Advise whether to rent out or sell my property

Rental Property Investor · Dallas, TX · Member since 2018 · 7 posts · 1 vote

Hey everyone,

I'm new to BP. I recently bought a new house and have listed new old property for rent but I'm having trouble deciding if its my best option. I bought the house 2.5 years ago for 195k. I put 30k into remodel. I had it appraised 3 months ago to drop my PMI. It appraised for 255k. I have it listed to rent for 2100. My mortgage is just shy of 1500. From my understanding in Texas you can't take a heloc out on an investment property so I don't see a way to take my equity out to reinvest in a future property. So I tempted to just sell it and get the equity out to invest into a different property. I appreciate any feedback, thanks in advance!

Scott Kelly

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Michael Pearse

Rental Property Investor · Kansas City, MO · Member since 2016 · 112 posts · 75 votes

@Scott Kelly After doing a very rough calculation on how much money is in the deal, the projected ROI is around 18% (not including taxes, insurance, interest rate, points, ect). This was done by making a few assumptions.

1. Paid 5% down on 195K = $9,750 into the house

2. Used 30K to rehab = $30,000 into the house

3. Cash flow = Rent-Mortgage (simplification here), $2,100-$1,500 x 12 months = $7,200 yearly cash flow

4. ROI = $7,200/($9,750 + $30,000) = 18%

If you sold the house at the projected appraisal value, you would make ~$60,000 (not including taxes, realtor fees, ect)

The question is, how long would it take to make $60,000 through the projected cash flow.

$60,000 from selling / $7200 yearly cash flow = ~8.33 years

Now, this does not account for any tax benefits from passive income. This situation really depends on whether you want to keep the house for cash flow or sell to purchase more homes.

If you really want to hold onto the property, I would highly recommend refinancing the property to get the equity out. This will be an option if you are unable to use a HELOC. If you are eager to sell, consider finding another property you want to invest in and use a 1031 tax exchange.

Best of luck!

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Michael Pearse
Rental Property Investor · Kansas City, MO · Member since 2016 · 112 posts · 75 votes
7y
@Scott Kelly After doing a very rough calculation on how much money is in the deal, the projected ROI is around 18% (not including taxes, insurance, interest rate, points, ect). This was done by making a few assumptions.
1. Paid 5% down on 195K = $9,750 into the house
2. Used 30K to rehab = $30,000 into the house
3. Cash flow = Rent-Mortgage (simplification here), $2,100-$1,500 x 12 months = $7,200 yearly cash flow
4. ROI = $7,200/($9,750 + $30,000) = 18%
If you sold the house at the projected appraisal value, you would make ~$60,000 (not including taxes, realtor fees, ect)
The question is, how long would it take to make $60,000 through the projected cash flow.
$60,000 from selling / $7200 yearly cash flow = ~8.33 years
Now, this does not account for any tax benefits from passive income. This situation really depends on whether you want to keep the house for cash flow or sell to purchase more homes.
If you really want to hold onto the property, I would highly recommend refinancing the property to get the equity out. This will be an option if you are unable to use a HELOC. If you are eager to sell, consider finding another property you want to invest in and use a 1031 tax exchange.
Best of luck!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Scott Kelly, Not current on LTVs for refi but I'd consider what you can actually get out of a refi for what it would cost you before going too far down that road. I know standards lower as a market ages but 75% was the refi standard on investment a bit ago. Maybe one of our mortgage colleagues can answer better than I. But at 75% leverage it looks like you'd only be able to get $10-20K out in funds (assuming you put 5% down originally). And my guess is the cost of the refi to get that amount out is going to be huge as a % of what you get!
Option 1 You must have bought this property as a primary residence. If you lived in it for 2 years you should just sell it and take the gain tax free using the primary residence exemption. That would free up $50 - $60K in cash with no tax consequences. Yes it leaves you without your first property but the ability to then use the cash to leverage more if desired.
Option 2 would be to sell and do a 1031 exchange if you don't qualify for the primary exemption. You still free up the same amount of cash but the tax is deferred not eliminated. And you do have to go through the 1031 process.
Option 3 if you like the property as a rental and like the appreciation potential is to just keep it. Hop on the slow train and build your war chest apart from this house for a while. If your mortgage includes escrows that's maybe not such a bad cash on cash return if you can get 2100 and especially if you consider the principle amortization by the tenant.
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Scott Kelly
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Rental Property Investor · Dallas, TX · Member since 2018 · 7 posts · 1 vote
7y
@Michael Pearse @Dave Foster Thanks for your replies! I failed to mention I put 20K down so I financed 175k and have made additional principal payments and only owe 161k on the property. It was my primary residence and escrow is included in my 1483 monthly payment. I'm still on the fence about what to do but ya'lls input has given me something to consider. Thanks again!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Scott Kelly yah that was an important detail. It would all still qualify tax free if you met the residence requirement because none of the additional down or extra payments would be considered profit. Aways take tax free when you can. Even if you reinvest It puts the power in your hands - unless that's the be all end all of great rentals.
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
7y
@Scott Kelly

A couple of thoughts
1) I think you are likely making less than 10% cash on cash return when you factor in repairs, capex and vacancy reserves.

2) you got about 10K of appreciation every year. Not bad but something you shouldn't count on in the future.

3) You save about $4,500 in taxes if you sell it and take advantage of section 121 exclusion.
4) Are you sure you can't take out a HELOC in texas? I haven't heard that HELOC's are state specific. Maybe the bank that you reached out to doesn't do HELOC on investment properties(which it now has become). You may want to reach out to a couple banks and see if they offer this option.

I think there are better investment properties out there.
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James Call
Specialist · Denton, TX · Member since 2018 · 126 posts · 84 votes
7y
@Scott Kelly

We have had this same issue with some of our investments.

I think there are a lot of "hidden" costs in selling a property. Realtor fees, closing costs (if it is customary in your area for sellers to help out with that), etc... I tell most landlords we work with to figure about 10% off the top of the sale price to go to those expenses.
If you are just starting as a landlord, that might be a good property to keep for a few years and learn the ropes of landlording on. You have some equity there and you would have a nice cashflow like @Michael Pearse mentioned.
18% on a property like that sounds pretty good in my experience. You can always get more doing other things, but sometimes getting the experience in a fairly simple situation is priceless.

Let us know what you decide to do. If I can help out with anything let me know!
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
7y
There is no way your SFH will have positive cash flow based on the standard 50% expenses. If you hold this very long you will have negative cash flow and have difficulty selling without first doing renovations.
Sell now before you go into the hole and tenants destroy the property.
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David Jessee
Member since 2018 · 6 posts · 2 votes
7y
@Scott Kelly thought of owner financing it out? 15% down and 2k a month for 15-30 years might help. Just a thought. Good luck
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