First rental with a lot of equity - WTD?

Question

First off, thanks for any replies in advance, as this is my first BP post!

So I still have my first primary home that I was fortunate to have bought in 2013 (bottom of the Fairfield County CT market by rough estimates). The property was purchased for 272K and has a rough market value of at least 370 - 380k today. In 2017 I converted it to a rental.

Mortgage balance is right under 230k, mortgage payment of 1710 all in. I have a long term tenant in place that will be renewing for one year starting May 1st with a rent of 2400. Net cash flow is 690.

After rifling through so much information here and everywhere, I have come to the obvious conundrum of what to do with this thing, with the caveat I might be moving out of state in 2021. Here are the scenarios I'm kicking around.

A. My original strategy - keep it until the lease runs out and sell it capital gains free (lived in it for 2 of 5 years which expires in September 2020), hold the money in a money market until I move and pick back up when I move.

B. Refinance NOW and cash out a small enough % of equity to have on hand to buy yet another property locally to hold/rent for a couple more years.

C. Sell it, 1031 exchange into a BRRRR situation, pull it out again.

D. Keep it in perpetuity even after I move because it cash flows so well.

Any advice would be appreciated. I have about 50k in equity in my primary home and a pretty high savings rate which has given me the comfort of treating this money as opportunity versus depending on it for survival.

Thanks!

Thomas S. · Answer

$380K value with rent at $2400. Long term this property is a money pit. You do not have positive cash flow and if you keep it very long you will quickly find out why. SFHs with generally 50% expenses long term leaves you with not enough to cover your present mortgage. I would definatly not be renewing your tenants lease. You need to sell, now.

Very sad to see novice investors operating under the misconception they have positive cash flow. Your $690 cash flow is a fabricated number based on yesterday not tomorrow, never going to see it. Your equity of near $150K with a opportunity value of 10% (invested in a equity fund) is worth nearly $1300/month. That is how much potential income you are losing every month before expenses and mortgage.

Sell, sell, sell.

Eric S. · Answer

@Thomas S.

OK. I see what you are saying – using the 50% rule the net operating income would project out to only 1200 which doesn't cover the mortgage. Lesson learned. I have just been lucky the expenses have been extremely low but I understand now with vacancies and major maintenance over years it probably wouldn't make much money.

Eric S. · Answer

Thank you for the lessons peoples. After this post, I went down the rabbit hole hard and have found myself in a much more educated position today with 100's of hours reading BP, books, podcasts etc. This thread literally started that.Update: Needless to say I'm selling this (at some point) money pit in the spring and will exit capital gains free. With a conservative estimate of the net sale (120k) and a HELOC on my primary that I've already put some sweat equity into (I can get about 35K out at .85% LTV), I think I should have a war chest of about 140k, with 15k to set aside as reserves to start doing things the right way next summer. Right way includes having no other debt except my mortgage and a decent cash position as an emergency fund not included in these figures, all of which I didn't have when i posted back in April.

As for what I'm going to do with that money I'm still trying to figure that out. Stock market feels like a cliff is coming with the election and I want the cash flow from rents anyways. I prefer to invest in my backyard which means in CT so I have to do some more digging to find places that cash flow and what niche will be best for me (I'm leaning towards multi-family based on what I've learned about this area). I'll post something in the local forums on that later.Thanks again everyone.

Nic Cooper · Answer

@Thomas S. I'm with him.  I did the math on my rental here in San Diego and realized that I was not going getting anywhere near a decent return on my equity.   I bought my rental in 2002 and it rode it through the highs and the low low lows.   My tenants had just moved out when I started listening to BP.  So I am selling and reinvesting my equity.  Sell now and stop losing money.  Interview at least 3 agents and only interview ones that sell a ton of properties.

Patricia Steiner · Answer

Until you have a purpose for the money, I do not recommend refinancing and incurring closing costs.  Most money market accounts are paying less than 2% - and 2% is what you have to make just to break-even with inflation.

It doesn't sound to me like you have another property on the radar so why sell - and lose a good tenant, good return, and trigger capital gains for sport.  My recommendation is to pat yourself on the back for getting yourself in this position and having options.  Sometimes doing nothing is the best strategy.

Eric S. · Answer

@Kyle KadishLiving in Connecticut I am a little worried about the  implications of the new SALT laws on real estate especially in the high  cost region the house is in. It's at an entry level price point which  should protect it from any major downturn in prices, however I can't  honestly say it's going to continue appreciating like it has. Seems like  this year is going to be a big test for where the market headed in  Connecticut. Listings are WAAAY up all over the region this winter.

Kyle Kadish · Answer

@Eric Smith Glad to hear it is a long-term tenant; too often tenants can be a cause of unneeded concern.  Cash flow is nice to have, but not the same as NOI.  The 690/month does not include property taxes, or reserves for any repairs that might occur.

I'll speculate on the property taxes, meaning you are generating less than 5% on your equity.  If you pay 3,000/yr in taxes, your return on equity is less than 3.5%.  There are better options to have your money work for you.

The real answer depends on your thoughts for the market....will prices continue to increase?  Are there pending capital expenses?  Will it sell better to an owner than investor? etc.  No answer is the wrong one.

Good luck in the process.

Eric S. · Answer

Update: I sold that property at full asking in 6 days, and made way more than I estimated. Silver linings 2020 edition.

Jay Bell · Answer

Great thread to follow. Thanks for circling back with an update!