Fix rental house or sell it & buy a different one?

Question

Hello everyone,

I am a newbie and need some advice. I have a cash flowing rental property out of state that needs work done on it. It is an older home with a huge backyard. It needs a lot of minor work but is eventually going to need a new roof and a new Water Softener. We include lawn service in our rental because we have found that prior tenants cannot keep up with the maintenance of a yard of this magnitude (almost an acre with lots of trees). We have a great tenant in place but her lease is due to expire in June. The property also gets drafty during the winter months. I would like to know if I should sell it and get something a little newer or if I should take out a personal loan and just fix? I don't know if it's worth keeping due to all the repair hassles. I would appreciate any advice.

Account Closed · Answer

@Tina C. Considering you not losing money on a rental you weren't keeping full track of expenses on, I would consider that a slight win and realize you got pretty lucky. As for selling the house, you said you have 15k equity on the house, but that won't matter if it's eaten up by expenses that won't raise the value of the house proportionately.

Tina C. · Answer

Yes, I agree.

Tina C. · Answer

UPDATE: Unfortunately, I wasn't able to put my property up for sale at this time. I spoke to a couple of different agents and was told that houses aren't selling right now and that I should hold on a while longer. My husband and I went out to the property and did several minor repairs that ended up saving us over $500 dollars. We plan to go out there more often and do a lot of the maintenance ourselves as this will lower our expenses. We drive to the rental property, so our travel expenses our minimal. This can be an inconvenience but I feel this is best for our current situation.

Tina C. · Answer

Wow thank you so much. Your advice is an eye opener. And I didn't know I should budget 50% of rental income for expenses. Yes, we do have equity of about $15,000 sitting in the home. I know there is still an emotional attachment to the home (I raised my 2 children here) that I need to overcome. I guess I can take the money from the sale of the home and invest it somewhere else for now, until I buy another investment property. Thank you so much for the advice. I think I just needed a wake up call.

Thomas S. · Answer

Expenses on a SFH going forward will be 50% of your rental income. Between that and your mortgage repayment there is no possible way for you to ever see any positive cash flow on this property. It is a loser as a rental income investment and should be sold.

If you want to invest buy local and manage yourself. Long distance ownership is not going to work for you since you have zero business skills.  Not knowing whether you have positive cash flow or not is a clear indication you should not be investing. I would guess that you also have equity sitting dead in the property costing you lost income as well.

Sell now before you lose any more money.

Tina C. · Answer

Thank you everyone, for your feedback. My current tenant has been there for about 16 months. I'm not sure if she is renewing or not. I really hope so. The rent is $1,200 per month and is located in Northwest Indiana about 40 minutes from Chicago and 15 minutes from Merrillville IN- close to expressways.  I live in Texas, which makes it hard to manage. We pay $100 per month for lawn care for the months of April-September. So I guess it's safe to say that rent is $1100 for 6 months out of the year. The total mortgage owed is about $72,000 after the current refinance. Our current tenant is our 3rd tenant since we've had the rental property; July 2015, so our turnover could be better. I guess I could use some help in that area also. Brian, I'm a little embarrassed to say that I don't know how much my expenses are. I would have to add up the receipts from last year and get back to you on that. I guess this is another reason why I should hire a property management company, since I know that they do give out end of the year statements. We had a bad experience with our property manager who managed the rental for the first 2 years, so it makes it hard to trust someone. I do know that the rental property is paying for itself, even after expenses. Our mortgage is $730 per month so we are cash flowing about $430 a month from October-March which is the winter season. We pay lawn service on the other remaining 6 months. We have owned the property for 16 years (it was our primary residence) and did our 1st and only refinance on it this past September (rate and term only) so we do have positive equity. I want to keep the property but I'm not sure if its worth putting so much money into it, just to rent it out again. Or should I just sell it and get something that requires less maintenance? Maybe get a rental that doesn't have a Water Softener since it requires more maintenance than having city water. Or should I keep it and hire another property manager? Is it worth hanging onto?

Theresa Harris · Answer

Repairs are unfortunately inevitable for any property-old or new.

Is the current tenant planning on renewing her lease?  Increase the rent a bit (which you should do every year to keep up with inflation) and get the necessary repairs done now.  Start saving for the bigger jobs (roof and water softener).  For the drafts, you can do spray foam around the windows and doors, replace weather stripping, etc easily enough.  Find a good, reliable handyman to do the work.

If you were to sell it, you'd get more money if you did all the repairs. Selling a place in need or repair, won't fetch top dollar.  Remember if you sell it and buy a new place, there are a lot of cost associated with the sale and purchase (realtors commission, lawyers, borrowing costs, etc).

Ray J. · Answer

In what city, state is the property located?Maybe somebody nearby can take a quick look at it and its location to help you decide and maybe even buy it from you.

Brian G. · Answer

@Tina C. It would help to have more info (ie Purchase, rent, expenses, cash flow, how long have you owned it, turnover, etc.). Ideally you want the property to pay for itself (including repairs, roof, softener, etc.) otherwise it's pretty tough to make a profit.

Brian G. · Answer

@Tina C. It would help to have more info (ie Purchase, rent, expenses, cash flow, how long have you owned it, is it a desirable property to live in, etc.). Ideally you want the property to pay for itself (including repairs, roof, softener, etc.) otherwise it's pretty tough to make a profit.