Bought a rental...now what?

Question

Hello everyone!

I am a young investor who grew up reading Kiyosaki's books and knew that real estate investing was for me from an early age. So I started saving. I finally saved up enough to buy a house and rent it out. But now I have a dilemma. It has a positive cash flow of $50 a month.

Some people tell me to use the tax advantages. But I don't make enough to pay taxes. This also means that any extra money that I make has to be put away for repairs on the house instead of saving for another one. I looked at tons of similar houses in the area and had calculated the positive cash flow to be more than that. Ideas anyone?

Robert Brubaker · Answer

Take a look at the projections for the rental market! Get the rent up- even if incrementally- Look at Sales Market and comps at least Quarterly.. If this is a house cheaper than the median- say lowest third - the pressure on prices should out-perform the market increases ! Plan to sell at some pre-determined margin! say plus 15-20% or fixed $ amount net $ 15K plus? Don't forget closing costs and taxes! As Jeff pointed out you havn't lost yet so There's hope! Best for success!

Dave Verza · Answer

Thanks very much for the replies! The house was completely remodeled when we bought it so it is in excellent condition. I did a standard conventional loan with 20% down. It's a small 2 bedroom 1 bath (gotta start somewhere right?), but it has a detached two car garage in the backyard that leads out to an alleyway, which is why I estimated a little more for the rent. Due to the market heating back up here in CA, I managed to get it just below market value (about 5%). So if I sold it, I would at least get my money back. So far it looks like I have a couple options. I could walk away and sell it when the tenant's lease expires. I could try and exchange it for a more profitable house, which I don't think I can do because housing prices are exploding here (2006 anyone?). Or I could just push through it and pay down the mortgage as fast as possible. Oh the choices...

Jeff Bridges · Answer

I'm trying to look at this from a unbiased analytical approach, so excuse the lack of emotion/sympathy in advance. First, consider yourself lucky that you haven't lost any money(yet). So don't think that your first venture into real estate was a failure by any means. It's a mostly self sustaining business for the time being. I'd take your experience as a lessons learned and see exactly what mistakes (if any) you made and can apply to future transactions so you do better next time. Did you miscalculate your anticipated rental price? Was it because of the size, renovation quality, location etc? Did you forget to include certain expenses or underestimate them altogether? Could you have done better due diligence on necessary repairs? Did you buy the property at 70-80% market value so that you could more easily sell the property when that time came? Next steps to ask yourself: what are you exit strategies and which one represents the best opportunity for you? If you were to sell the property in current conditions, would you breakeven, lose money or gain money after considering all closing costs (calculate closing costs from both the purchase and possible sale, including ~6% agent commission at sale). If you kept it, you might get $600 a year (is this including 8-10% vacancy allowance?), but I don't know how much work you put into the place initially and how new the systems are to determine when the next major repair is to be expected. Any major repair would likely result in a net loss on an annual basis. Further, you might need a few years to build up a property repair reserve account based on that income and will be unable to take any profits to reinvest in other prospects. You might have to decide if market is favorable to sell now or sell now anyway and accept a loss on your initial investment or wait for more favorable market conditions while having a risk that repair bills might be incurred during that timeframe. Lots to consider. Good luck!

Anthony McDougle · Answer

First of all - I'm by no means an expert or even an amateur. I've done a bunch of research but am only now in the process of buying (or rather looking for) my first property... so understand that first of all. But it sounds like you're asking how to make more money, right? You say that other properties in the same area are cashflowing better. Are they renting for more? If so, could you increase the rent? If not -- how exactly are they doing that? Did they put more money down so the costs are less each month? Are they smaller/cheaper properties? I guess if you want this specific property to cashflow better, figure out ways to increase income or decrease expenses -- maybe find out how the other properties are doing it? Otherwise you might just need to wait until your next purchase haha! Good luck!