Should I hold or sell? Seeking advice

Question

Hello investors, I'm a first-time landlord who lives out of state and seeking advice.

During pandemic, I purchased a rental property near Austin for around $380k with 25% down and a low interest 30yr mortgage. Ideally, my property generates around $500 per month cash flow after accounting for rent, insurance, tax, interest, PM fees.

I’ve recently realized that repairs costs have notably affected my profits. I’ve spent 2k last year on various repairs including a major expense to replace the water heater, I am not overly concerned as this also contributes to the property value. This year I've had two water leaks, one of them is ongoing. While insurance has covered some costs, the process has been stressful, even with a property manager (their responsiveness to these issues has been slow). My tenants intend to end the lease due to ongoing repairs. The combined burden of vacancy, repair expenses and the overall stress has prompt me to reassess my investment

My options seem to be:
1. Complete repairs, find new tenants and keep the property. Expect my insurance goes up and hoping for fewer problems in the remaining year and the future. Hope the property value will increase when rates eventually decline.
2. My property has a capital loss. Take the loss and sell the property and reinvest in REITs to benefits from the housing market rebound after rate drop. Or exit real estate altogether and invest in S&P500. This reduces direct property management stress.
3. Replace my current property manager with a more proactive one, though there is no guarantee that the next one will be a better fit. It has been a month since the current issue was discovered, and we have not yet begun working on a fix yet. I realized the value of a reliable PM, unfortunately, I currently lack that asset.

Q1: Given my situation, what is your recommendations?
Q2: Is this property a good investment and worth to hold?
Q3: I am curious to know, have your rental properties outperformed the S&P 500 or REITs and worth the hassle?
Q4: What are your thoughts on the current and future Austin/US housing market?

Your insights and advice would be greatly appreciated!

Basit Siddiqi · Answer

"expect my insurance goes up', 'hope the property value will increase', 'hoping for fewer problems', A business is not build on hopes and expecting.Build a budget, is the expected return more than your required return?There are some years, that income and expenses will be less than your budget and other years where it is more.If you have more properties, and have the property for more years, you will reduce the risk of outliers to your budget.

Jordan Moorhead · Answer

@Shirley PuWhat part of town is your property in?Your cashflow will rarely outperform the S&P but your overall return will generally blow that out of the water. I've seen many 20%+ returnsYou definitely need a new PM if they aren't doing well. I love Tower Property Management here in AustinI don't recommend selling right now unless you have a huge margin and a better place to put the moneyIf you want to jump on a call I'm happy to help

Theresa Harris · Answer

Sometimes everything seems to happen at once (I had to repair a furnace, replace a dishwasher, washing machine and fridge in one year at one place-all appliances were original to the home and 3 decided to quit at the same time). Go through your year over year expenses and ask if this year was a one off. Are the leaks related to the water heater or something separate?Talk to your PM and tell them you are not happy with their response and see what they say (also define what you mean by slow as that can mean it took them weeks or that it took them 24 hours-for a water leak, they should respond immediately). Read your contract with your current PM.I just sold one of my places as I was tired of the turnover (not the PMs fault) and repairs. The last two tenants broke their lease early (said they got new jobs and had to move). The timing with this one was perfect with the hot spring market, so I sold it.

Brian Adams · Answer

Q1: You mentioned taking a capital loss if you had to sell? Have you had a market analysis done recently on the price? Obviously Austin has taken a hit on prices and continues to be soft at the moment. I would make sure you know what that $ is at the moment and the potential DOM risk before making the decision to keep it vacant chasing a price you can't get. Q3: I'd be happy to do a CMA and underwriting for free if you'd like to DM me the address so I can give you a more precise opinion. I think that's the only way I could give intelligent advice on this Q. Q3: My personal rentals have not, but I bought in Lawton, OK because that was my duty station. I've sold my Killeen rentals during the increase in prices, but even those probably did not beat the S&P during my hold period because they were cash flow negative and a long hold period. I didn't do a full IRR analysis at the time, but it probably didn't beat the stock bull run. That said, I bought them with VA and FHA loans so my return on assets was still pretty good. Q4: I love Texas and am biased. But I think Texas is the future of America. Just as the 1800s were New York's century, and 1900s California's century, the 2000s are Texas's century, and it is only just beginning. I think anyone who is holding property here with a long term view and doing it smartly is more likely to be rewarded for it than not. It sounds like you've put some capex into these already. That might be necessary whether you continue renting or selling either way. But would be a shame if selling into this market were the outcome. My gut says that if you are still break even or better, you'll be glad you held in 10 years time.

Mark Ainley · Answer

@Shirley Pur Q1: Given my situation, what is your recommendations? - Hold it...there will always be down years around maintenance and turnover but time is your asset here and you are in an expanding market.Q3: I am curious to know, have your rental properties outperformed the S&P 500 or REITs and worth the hassle? - There are 5 ways you make money in REI that directly help you unlike S&P and REITs. This season will pass and maybe it is a new manager or maybe it is just getting over this hump but keep on this path. 1. Cash Flow 2. Tax write offs against income 3. Hedge against inflation 4. Residents paying down mortgage 5. Appreciation