Am I doing this right?

Question

Hello all,

I'm weighing whether to keep a single-family rental I own in Illinois. My mortgage and landlord insurance come to $1,660 a month, and realistic market rent in the area is $1,700 to $1,800, so the property roughly covers itself.

Even with that thin margin, I'm leaning toward keeping it. The home is in a great neighborhood, which attracts highly qualified tenants and means I don't have to worry about the area or the neighbors. Tenants would pay down the mortgage while I benefit from the tax advantages of owning rental property. I can also afford to build a reserve in a high-yield savings account to cover repairs and other expenses as they come up.

This house is also part of a bigger plan. I intend to buy more properties in the same area within the next year, and once I own at least two more that are properly underwritten, I'll bring in a property manager to run the portfolio. Lastly, for the time being, while I have just this property in that area, I have a lot of personal connections in the area to self manage it.

Vaibhav Puranik · Answer

It's also not a great time to sell. If possible hold on to it until the interest rates come down a bit.

JD Martin · Answer

Well, it doesn't generally make sense to hold a property that doesn't make any money just because you can get synergy from it. You sound like you have other reasons you're interested in holding. What is the appreciation history and likelihood of further appreciation beyond inflation? Every year someone is there wearing out the house so that is an expense. Principal pay -down is actual cash in your pocket so that should be subtracted from you holding costs as you calculate the true return on the property. How much of your own actual cash is in the property is another factor. If you have nothing in it other than principal pay-down, and you are making any kind of cash flow on it - whether from actual cash or tax benefits or real appreciation etc - then you have an infinite ROI essentially that you need to balance against your level of risk. If it goes vacant, can you carry the asset without losing it?

Henry Lazerow · Answer

That is negative cash flow. You need assume a good $3k a year minimum towards capex reserves etc. Also vacancy and leasing fees. Maybe if you think the area will strongly appreciate could make sense to hold. I work in IL and rarely see houses make sense, to get the good ratios need 2-4 unit buildings.

Darrion Jackson · Answer

Great idea. I don't want to sell; I also don't want to have rose-colored glasses on when it comes to the property. I am highly likely to keep it since I will be buying really cheap properties in the area as well.

Am I doing this right?

Am I doing this right?

Most Popular Reply

4 Replies