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Updated almost 7 years ago, 01/30/2018
new to BP - seeing advice to make a move in the best direction
My first post on BP, so thanks in advance!
I could really use some help on making a smart move with a rental property I own.
It's a single-bedroom condo, owned free and clear in DC that I've had since I bought it 20 years ago. It's worth about $450k and cashflows about $19k/year in rent after all expenses - (a measly 4% return on cash, plus any appreciation).
I know I can do better, and urgently need to leverage up into other property to increase equity and/or cashflow. I'm feeling a lot of pressure to do something but finding it difficult to decide what I should do.
My goal is to increase cashflow with a long term hold on a larger property - in theory multi-unit, commercial, or perhaps a vacation rental where I now live on the Outer Banks of NC.
Questions:
1. Should I sell the property outright and 1031 exchange to leverage into a $1m - $1.2m property with better cashflow? Or better to keep it and cash-out refi to reinvest in more property? I did try this once (running the numbers to buy a vacation home similar to below, that had good cashflow) but the lender said my debt to income was too high and would not let me do it.
2. Would I even realistically be able to get a loan for a multi-unit property considering my lack of experience in that sector?
I've read a few multi-unit investing books, lurked on this forum for years, and like the idea of multi-unit and commercial property. But the reality I see is that finding a good deal on a multi-unit these days is next to impossible unless you've got insider track with property managers etc...There are zero multi-unit properties less than 2hrs drive from me. I've searched and considered locations around Virginia and NC - (it's unlikely that I would have the guts to buy my first multi-unit in a faraway state that I could not drive to in a few hours).
So that leaves me with something I know a bit about - local vacation homes on the Outer Banks. The appreciation picture for where I'm considering is favorable, cashflow after taxes would be a little bit better. Here's actual numbers on a property that works on paper for me if I sold the DC condo outright:
*The $96k income is last years rental numbers.
Property Information | Cost Information | |||||||||||||||
Property XXX | XXX | Building Cost | $ 820,000 | |||||||||||||
Location | lighthouse dr | Land Cost | $ - | |||||||||||||
Type of Property | Cost Basis | $ 820,000 | ||||||||||||||
Size of Property | 3892sf | Less Mortgages | $ 420,000 | |||||||||||||
Equals Initial Investment | $ 400,000 | |||||||||||||||
Amortization Period | 27.5 | |||||||||||||||
Ratio Information | ||||||||||||||||
Loan to Value | 51% | Mortgage Information | ||||||||||||||
Cashflow / Initial Investment | 5% | Balance | Payment | Interest | Loan Term | Amtz Period | ||||||||||
Cashflow / Assets | 2% | 1st Mtg | $420,000 | $(2,128) | 5% | 30 | 360 | |||||||||
CAP Rate | 6% | |||||||||||||||
# | Description(All Figures are Annual) | Annual Amount | Notes | |||||||||||||
1 | POTENTIAL RENTAL INCOME | $96,000 | Total Potential Income if rented 100% | |||||||||||||
2 | Less: Vacancy | $(450) | Assumed 2% Vacancy Factor | |||||||||||||
3 | EFFECTIVE RENTAL INCOME | $95,550 | ||||||||||||||
4 | Plus: Other Income | $- | Other Fees, charges, etc | |||||||||||||
5 | GROSS OPERATING INCOME | $95,550 | Total Revenue | |||||||||||||
OPERATING EXPENSES | ||||||||||||||||
6 | Real Estate Taxes | $5,000 | Property Taxes | |||||||||||||
7 | Personal Property Taxes | $- | ||||||||||||||
8 | Property Insurance | $5,000 | ||||||||||||||
9 | Off Site Management | $22,000 | ||||||||||||||
10 | Payroll | $- | ||||||||||||||
11 | Expenses/Benefits | $- | ||||||||||||||
12 | Taxes/Worker's Compensation | $- | ||||||||||||||
13 | Repairs and Maintenance | $8,000 | ||||||||||||||
14 | Utilities | $6,000 | ||||||||||||||
15 | Accounting and Legal | $- | ||||||||||||||
16 | Licenses/Permits | $- | ||||||||||||||
17 | Advertising | $100 | ||||||||||||||
18 | Supplies | $- | ||||||||||||||
19 | Lawn and Grounds Keeping | $2,500 | ||||||||||||||
20 | Miscellaneous | $1,000 | ||||||||||||||
21 | ||||||||||||||||
22 | ||||||||||||||||
23 | ||||||||||||||||
24 | TOTAL OPERATING EXPENSES | $49,600 | Sum of Line 6 thru 23 | |||||||||||||
25 | NET OPERATING INCOME | $45,950 | ||||||||||||||
26 | Less: Annual Debt Service | $(25,537) | Total Mortgage Payments | |||||||||||||
27 | CASH FLOW BEFORE TAXES | $20,413 | ||||||||||||||
28 | Add Back: Principal Payments | $6,637 | Principal Paid on Loan | |||||||||||||
29 | - Depreciation | $(29,818) | Tax Depreciation on Building | |||||||||||||
30 | TAXABLE NET INCOME (LOSS) | $(2,768) | ||||||||||||||
What do you guys think of these numbers above?
I kind of hate to sell the DC condo. I'd be more diversified keeping it. On the plus side it's in a very desirable downtown neighborhood in Washington DC (Dupont Circle) so I only deal with very professional high quality renters. It's been rented for 15 years and I've never had a single day of vacancy believe it or not, nor have I even had to meet any tenants since the last 3 turnovers over about 8 years. I live in NC, so that's why I haven't met them!
The big vacation houses have added risk of a storm or something knocking out weeks of prime summer rental income, compared to a year-round tenants in multi-unit. But these vacation homes in the $800k and up are the only thing I see near me that even comes close to a decent cashflow situation.