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General Landlording & Rental Properties

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Eric S.
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  • Concord, NH
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First rental with a lot of equity - WTD?

Eric S.
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  • Concord, NH
Posted Mar 26 2019, 08:22

First off, thanks for any replies in advance, as this is my first BP post!

So I still have my first primary home that I was fortunate to have bought in 2013 (bottom of the Fairfield County CT market by rough estimates). The property was purchased for 272K and has a rough market value of at least 370 - 380k today. In 2017 I converted it to a rental.

Mortgage balance is right under 230k, mortgage payment of 1710 all in. I have a long term tenant in place that will be renewing for one year starting May 1st with a rent of 2400. Net cash flow is 690.


After rifling through so much information here and everywhere, I have come to the obvious conundrum of what to do with this thing, with the caveat I might be moving out of state in 2021. Here are the scenarios I'm kicking around.

A. My original strategy - keep it until the lease runs out and sell it capital gains free (lived in it for 2 of 5 years which expires in September 2020), hold the money in a money market until I move and pick back up when I move.

B. Refinance NOW and cash out a small enough % of equity to have on hand to buy yet another property locally to hold/rent for a couple more years.

C. Sell it, 1031 exchange into a BRRRR situation, pull it out again.

D. Keep it in perpetuity even after I move because it cash flows so well.

Any advice would be appreciated. I have about 50k in equity in my primary home and a pretty high savings rate which has given me the comfort of treating this money as opportunity versus depending on it for survival.

Thanks!

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Kyle Kadish
  • Financial Advisor
  • Manchester, NH
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Kyle Kadish
  • Financial Advisor
  • Manchester, NH
Replied Mar 26 2019, 09:22

@Eric Smith Glad to hear it is a long-term tenant; too often tenants can be a cause of unneeded concern. Cash flow is nice to have, but not the same as NOI. The 690/month does not include property taxes, or reserves for any repairs that might occur.

I'll speculate on the property taxes, meaning you are generating less than 5% on your equity. If you pay 3,000/yr in taxes, your return on equity is less than 3.5%. There are better options to have your money work for you.

The real answer depends on your thoughts for the market....will prices continue to increase? Are there pending capital expenses? Will it sell better to an owner than investor? etc. No answer is the wrong one.

Good luck in the process.

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Patricia Steiner
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Patricia Steiner
  • Real Estate Broker
  • Hyde Park Tampa, FL
Replied Mar 26 2019, 10:18

Until you have a purpose for the money, I do not recommend refinancing and incurring closing costs.  Most money market accounts are paying less than 2% - and 2% is what you have to make just to break-even with inflation.  

It doesn't sound to me like you have another property on the radar so why sell - and lose a good tenant, good return, and trigger capital gains for sport.  My recommendation is to pat yourself on the back for getting yourself in this position and having options.  Sometimes doing nothing is the best strategy.  

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Eric S.
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Eric S.
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Replied Mar 26 2019, 10:18

@Kyle Kadish sorry I didn't clarify the property taxes AND insurance are included in net cash flow number as they are part of the 1710 mortgage payment (5800 a year yikes). I also have about 25k in cash reserves set aside for whatever I need it for. Over the past two years I have not spent very much in other opertaing expenses and maintenance so I have been lucky.

Either way I am learning to factor in those operating costs into any future analytics for other properties the more I learn.

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Eric S.
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Eric S.
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Replied Mar 26 2019, 10:30

@Kyle Kadish
Living in Connecticut I am a little worried about the implications of the new SALT laws on real estate especially in the high cost region the house is in. It's at an entry level price point which should protect it from any major downturn in prices, however I can't honestly say it's going to continue appreciating like it has. Seems like this year is going to be a big test for where the market headed in Connecticut. Listings are WAAAY up all over the region this winter.

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Replied Mar 26 2019, 11:19

$380K value with rent at $2400. Long term this property is a money pit. You do not have positive cash flow and if you keep it very long you will quickly find out why. SFHs with generally 50% expenses long term leaves you with not enough to cover your present mortgage. I would definatly not be renewing your tenants lease. You need to sell, now.

Very sad to see novice investors operating under the misconception they have positive cash flow. Your $690 cash flow is a fabricated number based on yesterday not tomorrow, never going to see it. Your equity of near $150K with a opportunity value of 10% (invested in a equity fund) is worth nearly $1300/month. That is how much potential income you are losing every month before expenses and mortgage. 

Sell, sell, sell.

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Eric S.
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Eric S.
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Replied Mar 26 2019, 12:16

@Thomas S.

OK. I see what you are saying – using the 50% rule the net operating income would project out to only 1200 which doesn't cover the mortgage. Lesson learned. I have just been lucky the expenses have been extremely low but I understand now with vacancies and major maintenance over years it probably wouldn't make much money. 

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Nic Cooper
  • Rental Property Investor
  • SAN DIEGO
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Nic Cooper
  • Rental Property Investor
  • SAN DIEGO
Replied Mar 26 2019, 20:57

@Thomas S. I'm with him.  I did the math on my rental here in San Diego and realized that I was not going getting anywhere near a decent return on my equity.   I bought my rental in 2002 and it rode it through the highs and the low low lows.   My tenants had just moved out when I started listening to BP.  So I am selling and reinvesting my equity.  Sell now and stop losing money.  Interview at least 3 agents and only interview ones that sell a ton of properties.

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Scott Hollister
  • Rental Property Investor
  • Connecticut
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Scott Hollister
  • Rental Property Investor
  • Connecticut
Replied Mar 28 2019, 11:14

@Eric S.

There are some good responses here, but this situation depends on what your long term goals are. I would have 3 options here as an investor. What type of loan did you get, and how much did you put down? 

  1. While living there I would've gotten a homeowner HELOC up to %100 of the value, being able to use the 100k or so of equity for other deals. Putting it in a deal, then refi out, repeat. (See BRRRR). I would have used Hard Money for the purchase and repair funds, using HELOC as down payment and carrying costs. But with you not living there now, it might be hard to get one. I would call a local bank to see your options.
  2. You can sell your home, just make sure you are within 2 out of the last five years like you said.
    1. My biggest concern with selling is that you're giving 5% of your equity to agents, 1% for transfer taxes, closing cost fees, and any repairs you need to make for it to be market ready. So right there you 20-25k in costs to sell it. Plus the on market time (paying the mortgage).
  3. Keeping it as a rental is a good option if you factor in holding it long term to gain the appreciation, which is often overlooked. Fairfield is a beast of a market, kind of separate from CT when it comes to outlook. Your cash flow isn't great once you start adding in maint, cap ex, turn costs, management, etc. You almost are at a break even. But you will get some decent principle pay down. 

So again, make the best decision you can for your goals. My question for you is, what higher and better use do you have for your money that you will pull out? 

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Replied Mar 28 2019, 11:30

Higher use would be to put your cash into a equity fund. As for speculating on appreciation that is a option but it is speculation, it is risky and it can disappear with a real estate down turn. I believe they have happened in the past making it possible that it will happen again.

Each to their own but once expenses roll in, vacancies happen or a eviction results in extensive property damage the glow will be gone and it will be too late.

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Craig Bellot
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Craig Bellot
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Replied Apr 10 2019, 03:39

@Eric S. can you increase the income by doing short term rentals a la Airbnb? Fairfield county in Connecticut is decent for Airbnb income  

Your current rent isn’t enough to cover any major repairs that would come up.  You would dip into negative cash flow  

The other option like everyone else says is to sell now while prices are high. 

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Eric S.
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Eric S.
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Replied Nov 18 2019, 10:37

Thank you for the lessons peoples. After this post, I went down the rabbit hole hard and have found myself in a much more educated position today with 100's of hours reading BP, books, podcasts etc. This thread literally started that.

Update: Needless to say I'm selling this (at some point) money pit in the spring and will exit capital gains free. With a conservative estimate of the net sale (120k) and a HELOC on my primary that I've already put some sweat equity into (I can get about 35K out at .85% LTV), I think I should have a war chest of about 140k, with 15k to set aside as reserves to start doing things the right way next summer. Right way includes having no other debt except my mortgage and a decent cash position as an emergency fund not included in these figures, all of which I didn't have when i posted back in April.

As for what I'm going to do with that money I'm still trying to figure that out. Stock market feels like a cliff is coming with the election and I want the cash flow from rents anyways. I prefer to invest in my backyard which means in CT so I have to do some more digging to find places that cash flow and what niche will be best for me (I'm leaning towards multi-family based on what I've learned about this area). I'll post something in the local forums on that later.

Thanks again everyone.

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Jay Bell
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Jay Bell
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Replied Nov 18 2019, 13:52

Great thread to follow. Thanks for circling back with an update!

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Eric S.
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Eric S.
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Replied Oct 16 2020, 07:28

Update: I sold that property at full asking in 6 days, and made way more than I estimated. Silver linings 2020 edition.

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Eric S.
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Eric S.
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Replied Sep 19 2022, 14:09