investment question(s)

[Paul Gimbel]

Okay BP here we go. I’m going to put this out there from the beginning. As you read this post understand that I'm at the stage before the beginner. I think that's either still in the womb or inside the egg. Either way, I do not currently have any real estate investments except for the house I currently own which is the main topic of this post. I have always been fascinated with real estate but like many considered it to be out of my reach. That's before Rich Dad Poor Dad and numerous BP Podcasts (they are amazing by the way). I have decided to venture into the realm of real estate, specifically buy and hold for long term stability. I've decided to map out a strategy to purchase my next home with an FHA loan with the expectations of living in the home for at least one year and then renting the house. I'm 36 years old and have an extremely secure job in Law Enforcement. I'll try to keep this short and concise but want to give the readers all the information at this point.

As I listen to BP podcasts and ponder my next move, I started thinking about using my current residence as my first investment property. I figure, I already own it and don't want to live in it anymore.

Here's the situation:

I currently live in a very good section of Philadelphia, PA known as Pine Valley, area code 19115, and want to move out of the city by September 2014 for schooling reasons. My house is a 3 bed 2.5 bath split level and is approximately 1,600 sq feet. I currently owe $185,000 on my home and have recently consulted with a Realtor to list my home after the snow clears, which should be in 3-4 weeks (late February 2014). [Side note: In my quest to gain knowledge I just signed up for classes to obtain my real estate license as well. Figure it can't hurt.] After speaking with the Realtor we decided that based on the market we should list at $319,000. If all goes well with this situation I would need to sell the house for around $309,000 to literally break even. Not bad since I purchased in August 2006. However, after listening to BP and reading posts my mind has been racing out of control.

My Thoughts:

I purchased the house in 2006 with every expectation that I would die in the house. Since 2006, I replaced all three bathrooms in the house, refinished the hardwoods, rugs, hot water heater, air conditioner, added pavers in the rear patio, replaced all windows and the list goes on and on as I’m sure everyone can imagine. Spending money on your house is nothing when you intend on living there forever, but things change. I started doing some math: I have been paying mortgage payments since 2006 which amounts to approximately $169,100 in total payments (this doesn't seem correct but I figured my average mort payment since 2006 was 1,900 and I made approximately 89 months of payments x 1,900 (month) = $169,100) CRAZY!

So after all of that, I will go to closing for the sale of this house and break “even”, or might even need to pay $2,000 at closing it the offer is short. Doesn't seem even to me.

Now, my mind is going and I'm thinking how I can salvage what I have built (what have I built, a mess?), a beautiful house in one of the most desirable neighborhoods in Philadelphia, PA. How can I turn this break even deal into a deal that will make me money. So at this point, obviously I'm thinking about renting my house instead of selling it. My monthly payment is 1800 (PITI, hopefully I used that correctly) and I believe I may be able to rent it for 2000 a month which would give me a positive cash flow of 200 dollars. Not that bad, right? This is actually a question? I'm not sure. On one of the Podcasts a Vegas investor was aiming to break even and speculating on the future growth of the market. When I was listening to that Podcast I thought, no way would I ever try to break even. I want cash flow. But now, faced with my current situation with my actual money tied up in the deal I am looking at it totally different.

Consider this, I rent for 1800 and cover my mort payment (realizing that this is not giving me any cash flow or money to set aside of repairs and maintenance). I will still be preserving this asset for future sale (not sure this is correct). Additionally, if I can get the principle down to 200,000 I can refinance the loan and start producing cash flow from rental income. Also, I would then be able to pull a line of credit from the property to purchase an additional property. I will need to pay for repairs with my own money and believe that this as an investment since it should yield a return in the future. If I put aside 300 dollars of my own money a month to build up an escrow account that will be used (or not used at all) for repairs, $3,600 a year for a total of $36,000 in ten years. Even if I spent all that money (which I can't imagine I would since I did not spend that money over the last 7 years for damages/repairs) I would be in a good position in ten years since the mortgage would be paid down to an amount that would allow me to refinance and create a positive cash flow or pay more principle.

BP, I decided to take a leap today and post this without worrying about what is right and wrong. I’m being honest about my knowledge and the best part is that I have not committed to this plan yet. I'm tired of talking to people that don't know what's good and what’s bad, what’s wrong and what’s right, and I'm sure that I'm not the only one who ever had these thoughts. Be gentle everyone, this is a look into the mind of a beginner. I'm sure when I look back at this post and read it in a few days, months, years, I will be laughing at myself. Either way, I got off the bench, I’m in the game (or at least the arena) and maybe this will help someone else out as well.

Summary:

My House: 3 Bed 2 1/2 bath split level. (App 1600 sq feet)

List price: $319,000 (I owe 185,000)

What I believe it will sell for: $309,000

Gain on sale: ZERO or -$2,000 money need at closing

Money into property: Mort payments: 169,000, Upgrades $50,000= $219,000

Let the voting begin. Feel free to add options.

Option #1:

Proposal: Rent house for 2000 month creating 200 cash flow or rent house for 1800 a month to break even and hopefully market will pick up. Risk: No cash flow to save for potential repairs, vacancy, etc. Refinance in 5-10 years to reduce mort payment, increase/add cash flow and pull line or credit to purchase property. Long term goal, hold property for rental income with the option to sell property when it's paid off and use money (hopefully 300,000 to purchase another investment house or retirement home)

Option #2: Cut my losses and sell the property. Consider myself lucky that I can actually sell my property since I purchased it in August, 2006. Break even or bring 2K to closing. Start investing with the next property. The money is made on the purchase.