it is dead and buried, wasting away. Get it out and make it earns it's keep.

    0Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    9y

    @Joshua D.

    Great job.  Good points by @Account Closed.  There are two important factors when you are holding properties.  Don't leverage too much and make sure they cash flow. These properties look like a no brainer.  Leverage is around the 50% mark and they look like they cash flow real nice.

    I would only sell if the particular property is not providing good cash flow or if you are going to reinvest the property back into a better property i.e., multiunits/commercial etc (1031 Exchange).

    Keep up the good work.

    0Reply
  • Aaron Gaffney
    Investor · Santa Barbara, CA · Member since 2016 · 75 posts · 35 votes
    9y

    Business coaches can be a great source of advice/clarity/direction when you are feeling at a crossroads or uncertainty!

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y

    @Account Closed So Mike i have calculated all my numbers up and with all my properties and please correct me with my numbers if im wrong. still a newbie at this. Im a construction worker haha and not the smartest but everyone around here says im doing amazing. Im trying to provide for my family and have no choice at a dead end job trying like hell with Real Estate so here are my numbers. I have rented some of the above properties higher then what they should be but should be those numbers haha so you might say the numbers arent adding up. 

    How i do my ROI= gain from investment-expenses/ cost of investment

    current Rent Total yearly= $94,824

    all expenses water,sewage,trash,insurence,full time remodeling guy and mait guy,lines of credit interest payment=     $43,763

    total invested=$250,000       I also really over calculated everything i believe to play if safe honestly.

    $94,824-$43,763/ $250,000= 20% ROI

    Not sure about Cap rate from what i know Cap rate is same thing as ROI but if you were purchasing with cash and no Interest to be paid. so my cap rate= 22% if im doing that right.

    Also @Thomas S. I also have 3 more properties i have not yet brought out the lines of credit yet for which would be around $300k. Just making sure i have all my ducks in a row and the banks are not giving me alot more then the properties are actually worth.

    Thanks Everyone for the feedback any more info would be greatly appreciated

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y

    bump @Account Closed @Thomas S.

    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joshua D.:

    @Account Closed 

    ...all expenses water,sewage,trash,insurence,full time remodeling guy and mait guy,lines of credit interest payment=     $43,763...

    Full time remodeling guy? Could you clarify that. If you typically have to remodel the properties to get them into habitable condition, technically, the remodeling cost would typically be a part of ' total acquisition cost' and hence not an expense per se and would affect computation of net operating income.

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    Mike Fletcher so he does all maintenance calls and when we purchase a new property he is in charge of the remodels with some extra help we bring on. But I included all the cost into absolutely everything. Labor,materials and renovation costs. Are you saying I should include that into it or not because I did.
    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    So from my input is anyone seeing anything I'm doing wrong here?
    0Reply
  • William C.
    Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes
    9y
    If you invested $250,000 cash then that would be how you calculate your ROI. If any of that $250k is part of the line of credit then it's not your cash in cash return. I think you really need to figure out what YOUR goals are and what you want to do in the future in order to get the right answer to your question. The community needs A LOT more information to even begin giving half decent advice. Also, you mentioned the full time employee. What another poster was saying was you should try to calculate what the cost to renovate a home is. Then you can add all other expenses like carrying costs and cost to acquire to have a "total cost". Then if you were to sell you'll have an accurate profit. Otherwise for example you could buy a home for $50k, buy $10k worth of materials and assume your total cost was $60k. But if you paid your employee $20k for labor to renovate then sold the home for $75k you would be losing money. This is an extreme example but I'm trying to illustrate why you calculate expenses this way so you can have a true picture of what a home cost you. Do you need the cash flow or do you need a lump sum of cash? The way I decide whether to hold a property or whether to flip it is to determine what the income would be on a yearly basis. For example $6000 a year. If I could sell it for a $60,000 profit, it would take me roughly 10 years to earn the same $60,000 if I held it. Of course I'm not accounting for principal reduction but I also wouldn't have to deal with tenants and management and repairs etc etc. So for this property how much will it cash flow each month? How much will your profit of you sell? Also, it appears your doing a great job. Id do a little more research or read some books on the numbers side of the business. For example each rental you listed has its own expenses. They are all probably different. If you lined up all your rentals you would see, according to the 80/20 rule, that you are actually earning 80% of your income for only 20% of your properties. Seems extreme, it's not. You might even be losing money each year on some properties and not know it. My point is you sure have a clear picture of how each property performs on a monthly basis and you'll be able to make better decisions on what to do with them. It would be pretty easy to sell a property if it's losing money right? With all that said, I would just keep doing what your doing if all your numbers are accurate. Your doing something right. Not too many people on this site have been able to find that many deals at such rock bottom prices. I will say that we are at or at least bearing the top of the market in terms of price. In other words I think you can't go wrong by selling right now. Whether interest rates go up, or supply increases, or Trump does something crazy I feel a market correction looming in the next 12 months if not sooner.
    1Reply
  • Andrew Holmes
    Rental Property Investor · Chicago, IL · Member since 2015 · 275 posts · 271 votes
    9y

    @Joshua D.

    Josh: Come up with a number you want to live on in terms of cash flow then multiply it by 1.2 times. 

    So let's says it's $ 10,000 from cash flow then scale up to where you would have $12,000 per month and focus and get the properties paid off. So a little extra than you need. 

    I think on BP we come from our points of view. You have to figure out exactly what you want and then work that plan. Sometimes just buying more and more for the sake of it just another rat race. 

    If you are like some of us that are buying more just to grow and love it then just get the properties you need set aside and you can grow your portfolio as large as possible if you love real estate. 

    Your numbers seem to be good from the info provided. 

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    @William C. So all the numbers I provided you with is literally everything with my guy labor and materials. We keep track of all expenses. besides some little maintenance calls and water tank replacements. So what exactly is the 80/20 rule. So I feel we don't need the cash upfront and want a stable income over the years. I also have 300k available for line of credit I can use should I use that up ASAP? I cherry pick a lot of my properties where i feel there is no way to loose on the deal if decided to sell. Never know though
    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joshua D.:

    Mike Fletcher so he does all maintenance calls and when we purchase a new property he is in charge of the remodels with some extra help we bring on. But I included all the cost into absolutely everything. Labor,materials and renovation costs. Are you saying I should include that into it or not because I did.

    Maintenance vs Remodeling Cost

    So we can view 'maintenance' as things you have to fix in the rental unit once the tenant moves in and that probably worked prior to their moving in. Broken door knob, plumbing etc. these are normal rental expenses. 

    'Remodeling cost' however can mean much more than just maintenance and can be used to describe work performed on the building prior to the tenant moving in. This is usually the case with many newly acquired fixer upper that may require considerable work to get it in a livable or rentable condition. How you classify such cost however can have a material effect on perceived investment performance.

    If you buy a foreclosure rental property for $70,000 but that requires substantial work done to get it into a livable/rentable condition -- say it has a torn roof, busted tiles/floors, needs a new ceiling etc. You spend $30,000 on these so your total cost of acquiring the rental property in a pure accounting sense is not $70,000 but $100,000. You wouldn't count the $30,000 as a normal rental expense when computing 'Net Operating Income' (NOI) but would count it towards the building acquisition cost - the initial investment.

    You may be utilizing the same guy that does your 'remodeling' for 'maintenance' but you still have to properly dissect and classify the cost to better measure investment performance. Using the example above, if computing the cap rate, NOI/$70,000 gives a different result than if using NOI/$100,000. How you classify the cost in this case also affect the NOI.

    0Reply
  • Craig Jackson
    Investor · Franklinton, LA · Member since 2017 · 43 posts · 35 votes
    9y

    The determination of rent/sell is primarily based on your goals and how you plan on utilizing the cash? Based on your strategy and cash flow, you have little risk to be worried about. Continue to sink profits in the business to grow the business.

    0Reply
  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y
    Originally posted by @Joshua D.:

    @Account Closed 

    So Mike i have calculated all my numbers up and with all my properties and please correct me with my numbers if im wrong. still a newbie at this...

    How i do my ROI= gain from investment-expenses/ cost of investment

    current Rent Total yearly= $94,824

    ROI for financed properties = [ NOI - Mortgage Payment] / [Down Payment + Closing Cost + Remodeling cost]

    0Reply
  • Joshua D.Pro Member
    OP
    Rental Property Investor · Pittsburgh, PA · Member since 2015 · 712 posts · 173 votes
    9y
    I believe your wrong noi should already have the mortgage payment deducted from it which I did. Or in my case line of credit payment which I overpay to pay the balances off. Can someone help us with roi and cap rate? Because I accounted for everything. Seems everyone has different ways of doing it all so I'm not to sure
    0Reply
  • Bill Goodland
    Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    9y

    To clarify. NOI =Gross Revenue - Operating Expenses

    Cap Rate = NOI/Property Value

    Cap Rate assumes you paid cash for the property because debt service is not included in operating expenses is more commonly used on commercial properties; however it can be a good quick analysis tool on residential properties. The reason it matters more on commercial properties(5+ units or more) is that they are valued based on cap rates and not comparable sales(as they are in residential). For example, 10-20 unit apartment complex in blank county are trading at an "8 cap". Therefore, if these similar properties are trading at a certain cap rate, if you increase NOI by either increasing revenue, or decreasing expenses, you will therefore increase the property value.

    As far as your numbers and whether or not you should sell, I would first define your goals and see if your investments align with your goals. If you want to reach financial freedom and generate wealth for you and your family while limiting your risk exposure, which I think most people on here are; I think you're on the right track and I wouldn't sell unless you can think of 3 reasons why you should(desperately needing the money, being maxed out on loans, property not cash flowing, bigger opportunity cost from putting money elsewhere.

    The number 1 thing I would look at as you're trying to expand your portfolio is not only your COC return, but the return on your existing equity over time. As long as you are young, I would try to maximize your return on equity and safely leverage as much as you can without selling off unless you have to. By safely leverage, I mean ensure that you are appropriately accounting for all expenses especially capex and vacancy and are mitigating risk by making sure you have strong tenant demand and they're not all dependent on one employer.

    Sure, a nice 15k check from selling off a property is nice, but remember that it is a taxable event if you don't defer. Now, if this many properties are too stressful for the quality of life you desire, or you need the money to live off of go ahead and sell. But I wouldn't recommend selling properties off out of fear that you're not doing something right. The number one regret I hear from older investors is that they didn't hold onto enough properties or didn't acquire as much as they could at a young age. I think you are on the right track and snowball your way to more wealth. Once you get to a property with like 70% equity and a lower return on your equity than you would like, I would then try to 1031 exchange that into a bigger property beginning with 30% equity and allow it to build over time while capturing all of the tax benefits. Sorry for the long post, but I hope my 2 cents was worth something. Good luck!

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