My first post here as a pro member, but looking forward to contributing and I wanted to get your thoughts on our unique scenario.
About 3 years ago, I purchased a single family home in the central Austin corridor for $379K. The house was built in 1940, in good shape, and sits on a 1/4 acre lot (hard to find anywhere in Austin, and there is a very strong opportunity to combine all of these lots and sell to a developer, my neighbors are on board.)
It's roughly 1100 sq feet, 3 bed/2 bath and I put down 5%. We were approved for lender paid PMI and the total rate is at 4.5%. Monthly payment is at ~$2,585 with escrow and insurance rolled in.
During the 2.5 years that I lived in the home, I added quite a few upgrades - including a completely new HVAC system, new roof, drywall repairs, new deck, fence, etc. I moved out of the house in September to pursue a job in Denver, which I got, and the relocation kicked off! We quickly got a tenant to move in and they've been fantastic working with over the first 5 months of a 12 month lease.
The tenants are paying $2,435/mo and have caused us zero headaches. No major maintenance issues in this time, the only cost was a minor electrical repair and extermination fees.
My question is, now that I'm looking at buying a new property in Denver, should I even keep this Austin property?
1. It's cash flow negative right now, impacting my new loan approval
2. I still don't have equity in the house, but I estimate it's probably worth around $415-$425K now, owing $349K on the loan.
3. Right now, I wouldn't need to pay any capital gains, but I understand how I can leverage a 2031 exchange down the road.
4. PMI - I still feel like I have no idea how a refinance will impact the lender paid PMI, I'm told by one of my lenders that it will never go away, and another that a refi will remove it if the appraisal comes in above 20% as usual.
I'm actively looking in Denver for something in the same price range, especially given the fact that property taxes are extremely low here.
Here's where I run into issues - My pre approval is coming in approved for the high $200K's, because I'm losing ~$100/mo on the rental house, I took a new job and they only account for my $90K base salary (not the $200-$300K on target earnings number, at least until I've worked there for 2 years), and I'm only wanting to put 5% down.
My solutions seem to be:
1. Sell the Austin house, take the $75K minus closing costs and smile to the bank. Then, put that toward a downpayment and start over here in Denver with a more expensive property, lower monthly payment because of taxes being so high in Austin, and after 2 years move it to the rental market.
2. Should I just build a second Accessory Unit in the back and rent that for another $1,200/mo? If I was in a position to pay cash or a private loan, this should raise my approval on the new deal, and I'm taking in another $1,100 in income monthly.
3. Put more money down, which I'm hoping to avoid but don't see a way around.
Do you guys have any advice as to what I should consider here? I am trying to build up my assets to meet my long term goal of owning 10,15,20,50 rental units. Selling seems like a step back, but it might not be, and I am 100% certain of my emotional attachment to the house.
Updated 5 months ago
Also: after speaking with my realtor, he believes we could list the house in the ballpark of $445K, possibly on the low end. After calculating everything, I might be looking at a profit of $70K with no capital gains. Minus closing costs ~20K, an $50K take away for my next downpayment. Does this sound right?
Welcome to Denver! Unless you are not planning to stay in Denver for the long run, then I would sell the Austin house (you are only losing $100 a month now, but repairs, maintenance, etc. will push that negative higher), take the cash, and do a house hack (a new term for me!). That way you're investing in property in Denver, but can learn through a hands-on approach. Once you save enough, you can move out and rent your unit too. Best of luck!
@Zachary R. What your plans for the place you buy in Denver? Is it to buy with 5% down, move out after 1 year, keep as a rental and repeat? Are you renting in Denver or do you own a primary residence? If yes to both of those, it probably makes sense to sell in Austin. You'll save rent money and can acquire property quicker.
If you sell in Austin, what are you approved in Denver? Does it make that big of an impact?
If you sell your Austin house tenant occupied, you will not get top dollar. You'll sell at a discount because most owner-occupied buyers can't buy a place and wait months to move into it. Ask your agent how that would impact the price.
You're also getting hit for a lot more than the $100 negative cash flow that you're seeing right off the top. Lenders will only look at 75% of your rental income, so $1,826. With a payment of $2,585 you're being dinged $759/mo.
@Chris Lopez You hit the nail on the head, no pun intended. I'm hoping to put 5% down in Denver, pre-approved for $290K (ish) but was hoping to buy closer to $400K. This is WITHOUT selling the Austin property. Right now, we're renting a single family home at $2,200/mo in the highlands/berkely neighborhood.
The Denver property will be a primary residence for 1-2 years. If we have enough appreciation from improvements, 1031 exchange to another property or sit tight. It doesn't sound like mortgage rates will really help us on any sort of refinance unless we do a major rehab project.
I guess the biggest factor for me, and this should be a red flag, is that I have an emotional attachment to the Austin house. That is something I'll have to get past. But also, I'm getting a property tax + mortgage interest write off right now of $7K and $18K, respectively. Property tax is so low here in Denver, I'm not quite sure how that will impact my tax return at the end of the year if I sell.
If I'm thinking too hard on this, let me know. The suggestion to sell came from a new lender I'm working with here in Denver, so there are a lot of sparks flying around in my head right now about directions to take...
Thanks for the feedback @Heather Miner !
Exactly @Alex Johnson - that's my primary hurdle right now.
@Zachary R. so here is the quick and dirty. Sell the Austin house. It's an alligator and it will eat you. The only reason to keep it is if you plan to move back there and want it as a fall back position. Emotionally it's hard to part with property but trust me being that far away and handling issues only gets harder with time. When the tenant's move it's a major headache to get it filled from a distance. If you pay a PM then you are even more in the hole. Better to have the money close to home where you can add value with your time.
Also don't forget the transaction costs (Realtor fees, title and closing costs) when figuring the funds you will take away from the sale.
It's great that you have the self-awareness of your emotional attachment. A common trait I've seen among successful business owners and investors are control of their emotions with the ability to separate it out from business/investing decisions. It's something I worked on in my 20's and it's helped me out!
I don't think the tax savings is that big of a deal. So you're justifying spending a dollar to save 30 cents in taxes? The math isn't that great.
A while ago I built a house hacking model spreadsheet. While it sounds like you won't be actively renting out rooms while you're living there, it can still show you some impressive numbers.
The screenshot below shows a model of you buying a new house every 2 years and renting out the previous ones. Here are the variables I plugged in:
- 400k purchase @ 5% down with 4% interest over 30 years
- taxes = $2000/yr
- Ins $1500/yr
- Repairs = $1500 /yr
- PMI = 2470/yr (it drops off at around year 9 with 5% down)
- Rent = $2500/mo (once you move out after 2 years)
- You're self-managing to save money.
The yellow cells w/ zero represent the years that you're living in the property. Of course, you're paying the mortgage. But you have to live somewhere. Better to spend money on a mortgage than rent.
- Properties 2, 3, 4 assume that you're buying a similar property, but in the future. The "Annual rent increase" and "annual appreciation rate" variables are factored into future property investments. For example, property #2's purchase price is the appreciated price after two years.
- It also assumes that interest rates will increase 0.5% everytime you buy a place. (4% for #1, 4.5% for #2, etc)
Even though 400k+ residences usually don't make the best rentals, you're still building a nice portfolio. Since it sounds like you're a high income earner, it would make sense to put down more than 5% for prop #3 and #4 for better cashflow.
I'll send over this spreasheet so you can play around with it
@Chris Lopez this is awesome, I'd love to check out the file. Thanks for sharing, truly appreciated. After speaking with a friend this evening that is also active in the market, I've made my mind up to sell. Now I just have to figure out how to get the tenants out, they love the house and just got a new dog last month. Stay tuned.
Sell to your tenants. Multiple sources have Austin overvalued by as much as 20%...not saying I believe the market will retreat 20% because I don’t, but that should help you feel better selling. If you sign up for Redfin (free no strings) you can pull up sold prices in Austin for research...just fyi.
@Zachary R. all of the above comments are great points. However, if you're looking to building your asset base, selling them off doesn't help. In this case, it's about coming up with a workable solution that will allow you to keep your asset. Name of the game is cash flow of course.
Have you thought about corporate rentals (aka Medium Term Rentals)? Any rentals above 30 days falls out of Austin's "progressive" short term moratorium ordinance. Usually MTRs will allow you to charge 1.5 - 2.5x long term rates. Getting it furnished with new used furniture here in Austin is not expensive. I've done it for our 2,200sf 4/2.5 STR property in Round Rock for under $4k! With so many people moving into the Austin metroplex and businesses flying in employees for training, etc, you should not have a problem getting it filled.
Here's a website that focuses mainly on this market: www.corporatehousingbyowner.com
Just another potential solution to building your real estate empire. Good luck with your house purchase.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing