To Rent Out or Sell?

Question

Hey all,

I'm a new investor who could really use some advice.  I do not currently have any rental properties, but my goal is to build up my rental portfolio to 10 units in the next 10 years to earn passive income while still working a full-time job.

I've recently inherited a single family home (3 beds, 2.5 baths) with a finished basement apartment (1 bed, 1 bath, kitchen, W/D). Upstairs could use new paint throughout. Basement apartment was finished 3 years ago, is still in new condition and has a separate entrance.

If I sell: Retail market value is around $425-450k. After mortgage payoff, I'd look to keep around $300k. Little to no cap. gains tax because it was inherited this year at current market value. I could then look to use those funds for other investment properties.

If I rent:  Basement apt. could rent for $1,200/mo.  Main house could rent for $2,500/mo. After mortgage, insurance, cap. expenditures, main., etc., it would conservatively cash flow $1,000/mo.  I would need to go through process to get the mortgage transferred to my name (or trust/LLC), plus closing costs, but it is doable and then I could access some of the equity for other investment properties.

Now here's the "catch"...

Catch #1:  1 meter per utility (electric, gas, water) for the entire house. Based on what I've read/heard at BP and other forums, I'd likely want to have them separately metered up-front, which could be pricey, but produce better cash flow long-term.  I'm interested to hear other perspectives though. Other up-front costs for new paint upstairs and installation of security doors between the two spaces.

Catch #2:  The finished basement apartment work was high-quality, looks great and should be durable, but I'm pretty sure a permit was not pulled for the work.

Catch #3:  My in-laws would love for me to keep it for a couple years so they could afford to move back to CO and live in it when they retire.

Again, I'd appreciate any advice you all could give on the direction I should go here, especially any advice on some of the challenges I'd face with the metering and permit issues.  Bottom line: Would you put in the work to rent it out, or sell it and invest elsewhere?

Thanks,

Josh

Josh Liss · Answer

This is great advice. Thanks Alex!  I appreciate your breaking the options down for me.

Ricardo R. · Answer

@Josh Liss looks like you have a good problem on your hands. So as I understand it, if you sell you'll net 300K which you will then apply to other investments on the other hand if you rent you'll net @1k/mo. so my input....

I looked up your area briefly on zillow - Littleton, CO and it seems like 3/2's start out @270K - @350K of course there are others that go above this price range but, I'm sure if you were to target a property for buy and hold you'd probably definitely try to stay on the low end of this. So here are my thoughts.

If you sold and did net the 300K, you could theoretically split that into 4 down payments of 70K (20%) each plus closing costs and purchase 4 - $350K properties ... assuming that you could rent them for close to the profit that the one you currently have would make... you could then net about $4K/mo; 48K/year in profit. However, and this a big however you would have to find 4 awesome deals and be sure that they cash flowed just as high, additionally paying 4 different closing costs and then assuming that you could easily acquire loans for all 4 of them before they had time to 'season'.

If you rented, you could make your $1k/mo; $12k/year in profit and then essentially instead of selling you could cash-out refinance. Cash-out refinancing usually only lets you take back out 75% of the appraised value (check with your banker) so assuming your place appraises for $440K that means you could take out @330K after you account for what you still you - you would be walking away with @ $200K cash in your pocket while still keeping this home and cash-flowing $1k/mo. You could then turn around and use the 200K in much the same way as above. So theoretically you could buy two other additional 350K properties and put down 70K (20%) plus closing cost and still have some money in your pocket. At this point you'd have 3 properties cash flowing you @ $3k/mo ; $36k/yr. --- Thus in 2 years you would have enough from saved from cash-flow ($72K) to go ahead and by another property... and so on and so on. Also keeping in mind that you could cash-out these other additional properties as well down the road if the numbers looked good. I prefer this method for a couple of reasons 1) you're not fully committing and going out into the investment world on a whim. 2) you can gradually build up to this plan i.e. you'll first rent out the place, then once you realize how much you're cash-flowing you can proceed with the refinance, then you can look for your next like deal and make this plan come together. 3) you already have one property why let it go if you can cash flow. 4) if all else fails, you can still sell. 5) You start right off the bat by being able to buy another home in 2 years and faster and faster with each and every additional home you buy.

Other options for your money might also be to be the lender and lend the money privately to other real estate investors for a quick and high return; you could also possibly look at investing in multi-unit properties; flipping is an option.

Just my ten cents, hope this helps.

Alex