Rental property opinions needed!

11 Replies

So I posted a while back about renting out my home with negative cashflow, and potential for a much higher equity gain YoY. I got quite a few responses, with most leaning towards the idea that negative cashflow is never a good idea. Figured this time, I would pull some numbers and pose a refi scenario -

Total Mortgage (w/PMI) + Insurance + Prop Tax = $1670/mo

HOA dues = $113/mo

Total = $1783/mo

Estimated rental based on others in the neighborhood = $1650/mo

Negative delta = - $133/mo

Based on my ownership since June 2018 (roughly 16 months), and looking at multiple recent comps in the neighborhood that have recently sold, the average equity growth is roughly +$16k ($1k/month).

Current interest rate is 4.75%. I've pulled the numbers of refinancing at a 3.75% rate (current market rate), and that saves me about $173/mo overall, putting me at +$40. I also should be about a year out (maybe less) from having 20% equity in the home and being able to drop PMI, which would add +$71, thus putting me more in the positive at +$111/mo

The area sees steady growth, very populated, 5 miles from RDU international airport, tons of shopping, etc. I've spoken to an agent and a mortgage broker that I know, and they don't foresee any downswing in the Raleigh market in the near future (I know....Anything can happen....). I will also not be hiring a PM company, as our new home would only be about 20 minutes away.

Looking for thoughts/input on this overall plan. Any advice/criticism is much appreciated!

with that +$111/month, is that you taking into account expenses on the property?  You also owned the home so you know what you are looking at with the big capital expenditures (roof, HVAC, etc) I guess at the end of the day it depends on your risk tolerance in my opinion for said property.  I have been looking at the Raleigh Market as well, a good friend of mine is an agent down there and the surrounding areas are exploding.  What is your long term goal with the property? If you do decide to hold onto it with minimal cash flow, I would have plenty in reserves.  


Originally posted by @Jeremy Goldizen :

with that +$111/month, is that you taking into account expenses on the property?  You also owned the home so you know what you are looking at with the big capital expenditures (roof, HVAC, etc) I guess at the end of the day it depends on your risk tolerance in my opinion for said property.  I have been looking at the Raleigh Market as well, a good friend of mine is an agent down there and the surrounding areas are exploding.  What is your long term goal with the property? If you do decide to hold onto it with minimal cash flow, I would have plenty in reserves.  

Jeremy - thanks for the feedback. You are spot on, the Raleigh market and it's surrounding areas are definitely booming. As far as cap ex goes, it's a townhome that's is maintained by the HOA, do roofing, yard, etc. is covered. It's also a relatively new home (built in 2011), so I figure that things like HVAC, etc. still have quite a few years of good life (knock on wood). End goal here for us us to have a rental property that steadily goes up in value, even with minimal cash flow, and ultimately sell in X amount of years for a substantial profit. I also have a few other non real estate investment avenues and hopefully plan to partner with a buddy of mine who is in real estate at some point in the future to secure a few more rental properties. This would just be my first. Another reason is that I am newly engaged, and we will be consolidating in the next year, and are entertaining ideas, as she too owns a home. It just so happens that have more equity in mine and am in a more desirable area.

Originally posted by @Travis Silva :

Originally posted by @Jeremy Goldizen:

with that +$111/month, is that you taking into account expenses on the property?  You also owned the home so you know what you are looking at with the big capital expenditures (roof, HVAC, etc) I guess at the end of the day it depends on your risk tolerance in my opinion for said property.  I have been looking at the Raleigh Market as well, a good friend of mine is an agent down there and the surrounding areas are exploding.  What is your long term goal with the property? If you do decide to hold onto it with minimal cash flow, I would have plenty in reserves.  

Jeremy - thanks for the feedback. You are spot on, the Raleigh market and it's surrounding areas are definitely booming. As far as cap ex goes, it's a townhome that's is maintained by the HOA, do roofing, yard, etc. is covered. It's also a relatively new home (built in 2011), so I figure that things like HVAC, etc. still have quite a few years of good life (knock on wood). End goal here for us us to have a rental property that steadily goes up in value, even with minimal cash flow, and ultimately sell in X amount of years for a substantial profit. I also have a few other non real estate investment avenues and hopefully plan to partner with a buddy of mine who is in real estate at some point in the future to secure a few more rental properties. This would just be my first. Another reason is that I am newly engaged, and we will be consolidating in the next year, and are entertaining ideas, as she too owns a home. It just so happens that have more equity in mine and am in a more desirable area.

I'd hold onto it, I guess IMO worst case scenario if you're just like screw it I don't want to lose this $40/month anymore... sell it.  You are looking at minimal maintenance it being a town home and it was built in 2011 and values are flying up.  Plus your end game is to sell it in a few years when prices are at their peaks.  

 

I don't have a problem with banking on appreciation - I think the downside risk here in Raleigh is pretty small.  That said, even if your maintenance and capex costs are relatively low right now, they will NOT be zero and you would be well advised to plan for SOME expenses.  You WILL also have turnovers (i.e. vacancies) that require some degree of investment (re-paint, carpet,fire alarms, light bulbs, etc, etc) and while the vacancies may be short, its not easy to turn over a unit with ZERO downtime.

Regarding your planned refi, I assume your 3.75% 30-year is based on an owner occupied mortgage? Even if you still live there at the moment, your INTENT clearly is to use this as a rental, so be careful about not running into mortgage fraud traps. Also be aware that many mortgage products may not let you drop PMI anymore without yet another refinance or at least reworking (for a fee) the current mortgage. Check the fine print.

Originally posted by @Andrew S. :

I don't have a problem with banking on appreciation - I think the downside risk here in Raleigh is pretty small.  That said, even if your maintenance and capex costs are relatively low right now, they will NOT be zero and you would be well advised to plan for SOME expenses.  You WILL also have turnovers (i.e. vacancies) that require some degree of investment (re-paint, carpet,fire alarms, light bulbs, etc, etc) and while the vacancies may be short, its not easy to turn over a unit with ZERO downtime.

Regarding your planned refi, I assume your 3.75% 30-year is based on an owner occupied mortgage? Even if you still live there at the moment, your INTENT clearly is to use this as a rental, so be careful about not running into mortgage fraud traps. Also be aware that many mortgage products may not let you drop PMI anymore without yet another refinance or at least reworking (for a fee) the current mortgage. Check the fine print.

Thanks for the input, Andrew! I do realize that no matter what there will be  unforeseen expenses, and I like to consider myself handy enough to tackle most repair tasks. Also, great point on vacancy. Hopefully there won’t be too much lapse between, and one can only hope to have great tenants that stay for a few years. Another great point is that refi rates will differ between owner occupied and rental properties. I’ll have to dig more into that. My HOPE is that even at a break even point, the market stays consistent and the equity continues to rise. 

@Travis Silva

with such a slim margin on cash flow, you better have some cash reserves set aside. under capitalized owners often become the desperate owner who has to sell because the property becomes run down. with so little cash flow, know you will have to dip into savings for repairs.

It's a gamble. Everyone would agree southern California is an appreciating market. When the market crashed, they lost 2/3 of their value and it took about ten years to recover. Can you pay $133 a month for 120 months while waiting for a market to recover? Don't forget taxes, insurance, and repairs will go up during that time.

Betting on appreciation shortly after a crash would be a much better bet. It's pretty high risk when the market has been growing steadily for ten years.

Hey man I am in CLT and browse here a lot but I actually joined to reply in regards to the being built in 2011 comment.  You don't know what will happen so DONT bank on things like that.  I had a rental built in 2010 that had a TRX valve lock up in 2016 which means the refrigerant was not flowing.  I loved the tenant at the time (she rented for 6 years with me up until this August) as she was hardly home and the place looked just like it did in 2012 when I started renting it.  The company that did the repair did not braze the line properly and all the refrigerant leaked out and with the tenant being gone for a 4 day weekend the compressor locked up and just like that a new evaporator and condenser on a 6 year old unit.  Needless to say the new unit has a low pressure shutoff switch installed.

Making some assumptions here but it seems like its not a huge ROI considering it seems you may have 50-60K of equity that's netting you potentially $111 a month.

My personal opinion (making some assumptions again)... sounds like you've got a nice home in a nice area close to the metro; I would sell, avoid the capital gains, and invest in a not as nice rental that is similar bed/bath/sqft or further from the city.


I'm not an expert by any means and I am not comfortable with cap rates as low as a lot of investors here (who have been doing it a lot longer than me) are.

@Travis Silva Most investors look at the rental property through four lenses: appreciation, equity, cash flow, and tax strategy. Different investors weight the four categories differently. Professional investors will not assess their property in a vacuum, but in comparison to alternative options. So, what does it look like if you sell the subject property and re-deploy the money either out of the buy/hold space, or in the buy/hold space but with different inventory? 

As a general statement, it's tough to cash flow in Raleigh and has been a good appreciation market. So, if you want to continue to bank on appreciation as a heavy part of your strategy, you might be in the right place. If you want cash flow, you might want to sell or 1031 and move to another area.

Your numbers on paper--as others have said--look "tight" at best, and don't have room for reality to strike and your cash flow numbers to hold. (Just raise rents and that will take care of everything)!!

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