The price on a rental went up, when to sell?

Question

Hi guys,

In 2009 I bought a little 1 bdr 1 bath house in Idaho for 25K, now its worth about 120K.

Its rented, I get $500 per month,  but the tenants is planing on moving in a few month.

Before this tenant I kind of had an issue with a good quality tenants. (its a college town so a lot of college students are applying, or, if its not a college student then its usually people in transition, like they sold their house and waiting for a relocation, so they will stay for 1 year only)

I have a great handyman there, so its kind of sad to sell a paid off property that is being taken care of by a great handyman...

1) Should I sell and buy somewhere where the rents are about 1K per month on a property like that?

2) Should I refinance?

Thank you!

Joe Villeneuve · Answer

Sell.  You're losing money.  You have $120k of an asset, and only getting $6k/year back.  That means it will take 20 years of perfect CF to equal the dollar amount you would get if you sold this property.

Once sold, use the $100k (probable cash available after closing) and 4 of the same property but at the $1k/month rent you mentioned.  That would still get you the same $500/month in CF...but times 4 = $2000/month...and you would have PV of around $500k.  This would mean if the properties all appreciated 5% over the next year, your PV if you stayed with this one property would equal $126k...but if you sold and got 4 properties, your PV would be around $524k.

Nathan Gesner · Answer

The lowest-priced rental in Glendale is a 1bed/1bath apartment for $750. A single-family home of decent condition should be getting about the same. That's 3% of the purchase price when most investors are looking for a 1% rent rate. You also have over $100,000 in equity.

If it were me, I would cash out some of the equity and use that to purchase anther property. Then you'll have two cash flowing properties, two tax deductions, two tenants building your equity, etc.

Mary Jay · Answer

I think what you are saying makes sense. Ive been thinking the same thing: Why am I holding on to a property that gives me $500 in rent only, when I can sell it and buy somewhere else for the same amount of money but it will rent at $1K...

I guess, what I am thinking is if I do a cash out refinance, I probably will be able to take out only a 100K (since its 80% loan to value)...

100K at 2.7% for 30 years , the mortgage will be 405$ plus taxes and insurance 110$. the rent is $500, so  I will almost break even, then ...

I guess, if I do the cash out refinance, this way I can buy another property somewhere else and keep this one...The problem is its an old house, plus yearly turn around of tenants, eats into my cash flow...

What if you refinance your duplex instead of selling it then use that money for building your new homes?

Mary Jay · Answer

Thank you. I agree with your reasoning. But why sell? Why not do a cash out refinance?

Alfred Amponsah · Answer

Mary, this is not financial advice but something I will do in your case. I will refinance just as indicated in the BRRR strategy and use the 70-80% cash to purchase several homes or properties or assets.

the goal is to increase your ROI and your portfolio.

David Ginn · Answer

Yes, I would say that you need to go into that deal with an extreme abundance of caution and look at all the numbers twice and three times and have everyone else look at it. And I would query him directly on why they raised the rent, state 50 what type of data they have, that would support that type of raising rents, there may be a reason, find out the reason, the more data you get, the better, tie back to their explanation and see if it really is true, what they're saying is. So basically, what you're talking about is based on the cost of lumber, houses going up, appliances shooting up all those things, the cost to bill is higher. So they may be raising the rents because the market is telling them that they could do that based on the cost of building the asset going up. So that's why you want to check into those numbers and make sure they're right. But remember, you're buying and investing in the high side of the market. And we do expect the market to collapse. So if the markets going into collapse, and they're raising their rents, it's a smart idea for them, because it shows the books are better, and they may be even able to get it over the short term. But what you have to do is look at the headwinds that are headed your way as far as the market retraction.

Mary Jay · Answer

The house is paid off now, and the rent is $500 per month. I am cash flowing now because the house is paid off. Once I leverage it, I think I will be in negative...May be I will break even if I am lucky...

So basically, I am getting $500 rent on a 120K of dead equity now... (So, technically, the $500 is not a cash flow, its a rent payment. The cash flow probably about $300 per month)

Mary Jay · Answer

Good point.

At what point do you sell your properties? What are your criteria?

Mary Jay · Answer

--Its the rent is only $500. And you are right, after taxes/insurance/repairs/vacancy I am probably only cashflowing about $300.

The house is paid off. So no mortgage...

"If you refinance, do you still cash flow after all your expenses?  
Based on your numbers ($405 mortgage, $110 insurance-is that per month 
or per year?, property taxes???) and renting for $600 instead of $500, 
you are not cash flowing. Chances are the rent will just pay for the 
mortgage, insurance and taxes.  It doesn't factor in vacancies or 
repairs."

---If I refinance the property I doubt there will be any cash flow, I might break even if I am lucky.

Bryan Balducki · Answer

@Mary Jay what do you mean you wouldn’t have the cash flow anymore if you refinance? If the rent stays the same/goes up over time and you pull the money out to put into another property, and your interest rate doesn’t go up terribly high, then you should still have cash flow. I will be refinancing on a property soon to increase the cash flow…

The price on a rental went up, when to sell?

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