Long Term Rental - Would you keep it?

36 Replies

I am trying to decide whether or not I should keep a single family home or sell it and am looking for advice. Here is the background story.

I bought this house as my first home borrowing the down payment from my parents at 3% and I only paid the closing costs. It was both a live-in-flip and house hacking home. Since then I have bought a new house, another live-in-flip, with my new wife, but we will not be house hacking this one. In order to do this, we used a line of credit on my old house to buy the new one with the intention to sell the old one, however, I am now reconsidering, even though it wouldn't meet the 1% rule and won't cash flow. Here are the current numbers:

Original Purchase Price: $156,000

Current Value: $225,000

1st Mortgage Lien: $116,000

Line of Credit Lien: $60,000

Parents Lien: $15,000

Rent: $1,400 / Month

If I sell it, I could pay off all the liens and my student loan ($15,000) and we would be debt free less our current primary mortgage... something to consider as I would like to be purchasing another flip in the next few months which may help boost my credit ability. Or I Refinance the current 1st and line of credit:

New 1st Mortgage: $168,750 - 4.5%, 30 Yr Fixed, 0 Points, $855 / Month - I'll pay the $7,250 to pay the difference between the new loan amount and the original 1st and line of credit. 

Parents Lien: $15,000 - $625 / Month - 3% - Paid in Full 11/2017

Therefore: 

Rent: $1,400 / Month

Mortgages: $1480 / Month for 2 years, then $855 / Month

HOA - $50 / Month (Includes Trash)

Taxes & Insurance: $140 / Month

So, do I sell it and become debt free less my mortgage and buy BRRRR properties in the future, or do I keep it as a long term wealth building investment that won't cash flow?

What kind of wealth will you have if you have negative cash flow.  That's like playing poker with a bad hand...and you still keep adding to the pot.

Sell it, and get another property to replace it that WILL have positive cash flow.

As far as future wealth, the new property will replace this one's potential, but it won't steal parts of it from you due to the NC F.

I dunno. Selling it and paying off all of your debts seems like a much better path than keeping it. Even after you've paid back the downpayment it's still marginal from a cashflow standard (146k financed and 1400 GRM). Get free of all debts, and buy an investment property for the purpose of renting it out. That's what I'd do.

It wasn't no money down--your parents put the money down. They gave you an under market rate loan to purchase your residence. How do they feel about financing this as an investment property? Have you asked them? Do they need the money back? Is there something they put on hold while they helped you out that they could use the money for? Shouldn't you ask them?

Why wouldn't you take the 7.5k that you currently have, pay it against the 15k lien to parents, keep the mortgage and LOC in place as is, and re do the amortization on the15k lien (now 7.5k) so you will cash flow positive from day 1, take advantage of full tax deductions, enjoy the appreciation and avoid unnecessary commissions to 3rd parties?

@Jeff Rabinowitz

My parents did put money down, however, it is a no money down deal from my perspective. It would be no different from seller financing the entire purchase price. And to answer your question, I have talked to my parents and they don't care what I do, as long as they get paid back in full in the next couple years. 

@Assaf Arie

The line of credit I used was a bridge loan with a set expiration date, meaning I need to refinance the line of credit or sell the house. Also, my 1st is on a 5 year arm that will be up in another year and half, so refinancing is likely in my future anyways and I would want to put in on a 30 year fixed. 

Also, If I wanted to, I could pay my parents lien off today, however, at 3% interest, I would rather put that money toward another property. Not to mention my parents lien is unrecorded. Or I would at least pay off my student loans which is recorded on my credit at $15,000 and 6.75% interest I believe.

I am also a Realtor so my selling costs are greatly reduced with only having to pay 1 commission. And I may have a buyer interested who is not represented which means no commissions if they go forward with the deal.

I would look at this a little differently.

You took out a $60k HELOC on the old house to buy the new one. That is an expense for the house you live in, even though you borrowed against the old house. When looking at cash flow, the payment on that $60k is a payment towards the house you live in, not towards the old house, because that is what you used the money for.

Personally, that is how I look at things. Of course, that raises your mortgage expenses for the house you live in.

Originally posted by @Brandi Carballo :

I would look at this a little differently.

You took out a $60k HELOC on the old house to buy the new one. That is an expense for the house you live in, even though you borrowed against the old house. When looking at cash flow, the payment on that $60k is a payment towards the house you live in, not towards the old house, because that is what you used the money for.

Personally, that is how I look at things. Of course, that raises your mortgage expenses for the house you live in.

Rationalization. Most expensive word in the REI vocabulary

@Joe Villeneuve I agree, lol. However, that is how I look at my expenses. Rents from all of my properties put together minus all of my expenses cash flow nicely. 

I would definitely use a HELOC form property A to buy property B. But that HELOC payment is an expense for property B, not property A. That is just the way I handle my expenses. I would analyze the property based on that.

I'm a CA guy and as such I focus on value add over cash flow ... even so, with that context being said, negative cash flow = sell on everything except a primary residence. That's my 1st pass filter, which your property doesn't pass.

For my 2nd pass filter, I take the property value, subtract out capital gains taxes and transaction fees to sell it. Then, I ask myself, if this house were for sale in the same neighborhood with that adjusted number as the sale price, would I buy it as an investment? If you wouldn't buy it, then you should sell it.

BTW, I did a similar thing with my former bachelor pad: rented it out rather than selling and bought my next place. This was 2009, though, and I passed the 2 filters described above, and it turned out to be the right move. However, in 2015 the property no longer meets the second filter, so I'm selling ... time will tell if this is the right move, but I feel good about the decision applying this logic and the net result is profit so even if it is not the optimal move I still can't complain too much.

Lastly, I hope that if you do sell it is within a time frame where it was your primary residence for at least 2 of the last 5 years ... if so, it is a nice capital gains tax break for you and worth considering for timing purposes.

@Colin Smith   all I can say is the tax free gain on Perosnal resi is the best tax treatment in the US.. Mr.  @Steve Vaughan is absolutely correct on this.

If I look back on my 40 plus years of just owning homes that I lived in   in the SF bay area and Portland Orygun.. I have made well over 2 million tax free when I sold one resi and moved to the another. it is the primary driver of my success in the RE business

And why I am a appreciation addict not a cash flow addict if that make sense.  Plus I like to smell the roses and I like high risk High reward ventures like building new homes LOL

@David Faulkner

I like your two filter test. Do you have a filter on minimum positive cash flow, ie, a minimum % return? If so, what is your minimum? 

@Colin Smith I would jump on any opportunity to go debt free (mortgages excluded). I did that and am very happy. 

But with school debt, you might wait around and see if the Gov (translation: taxpayers) will pick up the tab. I wouldn't be surprised to see this proposed leading up to the 16 elections. 

@Larry T. in the right area I would make that 225k purchase for 1400 rent all day long I had about 20 of them... selling them all right now.. they basically broke even I took the write offs some of them substantial as it was go zone and they have appreciated and I am getting nice profit checks.. that are bigger than if they cash flowed 200 a month and never went up and my tenant base was one and is one I can have my secretary manage I need no PM because of the quality of the homes and areas. And a few have gone up 50% or better..   I think the whole appreciation to cash flow debate is regionalized. and depends on your financial capability starting out. And your tolerance for dealing with the ups and downs of landlording.. I am retiring from landlording myself.. and moving to Cash flow debt much easier and less drama.. although one does need to be smart about it.. its not like its guanranteed either  LOL

Originally posted by @Jay Hinrichs :

@Larry T. in the right area I would make that 225k purchase for 1400 rent all day long I had about 20 of them... selling them all right now.. they basically broke even I took the write offs some of them substantial as it was go zone and they have appreciated and I am getting nice profit checks.. that are bigger than if they cash flowed 200 a month and never went up and my tenant base was one and is one I can have my secretary manage I need no PM because of the quality of the homes and areas. And a few have gone up 50% or better..   I think the whole appreciation to cash flow debate is regionalized. and depends on your financial capability starting out. And your tolerance for dealing with the ups and downs of landlording.. I am retiring from landlording myself.. and moving to Cash flow debt much easier and less drama.. although one does need to be smart about it.. its not like its guanranteed either  LOL

Good point. I would too if I was confident of the appreciation. Definitely a much more lucrative play. I've been waiting for you to show me how to evaluate markets. It's definitely not here, I know that much.

Originally posted by @Colin Smith :

The gain would be tax free at this point in time. And I did make $30k in rents while I lived there, so it certainly hasn't been a bad property, I think the part that is getting me is trying to sell a house that I got for no money down.

 Just to be clear 'tax free' is conditional, so don't read the above as being absolute.

The IRS says clearly:

  1. If you have a gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income. You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home, provides rules and worksheets. Topic 409 covers general capital gain and loss information.

In high property value locations, this easily becomes an issue.

Originally posted by @Jon S. :

@David Faulkner

I like your two filter test. Do you have a filter on minimum positive cash flow, ie, a minimum % return? If so, what is your minimum? 

My minimum is, well, positive (greater than zero) after ALL expenses are estimated conservatively on day 1 of its life as a rental. Some months will be negative, most will be positive, and the net should be positive. Keep in mind, though, in my market and strategy I'm not counting on positive cash flow to make my profits, it is more like an insurance policy so I can afford to hold it through thick and thin if I need or choose to. In the example I gave, this was a SFR in a class A neighborhood in Southern California ... I made hardly anything on cash flow (it wasn't negative, though) but hundreds of thousands in capital gains. This goes against the grain of what most on BP advise, but it works for me ... if I were investing in Michigan, it would be a different story and my strategy and advise on minimum cash flow would be completely different. To generalize, positive cash flow for safety, then consider ALL of your sources of profit (value add, mean reversion to historic price & rent trends (which could help or hurt you),cash flow from rent, etc.) and timeline to determine if the TOTAL investment returns over the complete life of the investment and if that total profit looks attractive compared to the risk then pull the trigger ... much like how a multi-family investor will project cashflows throughout the lifetime of an investment and compute IRR.

I would say if the house isnt in the 2% rule or the 1% rule or in an amazing area I would sell. Tax free money plus pay off your depts that's a great incentive as well. If you're looking for cash flow try finding a better deal or another house in a different area. Seems to me your money would be best elsewhere.

@Larry T.  in your market I would do,  and invest,  exactly how you are doing it.. CASH FLOW only .. when your in a market that basically has more homes than people there is not price increase to speak of and the value of the assets is more commercial in nature IE Cap rate driven.. what will an investor pay for that cash flow.  I started my now famous thread ( 2% rule kills values) based on this very premise.

Most of what I see in these areas the homes could never be replaced for what you pay for them so new construction is out.

I was in Milwaukee last summer and looking at some absolutely stunning 1930's and 1940's craftsmen homes that would be well over 1 million in our market and they were 60k and would cost probably 500k to replace... this is the same in virtually every market in the upper mid west and other parts of the mid west as neighborhoods turn from owner occ like they were 30 years or more ago to rentals... and they will NEVER return save the little pockets that are right by down town areas and developer with VERY deep pockets come in and  re- gentrify.. this is playing out in most big cities for sure.

ON the West coast were we do NOT have enough houses for all the people's that live here,   values hold by and large,   Very few SFRs are bought as rentals in comparison to mid west rust belt.. So the values hold and increase to at least replacement value and above.