Relocation - Austin to Denver and should we sell the rental house

[Zachary R.]

Hi,

My first post here as a pro member, but looking forward to contributing and I wanted to get your thoughts on our unique scenario.

About 3 years ago, I purchased a single family home in the central Austin corridor for $379K. The house was built in 1940, in good shape, and sits on a 1/4 acre lot (hard to find anywhere in Austin, and there is a very strong opportunity to combine all of these lots and sell to a developer, my neighbors are on board.)
 

It's roughly 1100 sq feet, 3 bed/2 bath and I put down 5%. We were approved for lender paid PMI and the total rate is at 4.5%. Monthly payment is at ~$2,585 with escrow and insurance rolled in.

During the 2.5 years that I lived in the home, I added quite a few upgrades - including a completely new HVAC system, new roof, drywall repairs, new deck, fence, etc.  I moved out of the house in September to pursue a job in Denver, which I got, and the relocation kicked off! We quickly got a tenant to move in and they've been fantastic working with over the first 5 months of a 12 month lease. 

The tenants are paying $2,435/mo and have caused us zero headaches.  No major maintenance issues in this time, the only cost was a minor electrical repair and extermination fees.

My question is, now that I'm looking at buying a new property in Denver, should I even keep this Austin property?

1. It's cash flow negative right now, impacting my new loan approval

2. I still don't have equity in the house, but I estimate it's probably worth around $415-$425K now, owing $349K on the loan.

3. Right now, I wouldn't need to pay any capital gains, but I understand how I can leverage a 2031 exchange down the road.

4. PMI - I still feel like I have no idea how a refinance will impact the lender paid PMI, I'm told by one of my lenders that it will never go away, and another that a refi will remove it if the appraisal comes in above 20% as usual.

I'm actively looking in Denver for something in the same price range, especially given the fact that property taxes are extremely low here.

Here's where I run into issues - My pre approval is coming in approved for the high $200K's, because I'm losing ~$100/mo on the rental house, I took a new job and they only account for my $90K base salary (not the $200-$300K on target earnings number, at least until I've worked there for 2 years), and I'm only wanting to put 5% down.

My solutions seem to be:

1. Sell the Austin house, take the $75K minus closing costs and smile to the bank.  Then, put that toward a downpayment and start over here in Denver with a more expensive property, lower monthly payment because of taxes being so high in Austin, and after 2 years move it to the rental market.

2. Should I just build a second Accessory Unit in the back and rent that for another $1,200/mo?  If I was in a position to pay cash or a private loan, this should raise my approval on the new deal, and I'm taking in another $1,100 in income monthly.

3. Put more money down, which I'm hoping to avoid but don't see a way around.

Do you guys have any advice as to what I should consider here? I am trying to build up my assets to meet my long term goal of owning 10,15,20,50 rental units. Selling seems like a step back, but it might not be, and I am 100% certain of my emotional attachment to the house.

THANKS!

ZW

[Bill S.]

@Zachary R. so here is the quick and dirty. Sell the Austin house. It's an alligator and it will eat you. The only reason to keep it is if you plan to move back there and want it as a fall back position. Emotionally it's hard to part with property but trust me being that far away and handling issues only gets harder with time. When the tenant's move it's a major headache to get it filled from a distance. If you pay a PM then you are even more in the hole. Better to have the money close to home where you can add value with your time.

Also don't forget the transaction costs (Realtor fees, title and closing costs) when figuring the funds you will take away from the sale.