Good cash-on-cash % but repairs crush cash flow

4 Replies

I bought my primary residence two years ago using a FHA loan so I only had to put 3.5% down. I did some minor DIY repairs when I moved in and now I am thinking of renting or selling it. All in costs for my house (not including the principal payments I've been making for two years) is about $10,000 (down payment plus upgrades).

So, I can rent it for $1,400/month, and after PITI and landscaping, monthly cash flow is $100 or 12% annual cash flow. Sounds great right? Well, last year I had to repair my HVAC which cost $1,800. If I was renting out this house, that one repair just took away ALL my cash flow for a full year, plus another 6 months. It is an older home (1960s) so I am afraid of more repairs like this coming up.

What would you do? Hold and make potentially 12% on your small investment (or 0% if more repairs come up), which is only $100 a month, or sell which would leave you approximately $25,000 in proceeds after paying off the loan (market went up quite a bit since I purchased).

Goal is to have cash flowing properties, but maybe I need newer assets with lower R&M. Thanks

Scottsdale is a great area.  I would consider selling when you find your next property - maybe triplex or fourplex.  Then you can live in one unit for very little money allowing you to save money for your next investment.

Since you only had 3.5% down I am assuming you are paying PMI? With the upgrades and principal payments do you think you could refinance the property and have 20% equity (and potentially a lower rate)? No PMI and a lower rate could get your property to cash flow how you wanted.

I would look at it as a business and decide what is your long term business plan. Is it to make immediate monthly cashflow or long term retirement? Also you want to make sure that you realize that cashflow is not the only way a true investor looks at real estate investment. There is the equity paydown by someone else paying this down, the appreciation of real estate over time, tax depreciation, and cashflow. Based on what your business model is, that is how you decide whether or not this does or does not fit your plan. If it does not fit then I would agree with @Patricia Newman and look to sell and reinvest it as a 1031 Tax deferred etc.. But do not do it off of a few bills, you own a business and as a business you are going to have expenses, some planned and some not planned. Think of owning a car, sometime you have to change the oil, the tires, register it. You have expenses, but sometimes you drive down the road and blow a tire, based on blowing a tire you dont sell the car and decide to walk every do you?

Though I'm a newbie I've done a lot of reading and a consistent rule of thumb I see in many places is the 50% rule, where you only structure a deal if you take 50% of the expected monthly rent, then subtract the note (PI) and what remains is often a good estimate of return in the medium & long term.  The idea is that the first 50% which you cut out captures an aggregate of Insurance; Taxes; Vacancy; Repairs; CofO fees; etc.      

Another rule I add to that is for SHF the cash flow estimate from the above equation needs to be $250/mo - this provides even a bit more buffer and also ensures that the time to do PM ends up worth it (vs making $5/hour kind of thing).  

How does your property fit to those two rules?       

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