Should I stay or should I go!!!???

Question

Hi guys! I love love this podcast and forum, got hooked on it by the rental rookies! I drive an hour each way for work and am sparked up for investing. I need some guidance though-  like real guidance- I have an investment property that I bought for 255k 3 years ago- and now can sell for 360-370 (My renters are highly interested in buying the property.) My loan is at 207k now. This is a small community that has held strong through the toughest of times However, I think it is definately topping out at this price. Plus 200 acres of land was just purchased to put up 800 new homes in this Mayberrish farm town. Here are the obstacles I was hoping I could get some advice on- Because of you guys- I want to grow my property portfolio and create financial freedom for myself. I am 43- retired broadway dancer, and have waited tables for income all my life. I love what I do- I just don't want to be locked into it for the rest of my life. I now realize that I an amateur in the game, but no less, in the game and have the potential to amass some more properties and basically want to set the blueprint for future purchases.

So- my father passed away in October and I made the conscious choice to leave a company I was with for 18 years in NYC and nurse  him through his transition in CA. Since then I have had to start with a new company at almost half the income. I am interested in moving North, closer to remaining family and a new and upcoming market because of a trillion dollar sports arena being built right in the heart of downtown. I feel the growth in this market has more potential. I'm lost when it comes tot he decision of keeping the investment property where I have negative cash flow but heavy equity( I pay $50-$100 a month out of pocket)- or selling it and buying 2 properties, 1 owner and 1 duplex-or do I keep the investment property and try a HELOC for 1 owner occupied property (Obstacle being new job and 1/2 income) Plus I am 43...the thought keeps creeping in my mind  "is it too late for me to be doing this? I am a single man with great credit-a Nice 401k-and an investment property- am I crazy?"

Makenzie Kelly · Answer

@Sean Mamola I follow the local markets extensively.  There is an absolute shortage of properties for rent.  One of my friends spent the last 5 months trying to find something suitable.  So for now, I don't think adding 800 properties in Mountain House (?) is going to move the needle much when we are tens of thousands of units short in the "greater bay area" (I use that term even more broadly as people consider the central valley now the bay area- but I digress)

My approach has not always been for cash flow.  I invested for appreciation once, and my "Bet" on appreciation lost.  So I learned from that and changed my approach and now I purely invest for Cash Flow.  If it were me?  I would take my winnings and run.

That being said, I have seen California investors successfully 1031 exchange their "Winnings" from appreciation and roll them over to cash flowing out-of-state properties.  And I have seen one investor go from making $300 a month on a single property to $3,000/month on multiple properties that he was able to buy with the same money.  No additional cash out of pocket.  No tax hit from those funds.  Work?  Yes, a little bit of work. But making money requires effort.  Passive income doesn't mean you don't have to work.

I think you're in a great position.  Good luck.

Dave Foster · Answer

@Sean Mamola, If you stay there could be trouble.  If you sell you could buy double.  so come on and let it go....

Take a look at properties you could buy that would actually cash flow positive for you using a 1031 exchange.  You'll need to buy at least 350 or so in property and you'll have 150 or so in cash proceeds to us.  That could be two smaller properties up north closer to your family or one larger multi.  By using the 1031 you'll pay no tax, get into real cash flow and away from a Mayberry gone wild.

Sean Mamola · Answer

Wow! Amazing feedback!

So after a long 2 weeks of listening to podcasts on my way to work, (Commuting from Tracy to San Francisco offers a great deal of time to educate oneself)I am somewhat closer to a deal. With that being said- here is where I stand. I have a copy of rich dad poor dad. I have spent more than a couple hours scrounging Tracy, California for signs that say "For Sale". Turns out it has been quite adventurous. I found 3 potential rentals that I like. Now I have to teach myself how to analyze a possible property and become familiar with an analytical rental spreadsheet~ I must be honest: I look at them and it might as well be written in Pig Latin, I get lost and discouraged in seconds. So, if there is anyone with recommendations on spreadsheets and analyzing- please feel free to weigh in.

My $360-370k price tag has gone down to the mid 340's.I have reached out to separate lenders and trying to achieve some kind of lending success with a secure feeling- can this hurt my credit score and is it ok to do?

I have gone to the renters of my current property and gave them a price that I would start negotiating at and that process has begun. I have an appointment with my tax man tomorrow and an appointment with a 1031 exchange specialist next week.

Thomas S.- Thank you for your advice! This $50-200 in the red every month is after my PITI. I have a property manager that I pay for at 7%. I am, according to her,  getting the most on the market. It is the highest on the market, I researched it. And the property is located in a great area. It's a swell location and a great rental. In addition I pay FTB taxes quarterly- yes it comes back to me at the end of the year, but still I'd like to see some kind of cash flow. My mind is now burning with all this information. But now..I feel as if after addressing everyones points, I have some sort of checklist that I need to go over before I make any moves. Thoughts?

Once again...Thank you everyone for the help!

Sean

Gordon Cuffe · Answer

@sean

@Sean MamolaSactown is growing again along with placer county. I know it is growing by the increased traffic and the many buyers that come from the even more crowded bay area. You never too old to start owning real estate. It is better than the rent increases that the tenants are experiencing now. If you ever have questions about investing in the area or what to see what off market properties that I am aware of, you can email me anytime.

Arlen Chou · Answer

@Sean Mamola I started to seriously get into REI in 2013 and I am currently in my late 40's, so you are not late to the game.  Slow down a little and take a look at your property a little more.  You say you are currently $50-$100 in the red each month.  Is this after PITI or just based on your monthly payments?  I don't mean to sound condescending, but many people only take into account their monthly payments.  On top of PITI, there are additional expenses that should be considered, but I won't go into that as there are many threads here about figuring this all out.

Where is your rent in the market place: high, low, middle?  Do you have property management fees or are you self managing?  If you have not looked yet, you should analyze where can you either save money in the operation of your rental business or increase the income.  If you can get yourself to breakeven or profitable, the picture changes very quickly.

The 800 units that are coming online could be good or bad for you, but it depends on many factors.  What size is your home and lot compared to what is coming online?  What does the neighborhood your property is in look like compared to where those cookie cutter homes are going in.  Is there planned infrastructure or public amenities that your tenants could take advantage of when the homes are done?  I would look for planned public parks, new shopping areas that might develop, etc. There are many points of analysis you should look at before deciding on a course of action and these are just a few.

I realize that making the jump into REI is fraught with uncertainty and self-doubt, but taking a little bit of time to really analyze what you have and where you have it can really help.  The grass is always greener on the other side of the fence.  In your case don't forget that you are ahead of the game in that you already have yard to look out from...

Good luck to you!

-Arlen

Dylan Vargas · Answer

@Sean Mamola ......Welcome! Have you refinanced or considered with such low rates? Maybe you already have a great rate but this can help with cashflow or paying the property off in 15 years. If you are going North sell and move on. Look at it this way, at least you have put yourself in a great position. You will win either way. I just wonder if the market will go down or up. Sometimes its good to take the money and run. Only owing 207K with a great rate gives many options.

Jerome Kaidor · Answer

Sean,

Tracy is a good place to be for rentals.  The market is very hot.    I bought a 13-unit building in Tracy last year, and it has run at 100% occupancy.   When a vacancy occurs, people come out of the woodwork to get it.  Good people.  People with jobs.   Tracy is the "gateway" from the Bay Area to the Central Valley - it's the first town you hit when you cross the Altamont.  So it is well located for people who work in Livermore/Dublin/Pleasanton etc and cannot afford to live there.

There are also real jobs in Tracy; the Amazon warehouse for the entire Bay Area is there.  Also a new Fedex hub going in.

You should browse the classifieds ( craigslist etc ) to find out what houses are renting for.  Then build yourself a spreadsheet and cruise the MLS.

You might even consider something in Livermore - the rents on SFR's there are fairly eye-popping.

Definitely familiarize yourself with the 1031 exchange rules before attempting.  We made it in just under the wire on our Tracy property.    Deals *can* be structured so the sale of your old property is contingent on acquiring the new one, and the purchase of the new one is contingent on selling the old one.   So it can be fairly safe.  HOWEVER, you will be in a stronger position if you've sold the old property already and have the cash in hand.  But then the 180-day clock starts ticking....

Thomas S. · Answer

If you need to ask how to run the numbers you are no where ready to even start looking to buy. Real estate investing is a very serious business that can easily cost you everything. What you are attempting to do would be like jumping out of a plane and asking the instructor on the way down what you are suppose to do.

My guestimate would be that it will take you 6 months of intensive research to be ready to start with enough knowledge to be comfortable making the right choices. You might get lucky without the knowledge but investing does not ever depend on luck.

Read the posts, blogs and listen to the pod casts. Absorbed the available free knowledge until you have no more questions.

Chris V. · Answer

Hi Sean - It sounds like you are really action oriented, which I think is great. I think most people that don't get ahead so so because they don't have a strong enough bias towards action. So I think that is great!

However, I'd strongly recommend to take some different actions first before listing your property:

1.) Speak to a mortgage broker in your area and go over your particular situation. Tell them honestly what your plans are and ask them if you could get loans based on what you want to do. You have just changed jobs, and it sounds like you may have taken a pay-cut? Since you have been renting out an SFR for a while your prospective rental income MIGHT be counted towards your PITI vs. income ratio. Or it might not. This is really important too. If you don't know of a mortgage broker in Tracy, or your realtor can recommend you mine, she's out of Plesanton, but since most if over the phone internet it does not matter that much. Also, while I am very happy with her, mortgage brokers are plentiful and all will be happy to help you figure out where you stand. The consult part if free, because they will only get paid out of the closing cost when they actually provide you with the loan. Anyway, In summary, it is extremely important that you know if your plan is going to work. If not, ask them what you'd have to do to make it work. It is definitely worth doing this BEFORE you do anything else.

2.) If you plan to buy a new investment property you will want to do a 1031 exchange. I am no expert but if you sell one rental property you can buy a "like property" (also rental) without paying capital gains tax. Here is the catch; there are time limits. This might sound like boring tax stuff but you need to look into this. Your realtor should be able to explain this to you or get you with an expert. Since you have a time limit you'll need to time finding a rental property and listing your current rental property. If you list your current rental property today and tomorrow someone puts in an offer the clock starts to tick, research this, but I think you need to designate the "like property" within 45 days of closing the first property, that property then needs to close in like 180 days, which is the easy part. I am not saying this could not work out, but by listing before you did your research you will force an artificial time limit on yourself. So you have to buy a "deal" under time pressure, which is not good.

Also realize that the capital free exchange can only go toward "like property". If you are selling a rental, you can buy another rental without paying the capital gains tax. But not a primary home. Also there are some things that you do need to pay taxes on I believe, like the write down you took on the property? Anyway, a tax person can tell you this, talk to one before hand...

Your listing realtor, who probably is a great person, gets paid when you sell. And he/she will rather get their commission today than "maybe later"... Realize this when asking their advise. And educate yourself on what that 1031 means to you. I would not list until I had a reasonable idea of what I wanted to buy. Also, I don't know where your current rental is but the market is on your side.. Its still going up. Anyway, I think a consult with a qualified tax person is a worthwhile investment. You are about to make some big financial decisions, and a few hundred bucks up front might save you a lot later.

3.) Continue to educate yourself on how to analyze multi family rental property. Its not extremely hard, but "rent" - "mortgages" does not equal cash flow:). This forum and the podcasts are a pretty good place to get started. I am curious it sounds like you are thinking of moving upstream/west to not have to deal with 580:). However I think the "deals" if any are exactly the other way (east)...:)

Anyway those are my few cents...:

Sean Mamola · Answer

Thank you Rob!! Ive just told my property manger to list the property and am heading out to look at duplexes on Tuesday. I'm extremely new at this and want to know what I should be doing to "run the numbers to see if I can clear $300 a month in a property.

Thanks again for your input!

Should I stay or should I go!!!???

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