Rental property expenses increasing-- time to sell?

[Mica Moore]

I own a single- family home in Corpus Christi, TX. The taxes & Insurance ( combined) have gone up $200 a month since the lease was signed. I don't think the market would bear a $200 increase in rent ( when lease goes month to month), but $100 increase is possible.

The monthly net cashflow is now about $400 a month ( down from $600). The $400 net does not take into account repairs, capital improvements or vacancy. The property is 21 years old and there will be capital improvements coming soon ( new roof - $10K, maybe new HVAC $10K).  

I bought it for $165K in late 2021 & current market value is about $185K. I owe $40K on the loan & it has a high adjustable rate of 10.5% & rising ( started out at 8%).

What I'm wondering is if I should sell or keep the property. Is there a spreadsheet or calculation I could use to see how much profit I'm making vs. how much expense it incurs? I don't think this house is going to appreciate much & the older it gets the more updates it will need. I will say that I have an excellent tenant who has been there for 2 years & no problems.

[Jacopo Iasiello]

Hi Mica. It sounds like you're facing some significant financial considerations with your rental property in Corpus Christi. Here are some steps and considerations to help you make an informed decision:

1. Evaluate Cash Flow: Create a detailed spreadsheet that outlines all income and expenses associated with the property. Include not only the mortgage payment but also taxes, insurance, property management fees (if applicable), maintenance costs, vacancy allowance, and any planned capital improvements. This will help you understand your current net cash flow accurately.
2. Consider Future Expenses: As you mentioned, the property is aging, and there are upcoming capital improvements such as a new roof and potentially a new HVAC system. Factor in these anticipated expenses when assessing the property's profitability.
3. Assess Market Rent: Research the current rental market in Corpus Christi to determine if you can realistically increase the rent to offset the rising expenses. Look at similar properties in the area and see what they are renting for. If a $100 increase in rent is feasible without risking losing your excellent tenant, it could improve the property's cash flow.
4. Evaluate Loan Terms: Your adjustable-rate mortgage with a high interest rate is a significant consideration. Determine if refinancing to a fixed-rate loan with a lower interest rate is possible and would improve your cash flow. Be sure to consider any refinancing costs and how they would impact your overall financial situation.
5. Analyze Appreciation Potential: While you mentioned that you don't expect significant appreciation in the property's value, consider the long-term appreciation potential of real estate in Corpus Christi. Research historical trends and economic indicators to gauge the area's growth potential.
6. Consult with Professionals: Consider consulting with a real estate agent or financial advisor who is familiar with the Corpus Christi market. They can provide valuable insights and help you assess your options objectively.
7. Use Investment Analysis Tools: There are several online tools and spreadsheets available that can help you analyze the financial performance of your rental property, including cash flow calculators and investment property analysis templates. These tools can provide a comprehensive view of your property's profitability and help you make data-driven decisions.

Ultimately, the decision to sell or keep the property will depend on your financial goals, risk tolerance, and the property's performance relative to your expectations. Taking the time to thoroughly evaluate your options and consult with professionals will help you make the best decision for your situation.

[V.G Jason]

Quote from @Jacopo Iasiello:

Hi Mica. It sounds like you're facing some significant financial considerations with your rental property in Corpus Christi. Here are some steps and considerations to help you make an informed decision:

1. Evaluate Cash Flow: Create a detailed spreadsheet that outlines all income and expenses associated with the property. Include not only the mortgage payment but also taxes, insurance, property management fees (if applicable), maintenance costs, vacancy allowance, and any planned capital improvements. This will help you understand your current net cash flow accurately.
2. Consider Future Expenses: As you mentioned, the property is aging, and there are upcoming capital improvements such as a new roof and potentially a new HVAC system. Factor in these anticipated expenses when assessing the property's profitability.
3. Assess Market Rent: Research the current rental market in Corpus Christi to determine if you can realistically increase the rent to offset the rising expenses. Look at similar properties in the area and see what they are renting for. If a $100 increase in rent is feasible without risking losing your excellent tenant, it could improve the property's cash flow.
4. Evaluate Loan Terms: Your adjustable-rate mortgage with a high interest rate is a significant consideration. Determine if refinancing to a fixed-rate loan with a lower interest rate is possible and would improve your cash flow. Be sure to consider any refinancing costs and how they would impact your overall financial situation.
5. Analyze Appreciation Potential: While you mentioned that you don't expect significant appreciation in the property's value, consider the long-term appreciation potential of real estate in Corpus Christi. Research historical trends and economic indicators to gauge the area's growth potential.
6. Consult with Professionals: Consider consulting with a real estate agent or financial advisor who is familiar with the Corpus Christi market. They can provide valuable insights and help you assess your options objectively.
7. Use Investment Analysis Tools: There are several online tools and spreadsheets available that can help you analyze the financial performance of your rental property, including cash flow calculators and investment property analysis templates. These tools can provide a comprehensive view of your property's profitability and help you make data-driven decisions.

Ultimately, the decision to sell or keep the property will depend on your financial goals, risk tolerance, and the property's performance relative to your expectations. Taking the time to thoroughly evaluate your options and consult with professionals will help you make the best decision for your situation.

These AI generated posts need to chill.

Why did you buy an adjustable rate during 2021 and you realize as the property appreciates your taxes will too, and insurance is likely going to also(cost to rebuild)? You need to properly underwrite when you do deals.

If you think PITI stays flat, that's naive--thinking it means you're property did not appreciate and net depreciated against inflation. You need to re-fi into long-term debt or sell it, and start investing differently. You have a lot of equity in it, so think possibly 1031'ing it makes sense.

[Theresa Harris]

The fact that you have 8-10.5% interest rate and still cash flow is impressive, but I'm guessing part of that is because you put a lot of money down.  To decrease costs, what about increasing the deductible on the insurance, can you refinance at a lower rate and pull some money out? or run the numbers if you paid it down.  

You bought it about 2 years ago knowing some of the upcoming expenses and should have budgeted for those.

If you sold it, you'd break even and wouldn't make any money on the house itself after your expenses.  What would you do with the equity and would it give you a higher return than you are seeing now?

[Jeff S.]

@Mica Moore the question is why did you buy this property. If the reason you bought it has changed then changing the situation could make sense. If everything is the same then stay the course.

[Bill Brandt]

Sell for $185k, net about $165-$170k and break even. The 10% doesn’t really matter on only a $40k loan, but your real problem is savings rates. You take the $125k you’ll have left after paying off $40k and put it in a 12 month CD. You’ll probably get more than 5%. But even at just 5% you’ll make $6,250/yr or $520/mo. You’ll increase your cash flow/income and reduce your risk. 

[Henry T.]

If appreciation looks bleak, sell and put in a CD like Bill says. You'll do better short term. Why the hassle and exposure for so little return?  Nice that you presently have a good tenant. Maybe find three beaters that would appreciate and cash flow better? I don't know.  Isn't there room to raise the rent? That usually works for me.

[Henry Lazerow]

Hold it. Rents have been increasing like crazy all over IL so I assume is increasing in Texas also which is more of a growth state. You can also shop around insurance, different providers often give very different quotes. 

[Mica Moore]

Quote from @Jeff S.:

@Mica Moore the question is why did you buy this property. If the reason you bought it has changed then changing the situation could make sense. If everything is the same 

I had thought I responded to this - but apparently it didn't post. So I bought this house for me as personal residence & did live there the 1st year. I bought it with cash but months later got a HELOC on it for some upgrades & other expenses. So that is why the rate is higher/adjustable & not fixed ( I still have a line of credit that I could draw on if needed). There was never a 1st mortgage since it was a cash deal. The HELOC has always been the 1st position & only loan.

I had a change of plans where I needed to move away from the area. So I hired a PM and turned it into a rental in late 2022. At that time I was not sure if I would or wouldn't move back to Corpus Christi & live in the house again. I moved out of area and in late 2023 I bought another house ( financed) in my new city & it is my primary residence. I will not be going back to live in CC, and I expect to live in my current location for a long time. 

The tenant has been the same one there the whole time ( since 2022) & will likely want to renew again in the Fall. She has been a model tenant so I had no qualms about renewing her lease. However, since I'm kind of an accidental landlord, Im not sure if I should hold or sale.