So here are the details on a rental property I currently own. I bought a single-family home back in 2007 with a VA loan. I am currently renting it out for $950/month. My mortgage is $822 but I pay $950 just to pay over on the mortgage, annual taxes are $750 and no other expenses, other than 10% management fee. It is rented out and has been rented out consistently for a while now. I have about $30K in equity in the house now. The question is... Do I sell the house and use that $30K to invest in another property to flip or hold it? Or do I just sell it and use the $30K to get out of debt. I have about $30K in debt. I'm at a loss here.
Thanks for any help guys and gals.
Well, your last statement..."I'm at a loss here"...pretty much describes everything you stated here. The numbers tell me this is in fact a loss...and should have been sold years ago.
Sell it, take the $30k and invest in a property that actually cash flow comfortably, and stop adding money to the principle every month. That doesn't help anyone but the bank...and hurts you.
Thanks for the straight forward honest advice. I think I have just been hanging onto it on just cause. I haven't really looked at the numbers until I came across BP recently. This is an awesome educational website.
Is the house rented for its full potential? ie, are other similar properties going for the same amount or are you under market?
I don't know what you loan stats are but refinancing may be an option which could cause it to cash flow. Or you could pull out your equity and use it for something else.
Since 2007, I'm guessing you could get a better rate.
I have a 4% fixed loan. And similar comps for rentals in that area are at $950.
@Michael Ritrovato are you calculating equity only as what you have put into the property or does your equity estimate include appreciation? Most folks on BP don’t operate in areas where appreciation gains significantly offset the near-term value of cash flow value, so the natural answer you will receive is to sell the property. Is this property in CA or elsewhere?
The likely answer may be sell the property since most indicators suggest we are at the peak of the market, but you’ll need to determine what additional upside in appreciation is left on the table, and the probability of you being able to capture that gain vs risk of losing your current gain.
You’ll also need to determine what you will do with the gains if you sell. If you plan to invest in the same market or asset class, then it likely doesn’t make sense to sell. If you are willing to invest out of state or in a different asset class then you’ll need to determine if the additional risk and effort are with the extra yield.
Markets are efficient and all investments reflect level of risk involved.
I Bought the property for $125,000 and it is worth about $127,000 and it's in NC. Not much appreciation in property there. Or at least that is what Zillow is saying it's worth, however there are houses around it that are going for $150,000. How do I get an accurate value on what it is worth? And I am looking at doing a flip in CA where I am at, which is why I'm looking at getting rid of it.
zillow provides an ok estimate for SFH if there are a high number of comps, though it doesn't take into consideration the condition of the property. If you don't want to get a Realtor involved to provide a professional comp, you can look at the other listings as well to assess yourself. Find comparable interior sqft, lot size, #BR and #BA homes to compare how the listing pictures compare to your property. If you find that current listings have nicer amenities, then factor the cost of freshening your property for sale.
Don't forget to account for applicable transaction costs, like Realtor commission, depreciation recapture, transfer taxes on all legs of your transaction (NC sale, CA buy & sell). Unless you are getting a phenomenal deal on your CA purchase, i suspect that you'll find it tough to make money on a flip in SoCal if you are sub'ing out all of your trades. You'll also get hit with short term capital gains on your flip. Many investments are make or break depending on whether you've accounted for all tax implications correctly.
@Michael Ritrovato . Where at in NC? Depending on where it is. Now is a great time to sell due to high demand and low inventory. A nice combination of summer movers and hurricane Florence. I have a house in NC and benefited from it greatly.
@Kyle Tipton It is in Jacksonville NC. And I emailed my property manager to see if they can list it to see how much I can get out of it
@Michael Ritrovato . Okay. My rental is in Newport. Well if you need a realtor, I have some good ones there that I’ve known for a while. Once you hear back from your PM, send me a msg if you want their contact info or have any questions. I just moved from there in March.
Not sure what your current rate is but have you looked at refinancing to lower your monthly mortgage and get more cashflow?
The captain always goes down with the ship!!!! Lol jk. Sell it, get your equity, and reinvest it into something better. Or just hold it forever!
If you've had it for 12 years and only have $30K in equity, I'd sell it. I would have expected more since you've been paying the mortgage for 12 years.
@Allan C. Thanks for the expert advice
@Wesley I. I have looked at a refi and no one can beat the VA loan rate of 4%
Is $822/mo just principal and interest or PITI?
It seems like it doesn’t have even 1% Rent/price.
You have bought it in 2007 - on the top of the market.
That's why Rent is barely covers the mortgage and don't get any reserves for CapEx, maintenance, vacancies.
You need to sell it
@Irina Belkofer thanks for your advice. Yeah I sent my PM a message to list it for sale
After 6% commission and x% transfer tax, how much equity is really left?
@Michael Ritrovato . You are losing money every month. Sell it ASAP and use it to pay off your debts. Learn how to write a monthly budget and live off of the budget you set up so that you can live within your means and save money. Once you have saved a three to six month emergency fund and a down payment, buy a rental property which cash flows or invest in index funds.
But to keep a property which you are losing money on does not make sense.
If the interest on your $30k debt is high, I would sell the house and pay off the debt. If the interest is low, I would sell the house, and buy a better property.
@Michael Ritrovato If you aren’t sure which direction to go, I would start by asking yourself about your goals. I think understanding good vs bad debt is important as it will likely affect your ability to get to your long term goal.
I’m not a fan of negative cash flow but selling the property comes with some significant costs. I don’t understand your current financial situation well enough to guide you, as it’s possible you make 250k a year, with 300k in the bank in which case your intentions may be to pay off the 30k tomorrow.
Bad debt is a wealth killer and so is negative cash flow. Selling the house and paying off the 30k would increase your personal cash flow, eliminating both the negative cash flow on the property and the negative cash flow your payment on the 30k strips from your personal finances each month. Do the math and see the effects that holding the house creates.
Good Luck 👍🏻
You bought it at the top of the market, and now we are (maybe) back near the top of the market. This is your chance to get out of this house, which isn't earning you any money, is probably not going to appreciate much, and is sooner or later going to need a roof, HVAC, or something unpleasant like that. Sell for what you can get and invest closer to home.
@Michael Ritrovato Sell it, and depending on the debt, either pay it off or use the money to find something with a higher return. If the debt is high interest, like credit cards, then i'd recommend paying it off with the sale proceeds.