Should I sell or keep my rental?

Question

Hey all, I've been poking around this site awhile now and it's causing me to take a long hard look at my current strategy.  I own a townhouse in southern Maryland (Great Mills), that I paid $140,300 for back in 2010.  It is now worth a whopping $141,000 according to Zillow and I still owe $103,000 on it.   I refinanced into a 15 year loan back in 2012 and I'm paying $600 every two weeks on the loan (the minimum payment a month is close to $1100).  My goal is to get it paid off by 2025 and would love to pay it off a lot faster.  However, I'm only currently getting $1050 a month and I also have a $600 a year HOA.

I'm renting the house to my friend who is doing all maintenance and upkeep, and has been renting it for the last 3 years.  I'm losing money each month but it has been a hands-off rental for years.  He has done repairs on the house out of his own pocket.  When he moves out (which might be in the next few months, pending him getting a new job), I should be able to rent the house for $1200-1300 a month.  My goal is to have several houses paid off and generating cash flows.

In your opinion, am I better off selling the house and trying to find a rental with better cash flow?  Keep paying the house down (I'm currently paying my car loan down as aggressively as possible and will then take that money and apply it to the mortgage)? Refinance into a 30 year to increase my cash flow (current mortgage is only 3.125%)?

Any and all advice is welcomed.  Just not sure if it's worth keeping or if I can achieve my goal of having multiple income streams (replacing my current income from my job) faster by selling.

Russell Brazil · Answer

After you factor in the cost of selling, you would only be looking at walking away with about $25k.  Give that amount, I say keep it. Hold it another 10 years and it will be paid off, then you can walk away with a lot more even if it never goes up in value.

Kevin Hunter · Answer

@Robert Morse, although this property is not cash flowing at all, and still won't when you raise the rent to market value, I recommend you keep it.  With the two payments a month, you will have it paid off in eight years, that means you are paying down about 12.5K of principal each year.  So if you are losing $300 a month, you are still gaining a very nice cash on cash return, one that you will not find anywhere else.

Where are you living right now?  If you are renting a place, I would say it is time to find another property with an FHA loan or another small down payment loan.  I would give @Russell Brazil a call as I am sure he can help you get into a new property.  I would suggest that, this time, you run the numbers much more carefully and ensure you find a property that will be cash flow positive when you move out, after all fees:  repairs, HOA, property management, CAPEX, utilities (if you have to pay any as a landlord), PITI, landscaping/snow removal.

Good luck!

Robert Morse · Answer

Thanks for the advice Kevin! I moved up to D.C. for a new job; still with the federal government. I'm renting a room at a buddy's place for only $600. I'm currently trying to pay off my truck as fast as I can, and then will start looking to buy the next property. Homes in this area are just too expensive to buy when I already have a mortgage and a truck payment. Truck payment is around $475 a month with about $20k left to go. I'm paying $450 every two weeks on it and I'm about to up that to $750 every two weeks. Once that's paid off, the extra money can go towards the original mortgage while I'm looking for house number two

Robert Morse · Answer

I gotcha. Thanks for your input...I'm still learning this crap haha. I'm absolutely increasing rent when he moves out, which should be soon.

Robert Morse · Answer

But yea, I agree...the houses don't seem to appreciate but there seems to be a ton of renters in that area.

Robert Morse · Answer

I lived in the house for awhile and replaced/fixed most issues so there shouldn't (hopefully) be any big surprises.  The townhouse is directly across from the elementary school on Chancellor's Run.  Roof is from 2013; HVAC is older; water heater and appliances are probably 7 years old.

Leland Barrow · Answer

I understand what you are saying about the maintenance and repairs. Those costs are often not as high as landlords think they will be. They are very property and tenant dependent. Some tenants will do repairs without telling you or pay to have them done. Some tenants will be high maintenance. There are a lot of repairs that you can put onto the tenant in the lease. I would rather have market rent and see how the tenant and property dynamic goes versus discounting rent for a tenant to do their own maintenance.

At market rent it looks like the property will break even. Rents tend to increase even if slowly and your debt service will remain a constant. The property will cash flow better 2-3 years down the road and you won't have such a tight operating margin.

Robert Morse · Answer

Hopefully I addressed everything.

Robert Morse · Answer

Damn.  I responded in your quoted text with bold but it didn't carry over when I posted....

Leland Barrow · Answer

You need to decide what your goals are. The question that you are asking cannot be answered unless you know your specific goals. I will give you some basic advice.

1. You are making a mistake renting to a friend that is doing the maintenance and upkeep. A rental house is like a small business. You are basically paying your friend to run your small business. You are paying him through discounted rent. If it was a small business you would go out of business.

2. If market rent is $1,300 per month then you should be getting $1,300 per month. The fact that you are not getting $1,300 per month means that you are incompetent at running a small business. Instead you are running a charity without any of the benefits of running a charity. Your friend performing maintenance is not good enough. What maintenance has he performed? What was the quality? Was it needed? How do you know that it was done?

If you want to be a real estate investor then be prepared to make business decisions. If you want to be a hobbyist and play at running a business then save yourself the heart ache and forget about it. If you want to run it as a business then you need to bring it up to market rents. What do your numbers look like at market rent?

You have ten years left on a 15 year mortgage at 3.125%. You are currently paying more towards principal every month than interest. In ten years this property will be paid off and your cash flow will increase dramatically. I am assuming this used to be a primary residence because of the interest rate. You are not going to get anything close to 3.125% again on an investment property. In real estate terms that is almost as close as you can get to borrowing money for free.

Another option is to try and recast the loan for better cash flow but I don't think that you need to.

Your alternative is to liquidate and buy another property with better cash flow. You are going to pay transaction fees, higher interest, and push a payoff down the road 30 years. You can calculate the NPV of both options fairly easily with an NPV calculator or look up how to calculate NPV. My intuition tells me that your NPV will be better on your current rental if you increase the rent.

Your other alternative is to refinance for 30 years. You will get a higher interest rate with a trade off for how much more in cash flow? You can calculate the NPV on this alternative also.

I would recast or get it to at least break-even and pay it off.

Should I sell or keep my rental?

Most Popular Reply