Evaluating 1st rental property - rental numbers vs. selling

[Dravus Myrscha]

First time poster and first time real estate investor. Thank you all so much for all of the information. It is a bit overwhelming but I am working through it!

In October 2019 we moved into our first home. Bought for $495,000 with a 3.625% mortgage, 10% down. We put another $60,000 down a year later and refinanced at 2.125%. We are thrilled with this as we have a very cheap mortgage for the area of $2050 at the cheapest rate we may likely ever see.

Now we are considering renting the home (just bought another fixer view property). When I look at the 1% rule it states I should be renting for $4900/month, but rents are at $3000 for a 3bdrm, 1.5bath, 1620sqft home with 1200sqft finished. We finished a kitchen remodel while we lived in it, all the appliances are new, and the plumbing and electrical were redone before we bought it. Can't foresee the future, but the property is pretty solid.

The breakdown is:
+ $3000 rent
- $2050 mortgage
- $260 property management
- $70 yard maintenance
--> $650/month cash flow

On the other hand, we put in $110,000 and now have a property that was comped at $800,000-$860,000. So we are looking at $318,00-$378,00 in equity.

We are comfortable with keeping the property, meaning we don't need the equity today, but we are not sure how to evaluate if this is a good time to sell and pick up something closer to where we moved.

My thinking is that an equivalent property at current rates would not be as good of an investment. That seems clear. What I don't really know is how to evaluate if this cash flow is good enough to keep the money tied up in equity. 

Any thoughts, insights, or ways to look at this would be most helpful. Thanks!

[Drew Sygit]

@Dravus Myrscha Property values rarely go up as fast as rental amounts.

So, the 1% Rule usually only applies to average valued properties, not high-end or above average.

In your case you need to decide if you want to have an easy Class A rental to DIY manage, has low cashflow, but potential high-for-the-area appreciation

-OR-

Sell, realize $250k individual or $500k married-filing-jointly in tax-free sale proceeds as it was your primary for at least 2 out of last 5 years. 

Then WHERE can you reinvest those funds for a better return (cashflow & appreciation mix)?

[Joe Villeneuve]

The 1% rule only applies to milk.  The market rental comps tell you what the property WILL rent for.  Start there, and work your way backwards.

[Sergey A. Petrov]

See similar discussion/ my reply here

https://www.biggerpockets.com/...

You are in a better spot because your cash flow would be positive. There are many ways to pull some of that equity out now and put it to use somewhere else. We are in a softening market so selling now means you’d be taking a decent haircut on the sale price. I am optimistic that we’ll more than rebound within the 3 years you can hold it with cap gains. That rate of return might be worth waiting for.

Oh and the 1% hasn't worked in Seattle for some time especially in that price range! Unless you do STR where it just might pencil better…

[Dravus Myrscha]

This is all good information, thanks. It mirrors some of my own thinking, and it is good to have confirmation. 

I am glad to hear that the 1% rule hasn't applied to the area for some time. I was thinking that I was missing something major here :)

While cash flow may be low, it does cover all expenses and some vacancies. We have a repair fund already. Looking at similar places near us (size/price/layout/etc), the higher rates yield less cash flow and equity growth, so I think we will rent this one and see what the market does. We can always sell in 2-3 years, as suggested. If rents keep going up then maybe we hold for the long term.

We could increase cash flow by managing it ourselves, but that seems daunting due to living 1.5 hours away, but maybe after the 1st year, we could see how it goes and try it ourselves next year.

In the meantime, I will keep reading to see how we can pull out some equity to put it to work elsewhere. Hadn't thought of that without selling. 

[Sherief Elbassuoni]

@Dravus Myrscha, the 1% rules doesnot typically work in the Seattle market unless you do STR, have high downpayment, or be creative like rent by room, or split level homes, .....

If you wanted to use the equity, you can think about doing HELOC. Interest rates are pretty high right now, and the market is a little volatile. If you are not in a hurry to sell, keep the property for the next 2-3 years then think about selling it if you want

[Julien Jeannot]

I agree, the 1% does not apply here.

Its been an equity appreciation type of a market with great year over year rent increases (COVID aside).

If you consider selling, keep in mind selling expenses of 8% to 10%, then add buying cost. That can eat into your profits rather quickly.