Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
I am a newbie to this forum and eager to learn real estate investment. I am wondering if any experienced investors can share your input about our case.
We bought a split level single house in Vienna, VA at $439K several years ago and the monthly rent is $2,300 now; however, the PITI will be at least $2,525 even though we are refinancing now. The location is within two miles from Vienna Metro, and a new metro station in Tysons Corner is to be built now. We see this property with a prime location for rent, but hate to see the negative cash flow. We've also considered selling this property and find other investment properties to bring in more positive cash flow; however, we figured we won't be able to get much cash back after selling it with the current assessment value, $490K.
I will appreciate if anyone is willing to share your wisdom with us. Thanks a lot!
Real Estate Investor · Cincinnati, OH · Member since 2011 · 119 posts · 59 votes
15y
This is the true definition of an "Alligator" property, you should sell it and move on. Even if you raise the rate to $3000 or even $3500 a month, you would still need to feed that alligator, it will continue to take money from your other sources of income, this property is like a thief stealing your money earned from your other jobs, how can you allow it to happen? There's no upside that I can see, properties are not going to appreciate that much, you won't have enough money to be worth a 1031 and you don't want to mess around with depreciation recapture tax if you don't sell soon.
Real Estate Investor · Austin, TX · Member since 2011 · 271 posts · 106 votes
15y
I like the rule of thumb of never losing money. In this case you are so that may help you decide. Second, assessment value is most likely irrelevant. Get a realtor to pull real deal comparable sales and find out what exactly it is worth. Even if it is worth $490k if you are losing money I'd sell it and move on to more lucrative deals. I could have made a small spread like that on our So Cal house years ago and guess where I am at on that thing now.....
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Thanks for your input, Chris. Coincidently, one of our neighbors there is selling their house now and asking for $590K. However, the neighbor next to it asked for similar price last year and didn't get to sell. Since Washington DC area is one of few areas with moving up trend, I will pay close attention to this neighbor and see if the house can be sold smoothly.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
Grace, is it presently rented? If so, what is the lease term and how does it show? Tyson's is a good location. We have had a few rentals there. Have you checked the sale comps?
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Cheryl,
We currently have a family occupying the house and it is under an annual lease. We expect to renew the lease in July if they wan to stay. I am just wondering whether this is a good investment approach even if we can raise the monthly rent from $2,300 to $2,500. According to the rent estimate from Zillow.com, we are supposed to rent it for $2,500 or above. However, the positive cash flow is still not much when we raise the rent to $2,500. I understand we need to bring positive cash flow to make this lucrative, but I am afraid it might be more difficult for a family to pay this high rent if we still plan to rent the house to a family. One solution in my mind now is we should consider rent this house room by room instead of renting to a family. With a two year old child, my husband thinks this idea may add a lot of extra property management work. Therefore, we are still trying to figure out what to do with this house even though it is in a great location.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
I would not rent it out by the room or to a group. Other than the cash-flow issues you mentioned, you might tend to have alot of turnover with a family renting a house. Most will want to buy as soon as they can. Will these people renew for 2 yrs at a higher rent? Do you have other funds available for investment?
I am concentrating on smaller places which generally cash-flow better. You are wise to have purchased in a nice area. If you can net 550K, you could 1031 into 2 smaller places. I'm concentrating on the nicer areas of Reston. Close to RTC and the Silver Line. There are some good buys right now in the lower end.
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Cheryl,
Do you mind sharing more details about the 1031 idea? We thought about selling this house and get some smaller townhouses with better cash flow. However, we just don't know how to make this idea happen since we are not experienced enough. I will appreciate if you can share how this concept works. Thanks a lot!
Real Estate Investor · Cincinnati, OH · Member since 2011 · 119 posts · 59 votes
15y
Grace, I don't see how you can afford to continue at this rate, I assume the property has been draining money from your other sources of income for a while by the look of these numbers, what were your total annual expenses last year (PITI+expenses+repairs+utilities or whatever else)?
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Jim,
We have to pay out of pocket approximately $450 each month without considering maintenance/repairs/utilities. Fortunately, we still have enough savings to cover this and we only rent this house for the second year. We need to make a decision whether sell or own by Sep 2012 because this house was our primary residence before Oct 2009. I am glad to find this forum TODAY, so I can get great input from you guys. Please feel free to share any new ideas which can inspire us improving the current status.
Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes
15y
You need to rid yourself of that alligator. You are not making any money on it. If you can sell it and break even, you should be thankful. There is so much opportunity around why hold onto something that loses money? What a financial and psychological drain.
Real Estate Investor · Cincinnati, OH · Member since 2011 · 119 posts · 59 votes
15y
This is the true definition of an "Alligator" property, you should sell it and move on. Even if you raise the rate to $3000 or even $3500 a month, you would still need to feed that alligator, it will continue to take money from your other sources of income, this property is like a thief stealing your money earned from your other jobs, how can you allow it to happen? There's no upside that I can see, properties are not going to appreciate that much, you won't have enough money to be worth a 1031 and you don't want to mess around with depreciation recapture tax if you don't sell soon.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
Grace,
You won't have to 1031 if you have lived there 2 out of the past 5 yrs. If we assume a net sale price of 550K and a loan payoff of 400K, that leaves you with 150K to invest with.
You will do better with less expensive properties. Demand is incredible right now and rents are up 8%yoy in NoVa. So you could take your 150K (assuming that's the number) and use it a downpayment on 2 or 3 places with better cash flow. I doubt you want to deal with the types of places/areas that would net you the cash flow others here are talking about.
I agree that there won't be much appreciation, so you need to get a good deal going in. I believe the new metro stops will give us a decent bump and RTC is on fire. Heck, I might even more over there.
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Unfortunately, the loan officer of my Vienna refinancing case just told me that the case won't go through unless I put some money back to this house to make the loan ratio 75% for this investment property. (Please bear with me if I don't use the right term.) We've borrowed some line of credit from this "alligator" to buy our primary home in Fair Lakes in 2009. Fortunately, we got it at the right time with a below market price,$525K, so our primary home has appreciated. (Our neighbor sold their house at $590K last year and Zillow gives an estimate $625K now for our home since the models are all similar in our community.) This morning, I was chatting with my husband to figure out how to utilize our current financial conditions because our goal is to get some lower value investment properties with higher ROI. Is it a smart idea to sell the current home also to realize the capital gain? Based on our above discussion, we shouldn't even put more money to the Vienna property but get rid of it ASAP, right?
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
Yes, I would sell. Vienna is pretty desirable. If it's priced right it should sell. It won't be a short so you will have a broader market. What did it appraise for? Maybe the LO was just going off of your numbers? Have you seen the comps and the inventory?
The key is to sell high and buy low. Now is a good time to buy low, although it can be tough to snag a deal. Cash investors are out in droves.
BTW, what are you getting quoted for investor money (rate/points)?
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
During the refinancing process, the appraisal value for this property now is only $505K. This is why I think our neighbor may overprice their house by asking for $590K in current market. If we sell our house at $510K, we probably just get to pay the line of credit back without getting much cash in hand for new investments. The refinancing rate is quoted at 5.125% with no point and no cost if it goes through. However, we are required to put $29K back to reach the 75% loan ratio for investment property.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
I'd probably sell it. Do you have an agent? I usually figure out the numbers on my own, but you might want to talk to someone who "farms" (works) that neighborhood. It's hard to sell something that is tenant occupied - they will resent the intrusion, fail to keep the place clean, etc. If you have a standard Bd of Va Realtor Lease you have the absolute right to have a lockbox on the place (60 or 90 days prior to lease end). Do your tenants want to buy it? I would ask them.
I think re-fi appraisals tend to be low.
It's not a "loss" as you have already pulled equity out for your new home.
p.s. I had no idea that investor money was that cheap.
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Cheryl,
You mentioned that you specialize in Reston. I just started to work in RTC last fall, and noticed it's a good area. Do you mind sharing some your insight or observations about this area? In fact, I did research on Redfin and focused on zip code 20190. The properties there are not cheaper because they are probably newer. Maybe you have a different investment approach?
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
Grace,
I'd be happy to discuss the developments that I am targeting. They are in 20190, although there are a couple other places where I see good value and upside.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
As a rental, a house that's worth $500K and brings in $2500 in rent is absolutely horrible. You need something like $5,000 a month in rent for this to be truly cash flow positive, once you consider all your true costs. I would sell this ASAP, especially if you can escape without bring money to the table. Give it five years of tenants breaking things and you'll need to spend money on rehabbing it before you can sell.
I do realize the DC area is trending up, but this one is so terrible as a rental that I don't see it being worthwhile to be spending the money to hang on. You imply you owe around $400K on it. If you can sell for close to the recent appraisal of $500K, you should have some cash even after all the selling costs.
Spend some time reading in the Rental Property forum.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
Jon,
I agree with you. DC is an expensive area but the rents can be very good. It's hard to make the numbers work on anything over 200K. If Grace wants property in decent areas with good upside it will be very hard to meet the 50% rule.
She can, however, get 3 TH's in some of the areas I own for about 150K each with rents at $1,400. This would be 450K with $4,200 gross. Not terrific CF, but she won't have to wear a bullet-proof vest to visit her property and if her tenant selection is good, she can sit back, relax, and have her tenants buy those places for her.
The places I have been buying are going for less than 1/2 of peak, newer and nice enough that I would have no problem living there myself (one of my criteria!).
Developer · Carlsbad, CA · Member since 2011 · 18 posts · 3 votes
15y
Now that you have to bring in another $29k just to refinance, you would be better off selling the property and taking any proceeds along with that same $29k to use towards a downpayment on a less expensive rental property. Like the others have mentioned, you will be able to find a much better ROI on a more lucrative property, AND you won't have the stress of this "alligator" haunting you in the long run. Interview a few local realtors to help you with your game plan. Good luck!
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
15y
The goal of owning rentals is to make money. $150k properties that rent for $1400 will be cash flow negative. Perhaps there is a long term play, and they're better than what she has now, but from a pure rental cash flow perspective theyre still losers.
The 50% rule applies everywhere. You can earn some if that 50% if you're willing to do maintenance and management yourself. But the rule of rhumb still applied.
Investor · Reston, VA · Member since 2011 · 683 posts · 191 votes
15y
I hear what you are saying John. I manage all my properties. I would like to hear from people in NoVa about their CF experience. I believe there is a trade-off between CF and appreciation and also that properties can have vastly different repair/vacancy numbers depending on area and neighborhood. You also have to put a $$ value on your time dealing with marginal tenants, etc.
I posed some numbers that would result in a 10% return on investment, ignoring appreciation and principal paydown. I make some trade-off's for properties that I believe are seriously undervalued.
I'm assuming 115K down on 450K of re. That will not be negative. The return on the dp will exceed 10% as rents should generate $1,200+ CF per month.
If I went strickly by the 50% rule I wouldn't have bought a waterfront farm in 2005 for 875K (1031'd into from a long-term rental house) that is worth at least 2mil. The old house rents for $1,500. The value is in the land. I'd be a million to the poorer by following the "50% rule". There is more than one way to skin a cat.
You make your money going in. Yes, I'd like to have rental income pouring in (and I have alot because I've owned and 1031'd for a long time), but I don't want to work too hard either. Again, I'd like to see some decent stuff in my locale that meets the 50% "rule".
A couple years ago I added up all our wages for 30yrs and compared it to our RE equity. The RE equity exceeded our wage income. There are trade-off's.
Homeowner · Sterling, VA · Member since 2011 · 39 posts · 1 vote
15y
Thank you all for your great input. The conclusion of this discussion is so clear. I am glad to have this discussion right before my re-financing case failed, so we've decided to stop right here and put no more cash in. We'll start to plan for selling this property.
Commercial Real Estate Broker · St. Petersburg, FL · Member since 2009 · 47 posts · 23 votes
15y
Move back into the Vienna home
Sell the Fair Lakes Home
Take the cash out of Fair Hills and leverage a couple of smaller properties that cash flow.
Use the cash flow to pound equity into Vienna home (I know Aaron's going to ask, why throw good money after bad?) Just bite the bullet for a few years until you can get your balance sheet to look better. Just a thought.