Hold or sell a house in La Porte, TX?

Question

Hi BP,

Real estate and BP newbie here. I have a house in La Porte, TX (inherited) that I am trying to figure out what to do. I ran the numbers using the BP buy and hold calculator and the numbers are not pretty (showing a negative cash on cash return), but there is a decent chunk of equity in the house. Here is some basic information:

-1600 sqft, 4 bed, 2 bath on 10K SF lot.

-House built in 1950, partially renovated in 2015.

-Needs a new roof, foundation work, and new windows.

Had a couple of area realtors come and give an appraisal of the house and they think it should list for $154,900. The remaining balance on the house note is around $117,000 @ 3.75% (30 year) with about 27 years remaining. For rental I have received a range of $1,450 - $1,600. Assuming $1,500 rental income per month below are my monthly expenses:

-Principal, Interest & PMI: $618.82

-Property Tax: $289.14

-Insurance: $208.33 (can probably be reduced by shopping around)

-Water / Sewer / Gas: $45

-Electricity: $40

-Lawn Care: $70 / month (summer); $35 / month (winter)

-Vacancy: 5% of $1,500= $75

-Repairs: 5% of $1,500 = $75

-CapEx: 7% of $1,500 = $105

TOTAL EXPENSES = $1,523.29.

As you can see the expenses are higher than the expected rental of $1,500. I can probably get the insurance lower by $50/month, but the property would barely cash flow. Should I sell and get the equity out and look elsewhere to invest? or should I try lowering expenses, spend on CapEX and see if I can get some positive cashflow?

Any suggestions or guidance would be greatly appreciated. If you need additional details please let me know.

Thanks in advance for your help!

Regards,Shakeb

Dave Foster · Answer

@Shakeb Syed, @Steve Graves makes a good point about the possibility of a 1031 exchange. that capital expense of the roof is looming plus it looks like a very tough project to make profitable. But you may not have to do a 1031 depending on when you inherited it.

When you inherited the property you received a step up in basis. So you inherited it as if you paid market value for it. That means that you may not have any tax to pay. that would be the time to sell and free up that cash to go to a better investment without paying any tax.

Steve Graves · Answer

Maybe a 1031 exchange would be best and buy a better property that cash flows and get rid of your tax liability for selling the house.

Joe Trainor · Answer

Figure out your true tax liabilities from the inheritance, sell and put that new found capital to work in a producing property else where. It will be tough to find a cash flowing property in La Porte that doesn't have a lot of front load cap ex needs. This house describes many in that area. You could try to 1031 but your holding costs during that time could eat up any real advantage you may see from any taxes you could just pay from selling.

Basically, run your holding costs with the house sitting vacant for 3 -6 months while you would go through the process of a 1031 exchange. Compare that to the benefit of what a 1031 would bring you and make an educated decision.

Anthony Bellesbach · Answer

Well one way to lower that is take care of the pmi when 20 % of the loan amount is payed or could pay 500 bucks about for a appraiser and if you have the value in the house. Then they do a 80% loan to value usaully.

Shakeb Syed · Answer

Thanks Clayton!

Clayton Mobley · Answer

@Shakeb Syed yes, if you just inherited it in 2018 and your market hasn't jumped since then, you likely have no real tax burden to speak of. A 1031 would be a good option if there were taxes to avoid/defer, but if not it seems like selling would be the obvious answer. You'd walk away with $35k-ish in cash after paying off the note, and you could leverage that into a better cash flow property that didn't have such large expenses coming down the pike.

John Craven · Answer

Shakeb,

I'd also add that you can likely help that cash flow number by having tenants pay utilities. It is certainly not uncommon in the greater Houston area for tenants to pay their own water/sewer/gas, electricity and their own lawn care.

Shakeb Syed · Answer

Thank you all for your response! It is very much appreciated. I can certainly try get rid of the PMI by getting an appraisal done and lower the insurance premiums, but that might result in a savings of around $100 per month. The primary reason I have held on to the property is because of the lower interest rate, equity in the property and the location (appears to be a good rental market). Based on the feedback from everyone it seems like selling and finding a property with better cash flow might be the way to go.

For a 1031 exchange, does the property have to be rented at some point for it to qualify for the exchange? The property was inherited back in April 2018 via a Transfer of Death Title and has been vacant since. From what I read it looks like I should get the step up in basis and there might be negligible tax consequences.

Thanks again for all your help!

Regards,

Shakeb

Anthony Bellesbach · Answer

pmi should save you about 30 to 50 bucks a month. Something also to look into is what kinda loan rate you can get cause no way your going to get 3.75 rate mostly will be 5 or higher if getting a different house .So factor that in as well.

Hold or sell a house in La Porte, TX?

Hold or sell a house in La Porte, TX?

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