Current Rental: Sell or Cash out Refi?

Question

We accidentally became landlords 10 years ago.  We want to get into some additional properties and build our passive income / retirement.  How do I figure out if it is better to stay in this property  OR sell it and invest in something else using  a 1031 exchange.  What kind of deal would I need to find to justify refinancing and using equity for another deal.

Original purchase: Owner occupied 3 Bd 2.5 bath townhouse in 2003 for $148,000

Been rented since 2007, we manage the property ourselves.

Refi at some point to consolidate a HELOC @ 3.5% interest  Current Balance is $126,000

Current Market value $290,000 - $300,000

Rents at $1500/ month, it is in a good area and I don't have problems keeping quality renters in it at that price.

Expenses - $200 / month (HOA and some utilities)

We see about $600 positive cash flow monthly.

With depreciation and home office expenses we  "loose money" every year and that helps us out on our taxes.

We would like to keep it, but don't know how to get into another property or if it would be worth it.  We aren't real estate people, and have other jobs so we would be looking for turnkey.  What are my options here?

Thomas S. · Answer

This will never be a worth while income investment property. In the real world this property, with present rent to income ratio, will never produce positive cash flow. Reality is it is now or soon will be a major money pit.

The true value of this property is in the dead equity which can not be successfully tapped through refinance. This is a property that every wise investor should place on their immediate sell list. It has exhausted it's investment potential through appreciation and as a rental is now a liability.

I would be listing to sell immediately to not only access the equity but to avoid any further negative cash flow.

Sell, sell, sell.

Andrew Kerr · Answer

@Steve George - also don't forget to budget in an line item for capital improvements. If you have owned the place since 2003, my assumption is you will need to do big ticket items at some point like, exterior paint or siding, new roof, new HVAC, remodel to bath or kitchen, new hot water heater, etc...

Corby Goade · Answer

@Steve George, thanks for the clarification. If this place cash flows well and you want to explore expanding your portfolio, you might look into a HELOC on the property. That's the tool I use to leverage and acquire new property, and it's worked quite well for me.

Dave Foster · Answer

@Steve George, Recapturing 15 years of depreciation can be avoided if you do a 1031 exchange.  You'll be able to transfer your basis and remaining depreciation into a new real estate investment and use the cash gain to purchase more real estate.  If you decide selling the preferred choice then a 1031 into one or more new properties that cash flow better or are easier to manage.

Thomas S. · Answer

Cash flow is based on the life of a property not yesterdays costs and expenses. Going forward your expenses will eat every dime you have received from this property and more. In the real world you do not have $600/month in positive cash flow. I see this property in the range of negative $400+/month based only on your limited information. Your HOA is 100% in control of your future on this property.

Statistically a rental property will have long term expenses in the range of 50% of rental income. A 300K property would need rental income in the range of $2500/month to see any positive cash flow long term Your ROI on this property is non existant based on future expectations of cash flow.

In addition you are losing out on a potential $700 - $1000/month income due to the opportunity value of your dead equity. Refinancing to pull out equity is definatly not a reasonable option.

Now is the time to realise your profits while the markets are high and before they turn. This is a SFH not a rental property and this is a sellers market. Get rid of your tennat and sell, now is your time.

Steve George · Answer

Tell me more about the rent to income ratio.  On my paper it does have positive cash flow.  $1500 in monthly rental income minus $900 in mortgage and expenses = $600 in my bank account every month.  You are right about it being an older property that will need to be updated and maintained.  It is a townhome in an HOA community so most of the exterior things are maintained through the HOA which is managed pretty well - although we could have assessments.

Steve George · Answer

I should have said we aren't currently real estate people, but we are realizing that maybe we could be.  The cash flow is positive, it has been easy to rent.  But is it a good investment? or is there a better use for this money?    Do we keep this and refinance at a higher rate to get cash out and buy another house (in a different area) or sell this one and buy two houses in a different area.   Our CPA says if we sell it we would have to pay back 15 years of depreciation.

Anthony Dooley · Answer

I would keep it and focus on your day job. The numbers don't really justify buying another rental unless it is in a lower price range. $1500 rent for a $300K house is a terrible ROI. Unless you can find another $150K house to buy, just hold it.

Corby Goade · Answer

You haven't mentioned why you want to sell or cash out- you say you "aren't real estate people," but it sounds like you are contemplating another investment. Why? Sounds like your cash flow is good, the place is easy to rent- what's your motivation to sell? Fill us in and I would happily give you some ideas.

Andrew Kerr · Answer

@Steve George Welcome to BP! You have a lot of options. I would start off my putting your current property into the Bigger Pockets Rental Calculator. You have to massage it a bit, as the calculator thinks you are buying a property, but just enter your details.

Play with different levels of down payment, as if you were going to do a cashout refi. Ideally, you should be able to borrow up to around $225,000 on a $300,000 value. Do one for $225k, then one for $200k, then $175k, and $150k. And see what type of returns you get. Then what you would do is use the cash out for a down payment on another property.

Also think about your long term goal. Would you rather acquire a bunch of properties and max your leverage? Or do you want to only have a few paid off properties?

When you run your numbers, you can also look at 15 or 20 year fixed rate which would give you less cash flow, but help you pay off the loan quicker.

Current Rental: Sell or Cash out Refi?

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