Hold or sell primary residence as investment property?

Question

Hi all,

I currently have a single family house with a separate guest suite.  It is essentially two units, 1B/1Ba, 3B/2Ba. I am looking to move out of the 3/2 and am trying to decide whether to sell the property or hold as a rental property.

The 1/1 currently rents for $1200/month. I estimate I could get $16oo for the 3/2, bringing the total rental income to $2800. The mortgage and escrow payment is $1750 per month. Estimated management fee is $224 (8% of estimated income).

Based on these numbers, the property does not pass the 50% rule.  Should I sell it, or are there other considerations that I should take into account first?

Thank you!

Michael Glist · Answer

I think keeping it would be a great idea, but I also think you should figure out what you could do with the capital that you could get selling it. If they capital you get selling it allows you to purchase more and get more cash flow than they one you have now then that would be the best route. If selling would get you a property with the same figures or less than it's not worth it.

You can also look into doing a cash-out refi and pull some of the equity out and invest that while keeping the current property.

Joseph A Gonzales · Answer

I recommend running the numbers in the BP calculators. If the numbers work out I would say keep it for your first rental property. A lot of people do that. I would even say if you have equity pull it out and use it to buy your next property. Without all the numbers we really cannot tell. But if you are going to clear some money $100+ why not just keep it to get the experience of owning a rental. Also, are you really going to make any money if you sell it? As long as you even out every month it is worth the experience and then if you want to sell it later after you get a few others under your belt then sell it. My recommendation if to keep it rent it out and get the experience, and you might make some money in the process. All of the rules people talk about worry about them later once you get experience.  Just make sure you are clearing some money each month for now.

Stephen DeThample · Answer

I would keep it as your first rental.  Lots of room to spare on cash flow, even if rent dropped a little you're still going to be ok.

Shawn Johnson · Answer

@Khalil Sleiman

I have a single family 3/2 and manage many more in Flagstaff and I agree with @Shawn Mahoney, you quite possibly could get more than $1600.

Khalil Sleiman · Answer

I am loving all of the input and ideas! It's great to bounce my thoughts off this community and get such great feedback!

The property is in Flagstaff. I have a desire to move out of state this year so I do not plan on continuing to house hack in it. The 1/1 is upstairs and 3/1 downstairs. Very good privacy between the two, but there are some shared spaces; driveway, backyard, laundry in the garage. Refinanced less than 6 months ago and locked in a great interest rate and reduced the mortgage, but increased the loan amount. Recoup time for the closing cost is probably 2 years. Upgraded the kitchen, master bath, backyard, new flooring and windows in the 1/1, which were all DIY except for the irrigation in the yard. I am expecting these upgrades have increased the value, so I am not beating myself up over the increase in loan amount. To be honest, I do not have a firm grasp on the numbers in the calculator yet, but am working hard to study. I am an engineer, but I never learned this type of math :). Still pretty new in my real estate journey.

$1600 is probably conservative rent for the 3/2, but since the property is shared I didn't think that a stand alone 3/2 would be an exact comp. Also, the third bedroom is off of the master without direct access from the main living area, so it is not a pure bedroom (although it has a built in closet and a window so it technically counts).

When the 1/1 was run as short term rental in May, June, and July of 2019 (pre-covid), it brought in an average of about $1500, with June being the best at almost $2400. Since it was live-in, costs were kept very low. In town there are limited STR management companies and I would expect to pay 30% in fees. I have a friend that runs a company in Phoenix who has interest in expanding to Flagstaff and is considering partnering with me. I suggested he could occupy the 1/1 for a month or two while he established a team and ran the 3/2, then move out and offer both as STR either together or separate.

There is an "jacuzzi room", which may sound luxurious but it's really just an unused space at the moment since the hot tub is very old and I am not convinced it actually works. Been wanting to renovate that and turn it into a sunroom, but prioritized other renovations first (only have so much time and energy when working a full time job and doing a live in DIY house hack). The 1/1 has paid for pretty much all of the improvements, but I still pay my own mortgage. If I were to do STR, I would consider getting a new hot tub or getting the old one in working order, but I am concerned of the risk it adds to the property from all the moisture since it's indoors.

Any recommendations for STR managers or property managers in Flagstaff? Also contractors or spa specialists would be welcome!

Thanks!

Marc Rice · Answer

@Khalil Sleiman

The 50% rule is a very conservative number. I’d see how you could get the 3/2 rent up higher or make more on the back 1bd with short term rental.

Amber Welsch · Answer

Hi Khalil,

I live in FLG too and was wondering why you estimate your 3/2 to only get $1600? Where would you live if you sold? Can you refinance and pull some $$ out for another property? Are you able to live in the 1/1?

Interesting situation...our market is crazy, no?

I’m a real estate agent and can provide you with a home valuation if that would be helpful.

Best,

Amber Welsch

Russ Lyon Sotheby’s International Realty

Tim Winter · Answer

Is this property in Flagstaff? Have you looked into what it would cost you to have someone else manage the short term rental for the 1/1, or even the 3/2? It might make more sense to do it that way, depending on how close you are to any military, college, hospital or events nearby that would drive short term traffic. What we typically like to do with multi units like these is rent out one long term, and the other short, and see if the long term renter wants to get some rent credits by managing the STR. Then you have someone on-site that can help out with the heavy lifting, and would free up some of that management time you experienced.

Also depends on what kind of leverage you have on the property. If its the current rock bottom rates, it might make more sense to hold it even if you are barely breaking even, as it's going to be a gold mine in about 3-5 years. Even properties acquired 3-5 years ago can still have low enough rates or amounts of leverage that doing a long term hold makes good sense if your hold term is longer than 5 or more years. Some investors are kicking themselves for selling in the past couple years because a refi at todays rates would have increased their income over most things they can pick up currently.

Khalil Sleiman · Answer

Thanks for your thoughts and advise, Joseph. Just to give you more of an idea of where I am at with my journey... I have run the guest suite like a rental on it's own and learned a lot through the experience with short term and long term rentals. Short term was very profitable, but cost more time and effort than I could afford. Long term rental has been great to learn landlord responsibilities. Found great tenants and signed multiple leases now. overall, it's been a great house hack. I have another rental property in Phoenix that I have had a property manager run for over 2 years now making about $200 per month. This has all been pretty nice, but I am looking to ramp up a bit and interested in starting to BRRRR in a different market. Home values are pretty high in Arizona now so I could get top dollar and then have capital to start BRRRRing in a market with lower home values.

Hold or sell primary residence as investment property?

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