Thanks for the advice - although I left out some info. First, the property is new construction - and is less than 3 years old so I’m hoping I wouldn’t have to replace anything for a while. Second, I have a 30-year fixed at 7 1/8 and the association fee has only gone up 5 dollars so far.
I bought the place for $122,000 and then did a dumb thing by putting too much into it - I added $14,000 of upgrades so my bottom line was $136,000. The property is now worth $142,000. The area is “hot” according to the realtors I’ve talked to. I would like to keep it but since I’m violating the number one rule of real estate investing (which is never to buy or hold a property with a negative cash flow), I’m wondering if I would be making a mistake by keeping it.
I live in a 2 bed townhouse and will be moving into a bigger home soon. I would like to rent out the townhouse and add it to my beginning portfolio, but when I do the numbers I get a negative cash flow of $10 a month. The property is in a nice area and would rent for $1200 a month. Expenses and debt are $1210 a month. I calculated I would have to manage it myself as well so I don’t lose more than $10 a month. The property is in a fast appreciating area and has gone up 5% each year. So, should I keep it and put up with the small negative cash flow or should I dump it?
If you are going to need to qualify for a loan on your new residence the existing loan can effect you. Only 75% of income is credited while 100% of the debt is charged to your ratios. You can get around this if you sell on contract. Many lenders will not include it in your ratios if you sell on contract. You may need the ability to borrow if you find a single family investment house at 65% for all cash.
Are you prepared to properly screen the new occupant. A bad tenant may not pay, force eviction, and trash the place. What was a small negative can turn into months of no payments whatsoever. Is there a home owners association that could raise dues or do a special assessment in the next few years? Are there and items that will needs replacement or maintenance in the next few years. AC, dishwasher, roof,or carpet(3-5 year life on rentals)
The plus side is that the tenant pays down the loan, the property appreciates, and the goverment says that in less than 30 years the place will be worth nothing. Short term renting may be required, like L/O’s, to accomplish a sale. Look at all the benefits and all the drawbacks to make a decision.
Re: Should I Keep or Dump My Property? - Posted by Glenn OH
Posted by Glenn OH on February 28, 2000 at 08:33:44:
I would consider a PACTrust. Get the depreciation, eliminate the management and expenses, raise the income (rent dollars are after tax, resident pays more to you instead of the taxes), participate in appreciation, and when the resident wants to buy do a 1031 exchange for another investment. If your interest rate is really good, make the PACTrust longer termed, and you will both benefit. Perfect for a Win/Win situation.
Posted by Rick W. on February 28, 2000 at 07:21:39:
Frank
Drew’s post had some good advise, as far as depreciation and appreciation goes, but there are other considerations that make this a good “Keeper”.
In addition to the tax savings Drew mentioned, you have deductable interest and property tax expenses. Plus, the principal on the existing mortgage should be reducing as well. Along with that, you may indeed have the property financed at an interest rate that is below market, compared to what is available today (I have mine on a 6-3/8 fixed, 15 yr. amort. - eat your heart out guys). If that is the case, you would be able to “Wrap” it in the future if you did want to sell it.
Unless there is a great amount of cash to realize from a sale, I’d suggest you keep it. You can always sell it in the future if you choose.
I had to ask since that is the mistake I once made. After figuring the tax savings from depreciation my cash flow looked better. Plus, if you raise the rent by 3% next year the negative cash flow is gone (forever!).
You also have to realize that you are gaining equity not only by appreciation, but by your tenants being so kind as to pay off your mortgage for you.
I’d hang onto it since it will cost you money to dump it.
Re: Should I Keep or Dump My Property? - Posted by Andrew Gray
Posted by Andrew Gray on February 28, 2000 at 06:23:19:
You could lease/option it. This will solve the chshflow problem and you can get top dollar for it. If they don’t execute the option then you have the capital gain, the option deposit and the chance to do it all over again.
You should seriously consider keeping the house. If you consider $120 over a 1 yr period vs. the appreciation you say will occur plus the potential for a “nuisance” increase on the rent of up to 5% this should more than cover the inconvenience pending any factors not mentioned.