Should I sell?

Question

Hey,

This is my first post after being a lurker for a month or two...

I currently have a property in Durham, NC (right outside Raleigh) that is a small home (3 bed /1.5 bath), 1,050 sq ft that I rent out for $825/mo. If I were to do section 8, it could rent for $925/mo. The place is in great shape (I just did all the renovations and everything).

I bought it from a friend for $45k, but I know that it is worth more than that, especially since it is bringing in such great cash flow. I don't want the place to to be empty while I try to sell it, but I would like to sell at the end of the year / early next year so I can get some cash to buy a bigger property.

Basically, I have two questions: 1) What do you think an investor would be willing to pay for this property? and 2) How do you go about selling a property with tenants in it?

I don't know if this is against policy, but FYI, the Zillow page is below for anyone familiar with the area: http://www.zillow.com/homedetails/809-Da-Vinci-St-...

Thanks in advance for the feedback!

Account Closed · Answer

Jeremy: It depends on how sophisticated a buyer you find. MOST investors are looking for a specific % return on their investment and will use a formula to figure it out. You can use one of the analytical tools on this site and back into a value.

The bigger crap shot is selling a tenant occupied. The last two rentals I bought had tenants already. I reviewed their pay history (it was good) along with the condition of the property as part of my due diligence. During the inspection, we found out they were burning their trash in the backyard, and we made the landlord address that before closing, including cleaning the property up.  For me, it goes back to landlord rule #1 manage the tenant not the property.

Jeremy Drawas · Answer

Thanks for the great responses everyone.

I was hoping to get into a multi-family unit (quad specifically) for around $200-250k. I don't have one in mind, but I was trying to figure out how I might go about getting the funding to purchase one.

I have a lot of research left to do in regards to different ways to get funding (portfolio lenders and conventional loans, selling and refinancing, etc.) but this information has been very helpful.

Thanks again!

Vincent Crane · Answer

Sounds like a great rental property to me. Or you can do a 1031 exchange and trade it for a more expensive, bigger property.

Matthew Minor · Answer

@Jeremy  Drawas, an investor would look for a solid rental history and cap rate of about 10-12% to go for it.  At 895/mo you'd be looking at 60k-70k.  If that gives you the cash you need then it might be a good idea for you.  But if the appraisal is right, a cash-out refi would be smarter to keep the nice passive income coming in while continuing your investing.  But consider the fact you will be paying higher mortgage cost.

Selling with tenants in place is usually better for an investor but you'll need to show all the due diligence you did with background check, on time payments, ect to show the profile of that tenant to help convince them it is a good investment.  This also doesn't rule out selling to owner-occupied buyers who might pay more based on their taste, it is not as likely though.

With all this said, you will also need to factor in closing costs to your decision which could amount to around $3k-5k.

I am a real estate agent here in Durham so let me know if I can help.

919-450-5999

Randy E. · Answer

@Jeremy  Drawas, I'm a Durham resident and investor and I know that area.  Do recent comps in the immediate area support your belief that you could get a lot more than you have invested in the house?

If you sell to an investor, I don't think you'll realize a significant profit.  Your best bet would be to try to sell to an owner-occupant who's looking for a home to settle down in.

I can't answer the question of "should you sell?"  Personally, if I had it, I would continue to rent it.  If I needed money for another deal, I would do like @Michael Barbari suggested and do a cash-out refi to raise the money.

If your mind is set on selling and buying a more expensive property for you to live in for a while (maybe taking advantage of an FHA loan?) then you already have the answer to your question.  I think your mind is fairly decided.  What you really want to know is, can you realize a big enough profit to make your wish a reality?  To that, I don't know.  You know how much profit you need to realize to do that.  Pull some recent comps and see if your goal price is realistic.  Or, ask a realtor.

Good luck

Michael Barbari · Answer

@Jeremy  Drawas  Have you thought about doing a cashout refi and keeping it as a rental? Use the refi cash to buy something else while taking advantage of the monthly cashflow.