[Philadelphia] Sell or Continue Renting Rental Property?

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[Philadelphia] Sell or Continue Renting Rental Property?

John Zent
Member since 2019 · 3 posts · 0 votes

Hi all- would like opinions on selling/exit strategy for a property I've owned since 2010 (in Philadelphia's Fairmount/Museum area).


Stats:

- Originally bought the property for around $200k in 2010.
- Current value of the home is somewhere between $325k-$375k.
- Been renting it out the past 3 years for around $2,000/mo. Before that it was my primary residence.
- Mortgage Interest rate is 3.875%.
- Annual expenses (besides interest) are around $4500 for property taxes, $1,000 for insurance, and maintenance/repairs really fluctuates but I budget around $2,500 (it's been less because I DIY a lot, but there's a value to my time).

Current tenants are moving out at the end of this month and I'm seriously considering selling the home, and here's why:

- Biggest factor: My last chance to take the capital gains tax exclusion for primary residences where you've lived there for 2 out of 5 years (I would move back in temporarily between when the tenants move out and until the house sells, to ensure I maintain the 2 out of 5 years).
- Local housing market (Philadelphia city) has moved from "Hot" to "Warm" (source: https://drexel.edu/lindyinstitute/initiatives/reports/) just like much of the country. I'm afraid if I wait until market equilibrium that I might have a harder time selling, because the home is older/outdated and not as nice as many other homes in the area.
- Landlording/owning the property is mostly smooth-sailing, but at occasional times can be aggravating, time-consuming, or stressful.

If I sell this house, I would not immediately buy another property. Just wondering what is considered a good exit strategy/rules of thumb for when to sell an investment property, and what everyone's opinions are for this particular scenario. I've heard of the 1% rule so I would compare that to what the house is currently worth, not what I paid, and it doesn't meet that criteria (but also keeping in mind you can probably only meet the 1% rule in low appreciation areas, which Philadelphia/Art Museum area is not).

Thanks so much for your input!

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Joe P.
Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes
7y

@John Zent, forgive me, but no, your numbers are not above. Some of them are.

Your goal is to make a high return, but we don't know your cash on cash return. We don't know it because you said your mortgage payment is not an expense, but it is. Not considering it an expense is skewing your view and your numbers. You can look at cash flow monthly or yearly, it doesn't matter to me...but what is it? $100 a month? $1200 a year? Your COCR is your rate of return in my eyes because you're interested in your exit strategy. If it's 2% and your money can do better in the stock market, in a different investment, etc., then its time to pull out. But you don't know that information (or haven't led on that you do) and therefor no sound investor could give you advice until we know exactly what is going on at this property.

Here's what I'm gathering:

  • Assuming you invested ~25% (20% down and 5% closing) so ~$45,000 on purchase
  • Income is $2000 per month
  • PITI is ~$1,211 per month (assuming $752 mortgage, $375 for taxes, $84 for insurance)
  • You are setting aside $209 per month for maintenance/repairs

You might be cash flowing around $580 per month, or 15% COCR. But sadly, I think its much lower than that:

  • You aren't budgeting for capital expenditures -- you should. A new roof will be 5-10k in the city, a new oven is $500, a new boiler is $4000...your maintenance budget is blown if you're basing it off of that.
  • You aren't budgeting for vacancies (pay yourself to deal with loss of income and finding/vetting new tenants)
  • You aren't budgeting the utility bills, and you likely pay for at least water
  • You aren't budgeting for city costs like license renewals
  • You aren't budgeting for your time, potentially, by even having a line item for "management" where you can pay yourself some money for your time.

So, if your goal is the highest rate of return, go through the motion of finding out what that is and report back to us. If its 10%, and you're happy with 10%, great. You can add in expenses for property management if you want to make it more passive, and then see where your return lands. I fear you haven't gone through the exercise (or haven't led on that you have) and not doing so puts you in the dark.

The 1% rule is a bunch of nonsense at this stage, and no one cares if you're hitting it or not. If the property cash flows, meets your needs, and is helping you do what you want to do, then au salute.

If you'd like some help putting the numbers down, feel free to reach out. The BP calculator is excellent, but all in all, I suggest you put down the numbers as-is; its too difficult to make a decision without having all the facts on the table.

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  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    Sell it

    1Reply
  • Joe P.
    Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes
    7y

    What's your monthly cash flow and what are you real estate goals?

    0Reply
  • John Zent
    OP
    Member since 2019 · 3 posts · 0 votes
    7y
    Originally posted by @Joe P.:

    What's your monthly cash flow and what are you real estate goals?

    Numbers are above. I look at things on an annual basis since monthly cash flow does not take into account that part of each monthly mortgage payment is principal/equity which is not an expense. Also doesn't take into account budget for repairs/maintenance. That being said, it's definitely cash flow positive, but I place much more importance on annual return as compared to other investments.

    I don't have real estate goals so much as financial goals- to make as high a return as possible, as passively as possible (and that includes potentially putting this money towards a different type of investment). I already own 4 pieces of real estate.

    0Reply
  • Joe P.
    Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes
    7y

    @John Zent, forgive me, but no, your numbers are not above. Some of them are.

    Your goal is to make a high return, but we don't know your cash on cash return. We don't know it because you said your mortgage payment is not an expense, but it is. Not considering it an expense is skewing your view and your numbers. You can look at cash flow monthly or yearly, it doesn't matter to me...but what is it? $100 a month? $1200 a year? Your COCR is your rate of return in my eyes because you're interested in your exit strategy. If it's 2% and your money can do better in the stock market, in a different investment, etc., then its time to pull out. But you don't know that information (or haven't led on that you do) and therefor no sound investor could give you advice until we know exactly what is going on at this property.

    Here's what I'm gathering:

    • Assuming you invested ~25% (20% down and 5% closing) so ~$45,000 on purchase
    • Income is $2000 per month
    • PITI is ~$1,211 per month (assuming $752 mortgage, $375 for taxes, $84 for insurance)
    • You are setting aside $209 per month for maintenance/repairs

    You might be cash flowing around $580 per month, or 15% COCR. But sadly, I think its much lower than that:

    • You aren't budgeting for capital expenditures -- you should. A new roof will be 5-10k in the city, a new oven is $500, a new boiler is $4000...your maintenance budget is blown if you're basing it off of that.
    • You aren't budgeting for vacancies (pay yourself to deal with loss of income and finding/vetting new tenants)
    • You aren't budgeting the utility bills, and you likely pay for at least water
    • You aren't budgeting for city costs like license renewals
    • You aren't budgeting for your time, potentially, by even having a line item for "management" where you can pay yourself some money for your time.

    So, if your goal is the highest rate of return, go through the motion of finding out what that is and report back to us. If its 10%, and you're happy with 10%, great. You can add in expenses for property management if you want to make it more passive, and then see where your return lands. I fear you haven't gone through the exercise (or haven't led on that you have) and not doing so puts you in the dark.

    The 1% rule is a bunch of nonsense at this stage, and no one cares if you're hitting it or not. If the property cash flows, meets your needs, and is helping you do what you want to do, then au salute.

    If you'd like some help putting the numbers down, feel free to reach out. The BP calculator is excellent, but all in all, I suggest you put down the numbers as-is; its too difficult to make a decision without having all the facts on the table.

    3Reply
  • John Zent
    OP
    Member since 2019 · 3 posts · 0 votes
    7y

    I'm a CPA so I place more emphasis on what is the equivalent of an Income Statement (truer picture) rather than a Statement of Cash Flows.

    I provided all my income and expenses related to the property above. Let me know if I missed any categories. That being said, I do agree with you on budgeting more in the maintenance/repairs category for big ticket items. And rental market is strong here, so haven't had an issue with vacancy,  but I agree I should budget half a month each year for this. All utilities are paid by tenants, including water. City fees are only $50/yr for a rental license. Regarding my time, I conservatively estimate about 60 hours per year spent on the home, and value my time at $150/hr (what I can make spending my time elsewhere).

    Here's my financials spreadsheet I maintain for this property:

    Costs/Expenses/Equity ContributionsAnnual Expenses
    Taxes3700
    Insurance1000
    Maintenance/Repairs2500
    Interest Expense (3.875% rate at current loan balance of $168k)6510
    Total Costs13710
    Rental Income21000
    Net Income7290
    Annual Appreciation (assuming 4%)12000
    Net Gain Including Annual Appreciation19290
    Annual Time spent on home -maintenance, finding tenants, dealing with city, etc. (60 hours x $150/hr)-9000
    Net Gain Less Value of Time10290
    Equity in Home (Approximate market value of $350k less loan balance of $162k less realtor selling fees of $15k, less seller's side transfer tax of $7k166,000
    ROI Analysis - Includes Opportunity Cost of Selling Home
    Net Gain compared to Equity in Home11.62%
    Apples-to-apples comparison with passive investment (factoring in value of my time above)6.20%
    0Reply
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