I made this deal 5 years ago. How bad did I do?

Question

Hello Biggerpockets,

I purchased a single family home 5 years ago for $80K. I financed it on a 30 year fixed rate loan. The rate was 5% and was financed as a owner occupied home. My monthly payment at first was $630, then jumped to $700, and finally settled at $740 before I refinanced it 2 months ago on a 15 year loan as a rental property (no longer owner occupied since I was worried about mortgage fraud) with a rate of 3.625%. My monthly payment right now is $794. The house currently appraises for about $150K. I've been renting the place out for $950 so it's paying for itself and leaving me a little extra as pocket change. I didn't pull any cash out when I refinanced and I kind of regret it because I want to invest in another property. So how did I do on my first deal? All criticism is not only welcome, it's actually encouraged.

Jeff Brower · Answer

If you decide to sell, keep capital gains in mind. You have 3 years from converting from your personal home into a rental to sell it to avoid capital gains. (must occupy home 2 of last 5 years). So if you rent it for 4 years and decide to sell, you will be taxed on the income ~150k-80k= 70k taxable. If you sell before 3 years it is a tax free gain.

Jeff Sprunger · Answer

It's hard to imagine that you have any positive cash flow if you fractured in vacancy, capex, mgmt, etc...

Thomas S. · Answer

This is poor income investment property that should be sold, appreciation may be fine but you have serious negative cash flow, rent is far too low for value of property and far too much dead equity for this to be a good income investment property.

This is costing/losing you a lot of money you are not aware of. My guess is this is losing a minimum of $500/month between expenses and equity costs..

Account Closed · Answer

Also my plan was to pay it off well under the 15 year deadline and collect rent on it for the rest of my life. Why isn't this a viable option? You guys kind of make it sound like a home has a short she'll life and you should always sell and find the next new deal. While I like the idea, I also like the idea of $950 monthly till the day I die.

Account Closed · Answer

These last few replies have really left me wondering. So just a little quick detail, vacancy is almost non existent in my area. Seriously the longest my house has gone vacant was about a week. It's a farm town and there are field workers who are always looking for a place to stay. The always pay the rent on time and take care of the place. Repairs are something I haven't come across yet, but who knows how long that will last. The home was built in 1999

Account Closed · Answer

My understanding is that payments went up due to taxes. I think Bank of America said something about an adjustment the first time it increased.Can I still pull money out of the property without having to refinance again? That refinance cost me like $5k and pretty much took away the little dent I had made to my loan in the 5 years I owned it.

Anthony Gayden · Answer

NA NA

I notice that your payment keeps increasing. You said that you did not do a cash out refinance, and that you got a lower interest rate, yet your payment increased?!?!

Is that increase all due to property tax/insurance costs increasing?

Joe Ebanks · Answer

Thomas S.    By expenses and equity costs you mean vacancy, cap ex, repairs and PITI? Am I missing any other costs?

I use 10% vacancy, 10% repairs, 5% capex when evaluating potential SFRs. How do you calculate this when evaluating a possible deal?

I am asking because I have a similar situation. My house rents for 1300 (planning to go to 1350) and my PITI is 907. I thought I am barely cashflow positive but after reading some of your posts I am wondering if I truly am.

Joe Ebanks · Answer

You can do it any way you like. I think Greg and a lot of people on here prefer to leverage their money as far as it will go. This is because they are very good at getting large returns off of borrowed money. So they will end up growing faster that way.

You have a lot of equity locked up in the house thats not bringing you a ton of cashflow. You are building up more and more equity. But still you could take what you have and purchase multiple cash flowing units that you will also build equity in.

Whatever you prefer to do! Good luck!

Amy A. · Answer

Would you buy it for $150,000 as a rental?  If not, sell it before you lose your owner/occupant tax exemption!  I know, you just refinanced...   That's a sunk cost, oh well.  Better late than never.

I would sell it and use the profit to buy 2 houses or a multiunit that cash flows better.  You have around $70,000 in equity making around $1800 per year, or 2.5%.  You an do better with bonds.  I'm assuming that the gain by mortgage pay-down by tenants is equal to the capex and vacancy expense.

I think you did very well with this investment, but it's time to cash out and move on to the next.

I made this deal 5 years ago. How bad did I do?

Most Popular Reply