SELL My Primary?

Question

Hey all!  I am looking for advice, opinions, suggestions, all the above!

I currently have 2 properties, for 5 doors, which are cash flowing about $1000 a month, after all expenses, cap ex, etc.  I would like to keep expanding, but market conditions are tough for buy and hold LTRs.  I am considering selling my primary right now, which will put $400k into my bank account after fees and taxes made on gains.  If I sell, I will rent locally, my expenses will go up from my current $2200 mortgage, to $3000-$3500 rent.  I just paid off $1500 in bills, so almost a wash.

With $400k available to me, I have a market picked out already, that will allow me to buy 2 LTRs, about $200k down each, that will cashflow a little over $1000 a month combined.  These houses will be newer, around 2020 builds, so cap ex hopefully low.  I expect average appreciation, 2-4%.  My primary now will sell for $750k, I owe $290k, this will allow me to buy 2 $400k homes.  So I will go from owning 3 properties, including my primary now, to owning 4 properties, 3 single family, and 1 4plex.  All properties are long distance out of state.

I am completely OK with renting, just would like to get everyone's advice or opinions.  Should I keep my primary, and keep saving, maybe I can buy another LTR in a year or two, or should I sell now?  If anyone has anything to comment, please do!

Nick Hogan · Answer

My goal is long term to get to 10 properties.  I like to be more passive, so I use property managers for my other properties, and just like to communicate with them.  I am not looking to get rich next year, instead be set up good 10 years from now is my goal, try to add 1 property a year.

Jaycee Greene · Answer

Hey @Nick Hogan! Before looking at whether you should sell your primary, let's focus on the numbers for 1 LTR. If you buy something for $400k, what would you expect the rent to be?

Aaron Lawrence · Answer

Seems like it could be a winner if you've got the bandwidth to manage / property management in place for the next two LTRs. Is this a correct break down of your situation? Current: $2200 (Primary) - $1000 (LTR) = (-)$1200. ------ is $2200 taking into consideration other expenses you wouldn't have as a renter? Higher insurance, capex, reserves, etc. Projected : [ $3000 <-> $3500 ] (rent) - $2000 (LTR) = (-) [ $1000 <-> $1500 ] ------ So looking at +/- a couple hundred bucks a month but accruing more in terms of appreciation and possibly taking on more PM work. I'm not sure how comparable Riverside is, but in my market (LA), I'm expecting pretty flat appreciation and modest rent growth as long as current conditions of weak buyer purchasing power and high prices persist. Take that (and whatever rent control is in your area) for what it's worth in your situation when you're looking at your projected rental expense creeping up.

Nick Hogan · Answer

Hey Aaron.  I would be giving up my current mortgage, $2200 month including taxes and insurance, and have to rent for $3000-$3500 month, not including insurance.  Both rental properties would cash flow $500 on the low side, up to $650 after PM, Piti, cap ex etc.  So I will be expecting a total of $1000 month for both properties together.

I will not be using the profit from the 2 LTRs for my rental that I will be living in.  Those will stay in their own accounts to build up reserves.

Jaycee Greene · Answer

@Nick Hogan So, with my CFO clients, I would then ask them the question, would you rather invest passively in the market and get an 8%-12% annual return or take on more risk and spend more time investing in real estate that is only expected to generate 8.3% annually?

Nick Hogan · Answer

7.49% cap rate, 5 yr IRR 8.28%, CoC ROI 5.8% I pulled these numbers from the BP Rental Calculator

Jaycee Greene · Answer

@Nick Hogan So is that around a 6.25% cap rate? With that high of a down payment, have you calculated your expected annual return (IRR)? I'm estimating it at just over 8%.

Nick Hogan · Answer

The market I'm looking at gets about $3000 rent for a $400k home.