Keep as rental or cash out?

[Dawn Anastasi]

I went in on a 4 bedroom single-family home with another person. We rehabbed it, and tried to sell it, but the market just isn't there. So we're going to rent it out for $1500/month.

Contributions toward purchase and rehab are $68,000 him, $18,000 me. (Numbers rounded for simplicity.)

There are two options going forward:

a) He buys me out for $25,000 and keeps the rental for himself; he will pay me a small fee each month for managing (he lives 45 minutes away; I'm 5 minutes away).

b) We split the rental profit based on our % invested. (80/20)

There is no mortgage. Property taxes + insurance is about $375/month.

I'm trying to decide what to do. I'm kind of thinking to go with option B and do a cash out refi which would get me almost all the money I put in out, to do something else with, but not as high as the $25K which I could use to buy another single-family house for cash. (Plus, 1500/86000 = 1.74 which is kind of low for me.)

[Bill B.]

Hi Dawn,
I'm sure someone with more experience will chime in, but here is the view from the cheap seats.

If I understand correctly, your normal rent to investment ratio is greater than the 1.74% on the current property. Assuming you take the buyout and purchase another property for 25,000 and rent at 2% of acquisition, your net rent after expenses and reserves (50% rule) is 250. Add 100 per month for the PM on the current property and you have a monthly net of 350. Add 31.25 for every quarter percent you get above 2%. i.e. if you normally rent at 2.75% of acquisition, you add 93.75 to the 350 for 443.75 net after expenses.

If you hold the current property, do a cash out refi, and split profit 80/20, I believe you are cutting yourself down to something far less than the 350 you get from the buy out and renting at 2%. Without paying a mortgage, 20% of 750 is (1500 and the 50% rule) is only 150. Your 20% share the mortgage would cut 50 per month from that 150.

And, your share of the proceeds of the refi would net less than 14,000. If you add 11,000 of other funds, buy another property at 25,000 and rent at 2% you get 500, but you can only attribute 280 of that to the cash out refi money of the current property. I assume that you do not receive the PM monthly because you are part owner of the property. But, to be conservative in the comparison, let us assume that because of your proximity that you get 50 month extra for doing the PM on the property. 280 + 50 is 330 per month net to you.

If (I mean IF.....BIG IF) I've done this correctly and understood everything correctly, you end up ahead by taking the buyout. Maybe substantially ahead if you do not get PM fees as a part owner.

Please educate me if I've left something obvious out of the analysis.