Evaluating a Nashville Rental, Calculating ROI, Sell vs Keep ?

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Evaluating a Nashville Rental, Calculating ROI, Sell vs Keep ?

Ralph Noyes
Financial Advisor · Nashville, TN · Member since 2018 · 18 posts · 8 votes

Currently have a 2bd 1ba 672sq ft SFH in east Nashville close to downtown, tenant paying $1245/month. (Probably a little under what we could've gotten in rent but we wanted to get it occupied before Winter hit last year...I suspect we could bump it to $1300 without scaring the tenant away). PM is managing it as we live in St. Louis. Got the house for 125k in 2014 on a 30yr mortgage at 4.375%, put 25k down. Currently owe 84k on the mortgage and the property is conservatively worth 220k - i.e. we've got about 135k equity tied up in it. After paying the PITI of $680, the 10% to the PM, and setting aside something for vacancy, maintenance, and Cap Ex it's likely only cash flowing 150ish per month.

What are your thoughts on this as a long-term rental? I'm thinking we sell while we're in capital gains tax free window, harvest the equity, and redistribute into the St. Louis market - either as a house hack or 1-2 rental properties. I know that over the long-term Nashville (particularly the area it's in) will likely appreciate well, but I think that equity will provide a better return in St. Louis, even if we just get some SFH's, but especially if we get into some small MFH's. 

As an aside...: When you're evaluating a rental that you currently own, i..e trying to calculate the Cash on Cash return, do you use the numbers from the time of purchase? Or use the current value? I realize that $1245/mo rent and 220k value is nowhere near the 1% rule...

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Josh Bakhshi
Real Estate Agent · Atlanta, GA · Member since 2015 · 359 posts · 158 votes
7y

Ralph,

Your question shows that you are thoughtful and knowledgeable.  Kudos.  So you are netting about 2K on your original investment of 25K (down payment).  That is pretty good.  Not to mention in 5 years, your value went up by almost 100K!  That's great.  Now you have a couple options...

1- Sell the Property and take your profits to build a little empire in St. Louis.  

2- Keep the property and hope the appreciation continues

3- (I would like to add a 3rd option) Do you have the chance to do a cash-out refi?  The higher payment will eat up your current cashflow, but at least you still get the appreciation, expenses will be paid and you have the funds to start something in your backyard.  

It depends what your current goals are.  All the information you brought up in your question is important and useful.  But you didn't really say what your goal is.  Once we know the destination, then we can make a plan to get there.

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  • Josh Bakhshi
    Real Estate Agent · Atlanta, GA · Member since 2015 · 359 posts · 158 votes
    7y

    Ralph,

    Your question shows that you are thoughtful and knowledgeable.  Kudos.  So you are netting about 2K on your original investment of 25K (down payment).  That is pretty good.  Not to mention in 5 years, your value went up by almost 100K!  That's great.  Now you have a couple options...

    1- Sell the Property and take your profits to build a little empire in St. Louis.  

    2- Keep the property and hope the appreciation continues

    3- (I would like to add a 3rd option) Do you have the chance to do a cash-out refi?  The higher payment will eat up your current cashflow, but at least you still get the appreciation, expenses will be paid and you have the funds to start something in your backyard.  

    It depends what your current goals are.  All the information you brought up in your question is important and useful.  But you didn't really say what your goal is.  Once we know the destination, then we can make a plan to get there.

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  • Devan Mcclish
    Investor · Nashville, TN · Member since 2015 · 688 posts · 607 votes
    7y

    Pretty simple actually - 150 a month x 12 = 1,800. 1,800 divided by 135,000 = 1.33% return on equity. Also known as losing money. Inflation is 1.8% right now. There is too much equity to justify the cash flow in this scenario. Sell the house

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  • Ralph Noyes
    OP
    Financial Advisor · Nashville, TN · Member since 2018 · 18 posts · 8 votes
    7y

    @Devan Mcclish Right. My feeling is that there's way too much tied up in the house, and that it could be better used here in St. Louis. Interesting formula for calculating return on equity. Never seen that before. When analyzing your holdings, do you typically use the equity formula, cash on cash return, something more intricate? 

    @Josh Bakhshi I've gone back and forth on the idea of a cash out Refi. Thing is, since we're not occupants anymore but "investors" instead, I've heard that the rates won't be nearly as favorable. Also the idea of acquiring a large loan on the Nashville house right before buying another one here feels like alot of debt. I think too that there's a value in consolidating properties into one concentrated area (St. Louis) both for liability and sanity.

    "The Goal" is still forming...maybe to eventually own 3-6 free and clear properties in a single, well appreciating area. My wife and I have primarily been in low cost index funds and are trying to diversify into something that won't crash along with the market (as I suspect will happen within 2 years or so).

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  • Devan Mcclish
    Investor · Nashville, TN · Member since 2015 · 688 posts · 607 votes
    7y

    @Ralph Noyes COC, ROE are great. I like them both. Value add is a big deal for me too when I am analyzing a deal.

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