Need advice badly ,please! hold or sell?

Question

Ok, so I have a older home that I owe 33,000 on. It needs some work but is rentable (barely).  I have owned it 18 years and could robably get 235,000/240000 for it.  Should I just continue renting it ( make 300 or 400  a month) or sell it, take just 2/3 of profit and buy a distressed property to rent out (or fix & sell) and then bank the remainder.  My thought was if I purchased a differnet (hopefully newer) home, that I stand to get some more appreciation out of it in the long run.  I can't see my 80 year old home going up much more in value.  I do not have enough $ to hang on to it & buy a different house.  I would LOVE to hear your take on this as I am very much new to this business.  Thank you much in advance.

Jon Holdman · Answer

I think you have to account for the reinvestment you've been deferring.  You also need to consider vacancies.  The possibility of major items like furnaces or sewer lines is very real for an old property like this.

Read in the Rental Property forum about the "50% rule".  That says all the expenses amount to about 50% of the rent over time.  If you defer maintenance, it will be less, but that has a way of catching up.

That would predict expenses of $650 out of your $1300 rent.  However, you list expenses that amount to $750, and you've not included anything for maintenance or vacancies.  So, I'd say the 50% rule is too optimistic for your property, or that you've underpriced the rent, or that you're paying expenses you shouldn't. Utilities are the red flag here.  There's no way you should be paying a $350 monthly utility bill.  That sounds like electric and gas, and you need to put that on your tenants.

If you could get this in line with the 50% rule and paid it off, your cash flow would be $650 a month or $7800/year.  The value of your asset would then be $230K.  That's a 3.4% return, way to low for real estate, IMHO.  I would certainly sell this property.  I'd only re-invest them money in real estate if I was able to find much better deals than this.  For $1300 in rent, break even is about $100K.  A "good deal" would be about $83K.

If you find deals like that, you could put 25% down and have about $22K invested in each one along with a $64K loan.  You would have cash flow of about $227 a month for a return of about 12%.  Even after the closing costs on your sale, you could do eight such deals  and have $1800 a month in cash flow.

Chris Martin · Answer

Jim says "Sheena, i would sell immediately for 240K, pay off your mortgage at 33K, stick 7 k in your pocket for a rainy day, and purchase 4 turn key duplexes(rehabbed with tenants and property management in place) for cash(50K each)."

There is no consideration for capital gains taxes and depreciation recapture? Do you assume tax deferred exchanges? If not, am I the only one paying taxes here?

Depreciation recapture is cumulative and I think there may be some capital gains.

E. Smith · Answer

Well it was the CMA price given to me by a local realtor.  Also house 4 doors down sold for 280,000 last summer(in better shape & an extra bedroom)  It is possible the rent could be a little higher, but thats about average for the type of property and the area.  Here is the scenario:  It is a SFR but has an "english basement that I rent a little cheaper and the guy takes care of the lawn for me .  The upper floor is in just ok condition.  2 bedrooms but one is very small, nice remodeled ktchen though. problem is with the utilities.  I have the upstairs tenant pay the heat/gas bill as they have the only thermostat control.  But I am paing electric/water/sewer /garbage as  I didn't think the upstairs tennant would want to pay for the other persons electric use.  I am deferring a lot of appreciation there as John stated. Am leaning towards a sale but who knows how long that may take in this economy. Although there are house selling in the neighbor hood.  Love to hear more feedback-thanks!

Dick Green · Answer

Quick question.....

Where did the $235,000 - $240,000 possible sales price come from?

Seems to me....if that's the market demand, the rents should be much higher.  What am I missing?

Jon Holdman · Answer

I gathered that's the point you were trying to make, Jim.  Those do look like some pretty attractive deals.

So, while I'm not too keen on far-away investing, your point that you may have to do that to have profitable rentals is very valid.

If you want to invest in real estate, E, you have to find good deals.  For cash flow, this one is very poor.  But you've managed some appreciation.  You paid $114K and now its worth $235K.  Unfortunately, that's only about 4% average appreciation for the 18 years you've owned it.  That's about what you would reasonably expect.  The bubble gave people very inflated expectations.  If you want to invest in RE, get involved and find some really good deals.  If you don't want to spend that level of effort, invest in stocks, bonds, or CDs.

Jim Doine · Answer

Sheena, i would sell immediately for 240K, pay off your mortgage at 33K, stick 7 k in your pocket for a rainy day, and purchase 4 turn key duplexes(rehabbed with tenants and property management in place) for cash(50K each). With rent for $600 per side so figuring 50% expenses, each one cash flows $600 per month with no mortgage. $600x4=2,400 per month cash flow   2,400x12=28,800 annually for a 14.4% return on investment. :D   Jim

Jim Doine · Answer

I will finish my update here since the last of it was lost somewhere in cyberspace.4,800 per year x10 duplexes= 48,000 annually for a 24% return on investment. :D Jim

Jim Doine · Answer

Thank you moderator for editing my post, it reads better now with no sign of solicitation. My intent was to point out to other members the advantages of investing in better markets and the advantages of leveraging. :D  :D   Jim

E. Smith · Answer

Now that was the complicated answer I was looking for.  I dd not know enough to come up with those figures-THANK YOU!

Jon Holdman · Answer

Truly clearing $5000 a year on a single rental is astounding.  Most folks here would consider clearing $100 a month as doing good.  I wouldn't claim to achieve that much.  That's after accounting for taxes, insurance, maintenance (though you say yours needs work), vacancies, capital items, evictions, legal expenses, accounting expenses, tenant screening, utilities (at least when its vacant) etc.

You profit rate depends on financing.  If you have very little of your own money in a deal, the rate can be very high.

Need advice badly ,please! hold or sell?

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