This was my former primary residence. It's currently being rented out until the spring. My first thought is to sell it and move on to something better. I wanted see if there is another option I'm not thinking of (refinancing into something to have lower mortgage debt, creating more cashflow)?
The house is in good condition, no major repairs coming anytime soon. It's in an up and coming area of Milwaukee as well. On the border of Tosa, which is a hot area. Another benefit is that it's brick, so no siding replacement required. The bad, it's on a slab and who knows how old the plumbing is and electrical. Numbers below:
|Total Monthly Expenses||$1,156|
|Projected Cash Flow||-$61.49|
I think I can get rent up to $1,200/m perhaps
As you can see with the current mortgage, I'm negative long term with the Cap Ex budget being applied. Is my only way out selling? Or can I refi something, reduce debt for cash flow.
What’s bed, bath, sq ft? I’ve been following your posts and I don’t think you’re far from my SFR. I’m on 92nd and Lisbon. I think you could get about $1300/mo with off street parking, garage. I guess the basement factor takes away storage potential.
On a side note, I would like to chat sometime, you seem to be on the complete opposite spectrum as me and I think we could learn something from each other.
You need to either increase the rent or sell the property.
There is no point of holding a property like this if you goal is to create passive income.
This property is costing you money every month so you need to increase the rent or sell the property and invest your $ into something that will cash flow every month.
2 bed 1 bath. No value add opportunity here. Selling.
@William S. If you can't get your rent up, I agree you need to move on from this property. There's no sense in holding a prop with negative flow like that, really. BUT, depending on how long you have lived there and how long you've been renting, you could potentially 1031 it into new investment property(ies) tax free. OR, if you'd rather have tax-free cash and you've lived there for 24 out of the past 60 months (2 out of 5 year rule) you can take up to $250k of gain tax-free (or $500k if you're married filing jointly). Do you have any idea what the property is worth now? Depending on the appreciation and how much you still owe, Sec 121 exemption could net you a tidy little nest egg.
Or, if you know you want to keep your money in real estate, and you've been renting it out for a year or more (not the technical IRS rule, but sort the rule of thumb everyone uses), you could use a 1031 exchange to roll the value of the property into new investment properties. You have to replace the total value with at least as much equity as you currently have, however, so bear that in mind. Basically if you owe $100k and sell for $250k, you have to purchase new props that have a total value of $250k and have at least $150k in equity (since that's how much you'd have in the current prop). You can finance the other $100k (replacing your current debt), or pay for it all in cash (adding in $100k of your own cash reserves to avoid debt completely), but either way you can't exchange for props that are valued at less than $250k and you can't have less than $150k in equity in the new props ---- IF you wan to do a completely tax-free exchange. You could, of course, sell this prop and buy a new one worth less, and pay taxes on the difference. It's not usually the route people go, but it is an option if it makes sense for you.
OR, if you meet the requirements for both the 1031 and the 121, you could combine them: http://www.exeter1031.com/article_overview_1031_12...
Whether you sell it and 1031, or just take the 121 exemption, or combine both strategies, depends on the numbers and your goals. But from the info provided I don't see any real reasons to hold onto it, unless you can get that rent up.
Best of luck!
Thought I'd follow up on this post. We had an offer but it fell through. Due to the time of year, I'll have to rent it out in August.
- If I hold it, I can increase the rent to $1,200 but I'd have to do a kitchen remodel and other repairs ($15k)
- Self manage, but hire out leasing
- Find new insurance. Current rate is way too high
- This would leave me a cash flow of roughly $160/m
- Appreciation for the area would only keep up with inflation
@William S. Oooooo, I'd be tempted to keep it! Especially with your moves to reduce your expenses and bump up cash flow a bit. You describe the area as being a good bet for future growth and for appreciation. You know the area well. The pictures you have posted have the look of a solid rental property. You probably have a good interest rate on your existing mortgage (as it was your primary residence) and you have probably already built up some equity. Tap the equity through a home equity loan or line of credit and use that to finance your next purchase. Keep this little cutie that you already know and love.
The area will not get worse by any means. It's a solid area, but by no means high appreciation. It'll just keep up with inflation that's it.
Interest rate is 3.74% with 20% down. Only equity is the 20% down and maybe an extra $5k. Can I still tap into the equity/down payment to fund my rehab?
@William S. while the increased rent is good, it requires a substantial expenditure. Think about how many months of $160/month cash flow it will take to earn that investment back.
It's been a while on this thread, but I don't see any indication of how much the property is worth now. Do you have any idea? What was the offer that fell through and why did it fall through? That and how much you still owe on the loan will give us an idea of the opportunity value here. Not sure if you refi that you'll get a better rate, as rates are increasing now.
But despite those numbers, it sounds like you're just trying to force this one to work by massaging it a bit - which is usually an indication that you should move on. You mentioned that you need to rent it in August due to the time of year - is that because school starts again and people don't like to move then? What's your thinking here?
My personal thought is still that you could be getting more for your money elsewhere, especially if raising the rent requires a $15k kitchen remodel and getting to any significant (ish) positive cash flow requires that you self-manage AND find new insurance...
@William S. sorry looks like you guys were posting while I was writing lol
At your interest rate and minimal equity, you don't have a lot of options finance-wise unless it has appreciated a lot while you've owned it. To pull money out via HELOC you can only borrow a max of 80% of the home value (for primary residences, but since you're converting to a rental, likely just 70-75%), less what you owe. At this point, you still owe almost 80% unless the value has changed considerably, so you'd have very little, if anything, to draw on. Your options are similarly limited in terms of refinancing because you haven't really paid down your first loan yet and you already have a very low rate. Since you're converting into a rental, your refi rate will very likely be higher since the bank sees investments properties as higher risk than primaries.
If you have a lender you really trust you could talk with them about options but I wouldn't hinge your plan on anything miraculous happening on the bank's end.
- We had a list price offer for $127,500. I bought it for $121,000 two years ago
- Buyer got cold feet. Strange to work with
- Owe roughly $90k on the loan
- Needs to rent in August because of the weather up here. Everything is very seasonal based
- Can only find buyers and renters from May 1st - Sept 1st
- Kitchen remodel would have to get done. Cabinets are original and falling apart
- If it does not sell this year, it'll be hard to ever sell. Selling time frame is short
- Was never intended to be a rental, but may be forced into making the best out of it
- Yes. It is not an ideal situation. At this point I'm focusing on how to improve the situation as a rental.
- I do have another rental that is performing well. Originally bought as a rental is why. High cash flow and $25-$30k in equity, but I am not interested in doing a cashout refi. Saving that for a later date when major repairs are needed
- So my current portfolio looks like this
- Houshack duplex. Pays for the PITI of a 3.5% down FHA loan in a A-class area
- 1 SFH rental that performs well
- 1 SFH converted rental that isn't the greatest
- I can fund the $15k rehab with a 0% interest Credit Card that I can payoff easily before the 15 month term
@William S. Ok that makes things clearer. So you really don't have any appreciation gain to speak of and very little of the loan paid down aside from your downpayment....
It sounds like with your limited options and seasonal restrictions you may have to, as you said 'make the best out of it'. The upside is that it likely won't lose value over time, so if you will need to do the kitchen remodel regardless at least you can boost the resale value for next year. The rent rate (at $1200) is good for the price you paid, it's just a shame that you need to pour more into the prop to get there, although those improvements will increase your tax basis which will be useful if/when you sell. If it's just cabinets and other cosmetic things, maybe you can get it done for less than $15k, fingers crossed.
Another thing to keep in mind is that if you rent it out for a 12-18 months, 'officially' converting it into a rental, you could use the 1031 to leapfrog tax-free (deferred, not completely avoided) into other investment props. If you sell within the next three years, you can still qualify for the Sec 121 capital gain exemption (up to $250k if you're single, $500k if married). So there is a sweet spot where you can take advantage of both (basically after one year but before three). Just to point out that you will have additional strategic options down the road if you do end up renting it for a while.
At this point, it sounds like you will need to just massage your numbers to get to positive flow, let tenants pay down the loan for a while and then try again next year if you feel like selling is the better option. It's kind of a tough spot to be in, but there are many people in much worse situations with their accidental rentals - at least you have a way to force positive flow, even if it isn't necessarily ideal.
@William S. once again we cross-post lol
If you have a plan to pay for the rehab expense-free, then all the better. Sounds like you know what you need to do. Sorry I couldn't offer a more profitable plan of attack. Hopefully if you end up selling next year when the weather thaws you'll have had tenants paying your mortgage and maybe a little appreciation to reward you for your patience.
One thing to keep your costs low, which I'm guessing you already have thought of, is to make sure you keep up on the maintenance. Don't defer things, as they just fester and become bigger, costlier problems down the road. We try to get any maintenance calls taken care of in 24 hours, which keeps good tenants happy and our long-term maintenance costs down. Since you're going to be the landlord instead of hiring a PM, just something to consider.
Granted those pics aren't super-high res, but the place looks cute as a button. You mention cabinets needing replaced. But I also see stainless appliances, stacked w/d, subway tile backsplash... Why not just do a decent, cost-effective refresh of the cabinets and call it good? What are your reno plans with that $15K/
You're also pretty tough on yourself numbers-wise: I see you've included the $500 lease fee in your costs, and assumed an 8.3% annual vacancy rate. Will it turn over that frequently? And $1164/yr for insurance? What are your deductibles? That seems quite steep... Finally, you're factoring in almost 20% monthly for maint and CAPEX.
No one will ever accuse you of being delusional about your properties :) The trend in this thread has been for you to dump it, but just thought I'd throw these observations out there... I've never been to that area, but if, as you say, you're in the path of progress already, why not see how it goes?
Insurance is actually $72/m, but I still am seeking around $50/m from another provider.
The biggest issue with keeping it is that it's on a slab. Plumbing is original, so if I keep it long term, I'd want to update that. Who knows how much that would cost........