What's the best way to proceed?

Question

Ok, here is my background:

My wife and I live and work in Qatar and have since 2006.  Our family income is around 140k, with housing provided here and no other debt (besides the house mentioned below) we keep about 100-110k of that as Net income.  We also have no Tax burden at all.

I just purchased my first investment home Aug 2007 and had renters move in almost immediately, we get $1100/m with $88 of that going to the management company.  We paid $225000 for the house, we financed 168k of it at 6.35%/15yr.

Here is my question, with our current family income I can pay the house off completely by June 2009 (This has been my goal but have been re-thinking thigs), is that the right move?  If not what should I be doing instead?

Shawn Massengill · Answer

Well, I should have prefaced this a bit...lol

For us, this is our Main U.S. House...a safety home of sorts in case anything kicks off in the region and we need to leave.  We picked it as something we would live in ourselves (good schools, good location, close to family..etc.)  So, technically not an investment home.

But, with our high level of disposable income and our plans to stay 5 more years in Qatar, I though that investing in RE might be a good avenue...especially with the falling prices of homes.

So, with that kind of income, what would YOU guys do as far as Real Estate investing?

(BTW, Investing in Qatar is not an option...they do not allow non-qatari investors)

Cyrus Uible · Answer

I would probably agree with the suggestion to sell the property.  Even when it is paid off completely you will probably only be cash flowing $750/month (high estimate) after expenses which works out to about a 3.75% annual return on your money given that you will have invested $240K in the deal.  (225K + interest + taxes)

Unless this house is in a prime location and you plan on keeping it for 20 years, then the long term gains may meet your investment goals.

Just curious, can you buy property in Quatar?

Tom Noonan · Answer

I would have to agree with Wheatie on this one.

Tom C · Answer

scmasse,

I am courious.. When you looked at this purchase orginally, what went through your mind that made this look like a good investment?

Jon Holdman · Answer

I'd advise you to sell that house ASAP.  Its a terrible rental.  I calculate your P&I payment on that place at $1423/month.  You're getting $1100 a month in rent.  You mention $88/month for property management, which is actually a pretty good deal. What about all your other expenses - taxes, insurance, any utilities, vacancies, maintenance, legal expenses, evictions, tenant damage?  You've probably not had some of these, but you will.  I'd guess you're actually losing $500-600 a month just based on the difference in rent and payment and the continual expenses - taxes, insurance, and property management.  As soon as you get one of these big hits, like an eviction or a two month vacancy, you're going to have months where your out of pocket $2000 or more.

Given the current situation, its unlike we'll see any appreciation in most places.  Unless there is a specific situation to drive demand, prices are going to fall in most places.  Already have fallen since Aug 07 in many places.

To justify a $225,000 house as a decent rental, you would need rent something like $3000-4000/month.  I'm currently looking at houses that will rent for $1200/month, and expect to be into them for $80,000-$90,000.  Even that doesn't meet some of the long time landlord here's criteria.

Jon

John Robertson · Answer

I'm green too, so just a warning, my knowledge is mostly borrowed from the gurus in my network.

I don't think there's a right or wrong way to approach this.  My partner and I like to call this sort of situation a 'good problem to have.'  I wish I could offer personal advice, but from what I've seen most investors like to purchase another property instead of pay off the ones they have.  It gives a much more diverse portfolio.