I need Advice on Rental Property

[Tim Carter]

Hello everyone! I am new to the forum but have been reading alot on rental investments over the past month and recently and am considering growing my portfolio using the BRRRR method. I currently own one townhome and rent it out, this was my first home purchase which I lived in for two years before renting (been renting for 3 now) I bought this home originally with the intention of living in it temporarily and using it as a possible rental. I knew nothing about real estate investing at the time but knew I wanted to buy a "deal" well under market value. I purchased this townhome as a foreclosure for 170K, invested 20k rolled into the loan for renovations putting my loan at 190K when it was all said and done. The appraisal value of the home at the time was about 210k-215k I currently owe 176k on the home and would like to do a cash out refi (if feasible)

I have very little saved from the rental income on this home, but recently have been in a better financial situation so I am putting aside all of the cash each month from the income to have as a backup/for repairs etc.. (which I should have been doing all along), I'd say I've made some mistakes from the beginning with this property not understanding what it means to own a rental and how to reinvest etc. 

Since reading up on cashflow, I ran some numbers on my townhome to determine what my cashflow is on the property. It turns out I have very little cashflow. I will list the details below. Some things to consider: The property is in a very desirable location, great school district and considered to be a higher end area of the county. I listed the rental in the beginning and had tenants within a few days. I've had the same tenants for 3 years going on four and they haven't missed a payment or caused any issues. As far as repairs, in the last three years I think I probably only had to put about 1k into fixing things. I do all repairs myself provided its nothing major.. Here are the numbers I came up with: 

Tenant pays: $1650/month and covers water and sewer bill
My Cost: $1350 (mortgage) + HOA ($80) =$1430/month

Gross yearly rental income: $19,800
My Yearly Cost of mortgage + HOA + insurances + taxes: $17,160

Other yearly expenses based off of research I've done. I never considered these costs before just a month ago :/ 

- Vacancy Loss@ 5% of rental income (19800) = $990
- Repairs/Maintenance/CapEx @ 10% of rental income = $1980

This would put my actual yearly Cost at $20,200 which would put me at a slight negative cashflow... Please tell me if these numbers look right to you. I wanted to refi cash out to invest in a second property but am questioning my current townhome as it is with the cashflow.. 

Standard Rent in the area is around $1600-1800 for a townhome my size - I don't really want to increase rent because they've been such good tenants and I already originally raised their rent from 1600-1650 this year. Since this property is in an appreciating area, desirable location, and has good tenants residing, does this make up for the little cashflow? The numbers show a small negative cashflow but they are conservative and I have not really spent nearly that much in tenant loss or repair cost as of yet, however I know it is possible in the future. 

Value of recent sold townhomes in the area are about $220,000 which I feel is what my home is worth considering it's updates and extra features. I owe 176k and interest rate is 4% on the property but my only concern is with a cash out refi I'm liable to end up paying more money each month for the property putting my cashflow at an even bigger negative.. Is this property even worth refinancing at the moment or should I just save up my own cash to put down on a second property and do a better deal and do things right the next time around now that I'm more aware..

Any advice or suggestions would be so helpful, I'm sorry for the long detailed post but I wanted to give as much information as I could. What would you do with these numbers and this rental property and what would be my best option for investing into a second home so I can get rolling with the BRRR method, Thanks in advance! Have a great day

[Karen F.]

I doubt you could get a bank to do a cash out refi on it, since the mortgage is already at 80 percent of the value.  Don't think about cash flow.  Think about return on investment.  Right now, you're getting very little return on investment on about 220k of your money/debt.  That's a bad deal, unless the area is rapidly skyrocketing in value.

You have a good tenant in place.  Don't raise the rent until the next lease renewal, and maybe not even then.

Honestly, this is why, in my opinion, condos are a terrible investment for your average investor (unless of course you're investing in an area where there is sure to be rapid, immediate increase in value - sort of like buying individual stocks is not a great idea, unless you have a surefire way of knowing that they're about to skyrocket in price).

If I were you, I'd think about selling the condo and get as much as you can out of the deal.  Research the market where you are.  Go to open houses of every condo comparable to yours, or ask the listing agent to show you them.  Look at recent sales.  Honestly assess yours, including its blemishes.  Then offer it to your tenants for sale, at just slightly under market.  They wouldn't have to move, and they'd get it at a good price.  If they don't want it, try putting it on zillow or redfin yourself first.  Then plan on selling it with an agent, if it doesn't go.

Plan on how you can put that money to work for you, to bring in more.  If you cannot figure out any way to bring in more with the money, maybe you SHOULD just leave things as they are, at least for now while you search for a better opportunity.

[Tim Carter]

Thanks for the reply. Maybe I will consider keeping the townhouse as of now since it is essentially breaking even. However, it is a townhome, not a condo. From what I understand townhomes hold more value than a condo. Atleast in this area townhomes are very common.It is technically a suburb of a large city so the area attracts alot of professionals. I can't say value in the area is skyrocketing but compared to surrounding areas it is a highly desirable location, so that's good for the long term I suppose.

[Nathan Gesner]

Trying to pull cash out would only make your cash flow more negative.

If you were shopping for an investment today, this home would not be a good purchase. For that reason, I recommend selling it and investing in something that has positive cash flow (after PITI and setting aside 50% for maintenance, capex, vacancy, etc.).