Seeking Advice: What would you do with this rental?

Question

Hi Friends, Happy Holidays.

Context: In early 2022 I bought a triplex in Connecticut for $220,000 (25% DP on a 30yr mortgage @5.85%) and over the last ~two years i've put in about 60k worth of work (~110k all in). The property is in a C-C+ area and some small developments are currently underway within a block or two radius. Property is worth about 320k with about $1,500 in net cash flow. My goal like many of you is financial freedom, and I don't want to waste any time getting there by getting married to an investment.

Dilemma: The property was built in 1896, and I feel like I am constantly throwing money at the property to bring it back to life. I recently had to add a new roof, gut rehab two units, and take care of repairs requested by the fire marshall. Though my property manager says all the large ticket items are behind us, I am torn on what I should do next as I feel like I am still catching up to deferred maintenance from previous owner. At the same time I don't want to give up and lose the CF/everything i've done over the last 2 years.

Question: Given I have about 160k in equity (pre closing costs), would you wait until rates dip over the next year or two and refinance to pull out some money? Would you sell the house and 1031 into something in a better area? I just listened to the most recent BP episode and it sounds like folks are doing much better in the low CF/high appreciating areas vs the other way around.

Samuel Eddinger · Answer

@Henry O'Toole - I'm an investor in central CT and property manager as well. There is so much deferred maintenance in our state so what you describe is not surprising. I buy a lot and then immediately put in a bunch of money to do roofs, heating systems, redo bathroom/kitchen, etc. My perspective is that I am in this for the long haul and strategically investing into the property will bring long term benefits over time. I've been doing this since 2012 and now am starting to make a lot of money on these investments. The biggest lie in this entire game is that you can get rich quick in real estate. In reality, you get rich slowly by doing what you can to operate it well and allow time and compound growth to work as your friend.I'd be happy to have a conversation with you if interested. DM me if interested. If your PM is being honest that most everything is done, I'd probably hold. I think CT will see significant rent appreciation in the C class properties (minimum wage is going up again January 1).

Basit Siddiqi · Answer

Is the cashflow $1,500 a month or for the year?If it is monthly, this seems like a good investment providing you both appreciation and cash-flow.I would then continue to hold it, especially given that your mortgage rate is lower than what you would get in the open market.

Kevin Sobilo · Answer

@Henry O'Toole, I'm in an area where older homes are the norm. So, I will see this differently than people who live in places where most homes are less than 75 years old. First off, you should have known the roof needed to be replaced when you bought it. That has nothing to do with it being an older home and should have been budgeted at purchase. Did you really need to gut remodel those units especially in a C/C+ class area? By NOT gut remodeling you can usually keep more control over the scope of work and the costs because you don't have to bring every aspect up to current codes. This can be really important when working with older homes where they were build to the standards of 100+ years ago and where making them compliant with current codes can be costly. For example, current codes might require R-19 wall insulation in your area, but if the walls are 2x4 studs you might only be able to get R-15 into the wall using bat insulation. So, to get the required R-value you might have to either fur the walls out creating a deeper void and making the rooms smaller OR use spray foam which has a higher R-value per inch both of which are much more expensive propositions! Instead, you could drill holes in the walls and blow cellulose or fiberglass insulation in and because you didn't open the wall, the municipality generally cannot require you bring it up to current codes. FYI. I have people doing EXACTLY THIS at a rehab today as I write this!Don't be afraid of older homes. If they are where the opportunity is in your market learn how to take advantage of them.

Peter Sosnow · Answer

@Henry O'TooleKeep it unless I knew what and why I wanted to buy with the cash. I have a very similar story/profile with CT investing and I continue to hold. Cash flow staring to improve, although interest rates will take a bite, solid appreciation and of course great tax benefits.

Michael Smythe · Answer

@Henry O'Toole I believe both appreciation and cashflow worked out for him.He only buys distressed properties or deals from distressed sellers. So, he gets a lot of "forced appreciation" when he acquires and rehabs.The ones I know about, he bought as Class B and within 3-5 years they gentrified to Class A, so he got more appreciation and cashflow from that.

Michael Smythe · Answer

@Henry O'Toole one of the mistakes we see investors make over and over again is NOT clearly identifying BETTER investments before they make a decision.Don't sell without a plan unless you are losing money!My manager, personally owns houses that were built in the early 1900's. They have solid foundations, but everything else has been upgraded over time: electrical, heating, plumbing, windows, insulation, doors, roofs, etc. So, now we have very little maintenance on them.They've also doubled or tripled in value and cashflow well.Why would he sell them unless he can find a better ROI somewhere else?

David M. · Answer

@Henry O'TooleYes, I would sell. The maintenance doesn't really stop, its like an old car that you keep throwing good money after bad..As to your very last comment, we've had that discussion on bp about cashflow vs. appreciation. I'm more of an appreciation investor. Cashflow might be nice for income, but the real wealth building is in the appreciation. The two don't always go hand in hand (of course, if they do, thats great). If you think about it, a "quality" property will go for a premium (i.e. higher value and thus lower cap rate). Lower class properties won't have that premium thus the higher cap rate. It "looks" good because the cash flow works out so nice, but thats because its less likely to appreciate. Just one school of thought on "valuations."If you've fixed up the place well, maybe you can sell it and effectively "cash out." You have a bunch of equity / cash now locked up in the property. As some say, 'you can only bake a cake once.'So, its all back to what are your investment goals and strategies. Hope this helps. Happy to chat. Good luck.

Anita Chu · Answer

It really comes down to the goal and strategy you're going for. I am more of a cash flow type of investor so I would probably hold if majority of the maintenance work is complete. In CT, since most towns have reasonable priced homes, the cash flow strategy makes more sense than appreciation. Unless you're looking at hot markets like Boston, NY, NC, FL, I wouldn't count on much appreciation in CT, it's like an added bonus if it were to keep appreciating like it has during pandemic. If you're going for the long haul and building your portfolio, then hold it if it's cash flowing well.

Henry O'Toole · Answer

@Samuel Eddinger I appreciate your advice Sam, I would also like to hear your thoughts on what you did with the properties once you took care of the deferred maintenance and had them at a stable state? I am assuming you also had a lot of cash in the deal, did you take the refi approach, HELOC, or some other strategy?

Henry O'Toole · Answer

@Basit Siddiqi Agree, $1,500 a month. Some months slightly less in case we have any repair requests. I am leaning toward holding but I do have significant cash held in the deal. What are your thoughts on refinancing when rates get below my current mortgage rate?