Should I keep my house?

Question

Hi all,

I've accidentally found myself as a real-estate investor and am seeking your advice.

I used to live in a house in Austin, TX.  When I moved away to get my MBA (no I didn't study real-estate), I decided to rent my house, rather than selling it.  Eventually I moved to San Jose, and did a cash out refinance of the Austin home to help with the down payment in San Jose (which is a MUCH more expensive market).

My question is, should I continue to rent my house in Austin or just sell it?  Here are the details:

- Purchased brand new in 2004 for $196K

- Cash out refinance in 2015 - house valued at $280k, I continue to own 25% equity ( $70K)

- Refinanced for 30 years at 4.25% interest ($210K loan)

- All in PITI is $1670 per month

- Currently rent for $1745 per month (locked into a 2 year lease with a good tenant)

- Property manager fee is 7.5% , and I'm living in CA, so PM is a must for me

There are all of the details.  I'm hoping the cash out refi was a good idea - but it enabled me to buy a great place in the Bay area.  Do y'all have any thoughts or advice for me?

Thanks in advance everyone!

Jeremy Schreiber · Answer

How would you factor in monthly equity,  plus tax benefits from interest plus property tax into the equation...  I know typically you exclude appreciation as speculation...

Gordon Cuffe · Answer

@Jeremy SchreiberSince you have a good tenant on a lease, you don't have to be in a hurry to sell. The easiest thing is to see if your tenant would like to buy it in the near future. If you do sell it then look into doing a 1031 exchange and buy where you can get the most cashflow like the Midwest. You can buy two fourplexes in Kansas City for 280k and collect 4k in rents or more. If your nervious about out of state then you could buy in fourplex in Sacramento for around 330k and collects 3200 per month in rents. Before you sell in Austin visit there as much as possible and write off the visit and have fun on sixth street.

Chris Mason · Answer

That TX property probably wouldn't have been a great deal going into it with the intent of being where you're at now, but as an "accidental landlord" type scenario, your numbers actually aren't that bad. I've seen a lot worse, to the point for example just last week that I took a wife off of a loan application because that one and only debt of hers (property in Washington state that bleeeeeeds money) completely screws up the couple's cumulative DTI (cutting their purchase power like 30%). In her case, if her lender needs to pretend the property (and her 782 FICO and zero other debts and solid income) doesn't exist to make a deal work... she pretty clearly needs to sell that thing.

If it were me, in your case with those numbers? I'd keep it if it's mostly running on auto-pilot with the local prop management folks and not taking any of my time. If value holds, I'm not really out any money and not really ahead all that much, basically a wash. If it happens to appreciate and/or rent goes up over time, cool.

Texas property taxes aren't nearly as sexy as our Prop 13 here in CA from what I understand of Texas, so that would be the only thing nudging me to unload it, depending on how aggressively the "we don't like taxes, this is Texas!" (o rly Texas? ha!) property tax assessor likes to screw me.

Sunny D. · Answer

i dont know about gilroy (feel its too far) but i will look in contra costa county

Btw send me a PM, curious on what u r doing on the job site. I did a mba from stern

Sunny D. · Answer

Jeremy

For a cashflow investor , all they care about is net positive cashflow, no of doors etc.

For someone like you who has a good job and has a good property in a market like austin that will long term appreciate with favorable demographics, you will need to think of the following positives.

1. Principal amount in ammortizing schedule (equity build up) = 300$ per month

2. Tax break for interest payments (approx $250 pm), depreciation writeoff, property taxes etc. = 350$ (conservative estimate)

3. Good tenant and chance to raise rent

Negatives:

1. Higher property tax

2. Adiitional maintaince and PM costs etc.

I would personally say keep it with the intention to sell and exchange to another investment property closeby in Sacremento area with similar cashflow but lesser taxes and chance to be closer to the property.

Sacremento has gone up a lot but the upside is less than Austin, so would only buy if its a good price. ( if you can pull off a sell higher and buy at a low price here)

Sunny

Steven Chang · Answer

If I understand correctly, $1745 less PM fees is $1614.13 income per month. That's already cashflow negative, but assuming you're also covering insurance/property taxes/repairs (but not utilities), on average you'd be losing a few hundred per month.

Sounds like it's not worth holding.

Account Closed · Answer

@Gordon CuffeWhere are the 4plexes in Sacramento going for $330k? If that's the case, please PM me.

Account Closed · Answer

Gordon makes a good point. I would say if you're already managing from afar, and you aren't cash flowing... sell the property, get your 60k or so of cash from the deal, and purchase a couple of properties in the midwest. The only comment I would make about Gordon's suggestion is the nature of the fourplexes. Although you can find that deal, it will be of an asset class that will require a bit more sweat/stress on your part to service. Even if you hire a PM, you may have to supervise them a bit to make sure things are going smoothly.

Even if you're a very conservative rental property owner, though... you can still buy two 150k homes from a turnkey provider that are likely to be B to A class, require little management, and comfortably provide you with a 12% yearly cash on cash return. The equity ROI will be higher considering the appreciation (3% for a decent property in the midwest is a fairly safe guess) plus debt paydown.

Furthermore... considering the state of the current market... I wouldn't rely on appreciation in hot markets (like austin). Sure, it will appreciate well long term... but in the most immediate future it is likely to contract moreso than less volatile markets. I know housing values places like KC and Indy were not hit very hard at all during the 08 crash, so if you feel that we are in a toppy place right now... you can put your money in something that wont dip fast. Then, if things are low later on, you can move your funds over to a hot market that will get you that better appreciation. Lose small during down cycles, win big during up cycles!

Jeremy Schreiber · Answer

Thanks everyone!  I'm amazed at how great this forum is!

It sounds like the concensus is that I should hold while I've got my good tenants and observe how the market moves over the next 2 years.  Then I should consider if there are better (higher cash-flowing) opportunities closer to home (and with lower property taxes).

BTW on a slightly different note...   In my head I'm confusing a few topics financially.  Can someone point me to a good resource here on the BP forums to clear things up? See my confusion below:

From a P&L perspective, as a company,  I have profit (or loss) = revenues (rents) - expenses (maintenance, depreciation, property taxes, mortgage interest, property management, etc).   Then I subtract the income tax based on that income to see my final profit (perhaps on a monthly basis).   However if I look at things from a cash-flow point of view,  I don't look at depreciation, but rather actual mortgage cost.  And somewhere in here, I get a deduction for taxes on mortgage interest and property taxes.    I've got a halfway decent spreadsheet I've built that examines both scenarios, but I feel like I could use a sanity check (or better yet - someone else's spreadsheet that factors in everything already!).

Can anyone point me to a good template that is comprehensive, factoring in tax deductions, etc?

Fred Heller · Answer

@Jeremy Schreiber

I would hold on to it during the lease. Retail buyers aren't going to be too interested in buying a house with tenants in place. And rental investors won't spend $280,000 for a house that only generates $21,000 in income.

Should I keep my house?

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