ADVICE PLEASE- Inheriting a Home- SELL or RENT??

[Mark Dreyer]

Thank you for viewing this post. I have yet to purchase an investment property so all this is fairly new to me yet I have been reading a lot this past year.  Heres the situation- had an unexpected death in the family and was deeded a newly built (2019) home in gated in community in FL. The gated neighborhood still being developed, i.e. lots of empty lots still. New hospital will be finished in 2 years (growth potential).

Rental Calculator:

Purchase Price in 2019 new build - $362k

Amount left on note - $298k, unsure of interest rate but will use 4% as a guess. 

Down payment and closing cost- $0 for now unless the bank tries to have us refinance this into a new loan after COVID later this year.

Rent - $2200 (rentometer)

Taxes and CDD fees - $6000 annual

HOA - $165 monthly

Insurance $100 monthly

Repair/Vacancy/CapEx- 5% each (can I go lower since this is a new build and has home/appliance warranty?)

Property Mgmnt - 0% (new build and only 20mins from my house so I can manage it)

Appreciation 3%. Expense Growth 2%.

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Cash Flow: negative $317

Purchase Cap Rate 4.45%

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Rent or sell?

Can any values be adjusted more accurately? 

Should I place a dummy rental advertisement to see if I can rent for $2300-2500?

I know I am negative cash flowing $317/mth ($3804/yr) but I am also putting $0 money into this and then making 3% annual appreciation ($10,860/yr) and loan pay-down ($26,400/yr). Is this worth the appreciation play? I know cash flow is king and appreciation is just icing on the cake but this is what I am working with. Thoughts/comments?

[Nathan Gesner]

An upper-priced home usually doesn't make a good cash-flowing property, even in the best of times. If the market tanks, people are going to start cutting expenses and rent is one of the biggest. This means large, high-quality rentals could be reducing rent rates or sitting vacant for a while.

I recommend selling while the market is hot and people are still ignorant of the imminent depression. Use the cash to purchase a four-plex in a solid B-class neighborhood, maybe even C-class. When feces hits the rotating oscillator, people will downsize to a B-class unit or B-class renters will downsize to a C-class. Either way, you'll stay full and your cash flow should remain pretty stable.

Just one guy's opinion.

[Jacob Sampson]

I would sell.  You are going to be higher than neg $317 cash flow because your repair and vacancy should probably be around 15-20%, for just those two items.  Plus, there is no guarantee you can get a consistent 3% annual appreciation.  Probably better to just take the 30k you would clear upon selling and invest it in something that will give a better return.

[Mark Dreyer]

I appreciate your insight Nathan. Thank you for the response. 

I forgot to mention home size in original post In case that matters at all to future responders. It’s a 3/2, 1984 sq/ft

[Stephen J Davis]

Sell. Don't keep anything with negative cash flow.

[Bjorn Ahlblad]

@Mark Dreyer get it listed fast! Then come back and we will help you with the real rental property. We love spending other people's money on proper investments!

[Michael K Gallagher]

@Mark Dreyer I'd hang onto it, especially knowing that the Hospital is coming and that the FL RE market is historically very strong.  

Alternative income streams being close to a hospital could include "furnished finder" for attracting traveling nurses when the Hospital is up and running.  Perhaps residents/nursing students become a future target market for tenants.  So perhaps take a negative cashflow for the first couple years and then you are able to use a shorter term solution like renting to traveling nurses to demand a higher price and cashflow it at that point.  Plus I'm partial to a long long term view, and when the property is paid off even at $2200 a month, that's a decent amount of income to build into a retirement plan.  

If you plan on making further income property purchases being able to borrow against the equity in this property can help you fund those deals and in the future you can always leverage the cashflow from those to help pay down this property. 

Bottom line, I'd view it from a very long term lens and see if it fits in a plan that works for you.  At the end of the day if you keep it for a year and it's not working out for you or your situation changes or a deal comes along you want to jump on, you can always sell at that point.

[Joe Villeneuve]

"I know I am negative cash flowing $317/mth ($3804/yr) but I am also putting $0 money into this and then making 3% annual appreciation ($10,860/yr) and loan pay-down ($26,400/yr). Is this worth the appreciation play? I know cash flow is king and appreciation is just icing on the cake but this is what I am working with. Thoughts/comments?"

No, you're putting $3,804/year into it.  You've got $60k in equity now.  Sell it and invest it into a positive CF property.  $60k in this house, or in the next, is still $60k.  Why can't you get all teh positives you speak of by holding this neg CF property, in the next one that has positive CF?

[Mark Dreyer]

@Joe Villeneuve Very good point, $60k into another house with positive CF would be better. I guess the downside is "another" home has more uncertainty (older home, more repairs/CapEx etc, inspections, lower class tenants). But risk is reward.

@Michael K Gallagher This is what I was thinking too but I am also using some emotion here (family members home) and want to be as objective as possible. Hospital-play has me holding out as this was a major factor as to why my family-member made this purchase in this location. 

Thank you everyone for the responses thus far. Doesn't hurt to list it and see what type of offers come our way

[Joe Villeneuve]

Originally posted by @Mark Dreyer:

@Joe Villeneuve Very good point, $60k into another house with positive CF would be better. I guess the downside is "another" home has more uncertainty (older home, more repairs/CapEx etc, inspections, lower class tenants). But risk is reward.

@Michael K Gallagher This is what I was thinking too but I am also using some emotion here (family members home) and want to be as objective as possible. Hospital-play has me holding out as this was a major factor as to why my family-member made this purchase in this location. 

Thank you everyone for the responses thus far. Doesn't hurt to list it and see what type of offers come our way

 Let's start with the certainty then.  Big time negative cash flow,...then...who cares.

Next is the uncertainty.  You can decide what you are buying, so don't buy a property that you know will, or will most likely need, expensive repairs.  In fact, go ahead and buy one that needs a new roof, and new furnace.  If you replace them now, when you buy, and burry the cost in the original financing, you will get them for free.

[Ian Walsh]

If it was me, I would likely rent it if I didn't need a cash infusion.  

[Caleb Heimsoth]

@Mark Dreyer sell but after fees and commissions I’m guessing there isn’t much equity there

[Jackie Cramer]

Sell. Too little equity. Also itsnoy a completed development. If times get tough the builder can undercut you and still be offering a brand-new house to compete against your used house.

List it.....today

[Bill F.]

@Mark Dreyer

We don't have enough info to give practical advice. What area of FL is this? Are people moving to this area or away? What is the demand for B+/A- SFRs? What has the rent growth been recently? What are your long term RE goals? Can you float the negative Cash flow? If so, for how long? 

If you sell now, you'll compete against the builders, who primary care about list price, but will give all sorts of rebates to make the net price thousands of dollars lower. Why would I buy your place if I could get a new place for a few thousand more?

If you wait and sell later, the builder's price focus will help you once the subdivision is done. Not to mention that if the area does have strong demand characteristics, the rental appreciation will make this cash flow positive sooner than you may think. 

I made a post awhile ago that looked at some data BP came up with to conclude that cash flow isn't always king and in the long term more money can be made from rental rate and home value appreciation.

If I were in your shoes, I'd think long and hard about my RE goals and see if this home fit them. Then I'd see if I could rent it for a break even number like you suggested. Worst case you simply get amortization as a return driver.