RE Portfolio Advice

7 Replies

Here's my current portfolio. I’m looking for advice on whether to sell and move into better cash flow properties:

Property 1: Florida SFR 3/2 (paid: $183K, worth $121K; rents for $925/mo.; own F&C).

Property 2: Florida SFR 4/2 (paid $234K, worth $175K; rents for $1000/mo.; outstanding mortgage = $164K @4.5% Fixed 30 year).

Property 3: Florida SFR 4/2 (paid $169K, worth $200K; rents for $1300/mo.; own F&C).

Properties 1 & 2 were acquired with lease options in place near the height of the RE bubble in '06 and '07. Fortunately, I received large upfront option payments and monthly payments with built in cash flows (approx. $200/per month) for the first 2 years of ownership which helped mitigate losses on these properties. The purchase options expired after the bubble burst and I turned these properties into rentals. The values have risen but will likely never return to the price paid. Lots of lessons learned here...

Prop 3 was acquired in 2004 before the bubble and has been rented out for the last 6 years continuously with the same tenant at $1300 per month.

With depreciation, mortgage, taxes, insurance, maintenance, etc., these three properties break even on an annual basis. There's not much opportunity to increase rents or reduce costs on any of these properties at this point. 

I've been content to keep these properties rented out, managing the properties myself to at least break even, while the FL SFR market increases in value. I'm not sure these values will increase much more so I'm contemplating selling all three properties and re-investing in better yielding properties closer to home (Indiana).

I appreciate any thoughts...what would you do? 

What are your goals?  Are these properties helping you to achieve those goals or not?  Could you afford to sell them and bring cash to the table?

Personally, I think all three of these deals are horrible, but that's based on my criteria for rentals. If you're losing money every month -- or have a very low CoC return -- it may be better to sell and start over. But, if you're achieving your goals, that's what matters...

Thanks for your reply. My goals are to generate at least $50k in net income annually within five to seven years. I'm inclined to sell and start over b/c I won't get there with these properties. What's your rental criteria?  2% rule is tough to find here but 1%  seem to readily available. 

@John P.  welcome to BP!

If you sell and start over, it sounds like you will loose a considerable amount of money?

If they are breaking even and won't hinder any future acquisitions - I would suggest to keep them and see if the market appreciates.

I am also curious what types of properties and what return you anticipating to generate $50k annually with five properties?

Originally posted by @John P. :

Thanks for your reply. My goals are to generate at least $50k in net income annually within five to seven years. I'm inclined to sell and start over b/c I won't get there with these properties. What's your rental criteria?  2% rule is tough to find here but 1%  seem to readily available. 

 Personally, I like to see at least 12% unleveraged returns and 15% leveraged returns...

Selling properties 1&2 would result in a loss of approx. $150k. Your cash back would be a loss of about $50k. Do you have that to bring to the table? This is a tough position and must be chalked up to an expensive education. Property 3 has equity and if it is break even cash flow or better on its own, you have options.

You should consider doing all the math, seeing what cash you would have left after liquidating and how much you have and could have by keeping, pulling equity out and reinvesting those amounts. Once you have both equations side by side, you can better realize which option would be better. I would choose the option that provided the ability to increase returns (obviously) and that may be a combo of selling 1-2 and keeping 3.

Thanks Shaw, J Scott and Will for your responses...

Shawn - True, but I feel that all I can do now is try to position myself for future success. If values are likely to rise you are right but I believe real estate values for these properties are not likely to increase much. It would seem wise to start over with the available equity and find properties under valued with good cash flows. In the current environment, I believe I could reach $50K in net income in 5 years if I can find properties in the $50-$70K range that could rent for $900-$1000 per month. I'm estimating that I would need around 10-12 SFRs to achieve that goal. 

J Scott - Thanks for sharing. I would be extremely happy with that cash return as well. What types of properties are you finding that meet that criteria?  

Will - Thanks for sharing your thoughts on how to evaluate the options. To clarify, selling properties 1&2 would net approx. $135K before fees (I own both props free and clear and have an outstanding mortgage of $161K). Selling all 3 properties would give me $335K to re-invest.  

All - What's your sense about property value forecasts? Do you anticipate another bubble?  It doesn't seem as bubbly as '06/'07 but values have bounced back from recent low's and some are predicting another bubble not to mention what the EU sovereign debt crisis might do to asset prices across the board if/when it spreads to the U.S.  

Originally posted by @John P. :

J Scott - Thanks for sharing. I would be extremely happy with that cash return as well. What types of properties are you finding that meet that criteria? 

 

In my area, it's not too tough to find single family houses in decent areas with these numbers.  Not nearly as easy as it was a couple years ago, but the deals are still out there if you're willing to look hard enough for them.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here