What To Do With Homes Not Purchased As Investments?

Question

I own a condo I purchased as my first home in 2008 and a single family home I purchased to move into in 2013.  Neither were purchased as investment properties.  I moved out of the second property in 2017 and I have had good luck keeping the properties occupied using a local property management company.  The condo value was less than I purchased it for when I moved out which is why I kept it to rent out.  It was so easy to get tenants that I decided to do the same thing with my previous home.

I've started learning more about analyzing real estate deals and realized that while I'm paying down the loan on both properties and they are appreciating, I have negative cash flow on each.  I recently read the The Book On Rental Property Investing by Brandon Turner of Bigger Pockets and I know have a much better understanding of what these properties are actually costing me.  The cash flow on the condo is -$125 per month and it's -$110 on the other house.  This includes budgeting for vacancies, capital expenditures, repairs etc.

If you count mortgage paydown the condo increases my net worth $155 per month after negative cash flow and the house increases my net worth $230 per month after negative cash flow.

I would like to do more real estate investing and I can't decide if it makes sense to keep these properties or to sell them and start over. I feel like it makes sense to keep them because I will lose so much to real estate commissions when I sell and closing costs when I buy a new property. That being said, there's so much to consider I'm not sure where to start.

Please let me know what other information I can provide. Thanks in advance for your help!

Tyler Gibson · Answer

Account Closed With how long you have owned the properties have you looked at refinancing the loans? Maybe you could refinance for the current balance of the loans and reduce the mortgage payment. This might correct your negative cash flow problem. Doing this will likely cost some money on the front end but could save you money over time and make the losers into winners.

Tyler Gibson · Answer

Account Closed Sounds like you have done your homework on the financing and yeah it would be hard to beat that rate. Have you been increasing rent to keep pace with market rents? I know there are many people that start renting and don't think about raising the rent. They fear that their good tenant will leave if they raise the rent. I have raised the rent on one of my properties 2 out of 3 years when renewing the lease. My tenant has never given it a second thought.

Bernadeau C. · Answer

@Alex Bloemer always increase the rent each year on both properties, and that will eventually make your cashflow turn positive. It doesn't look like a refinance make sense.

Mark Bosworth · Answer

First off, you need to think about the rate of return you are getting on your money.  So if you sold the properties today, how much cash would you get out minus your costs?  If you invested that money in a CD/bond, you'd get around 3%.  So is your current home investment giving you more return than you could get somewhere else?  Remember to add in the annual appreciation you get from your house as part of your return.  The nice thing about living with low bond yields is that it makes your real estate investing more attractive.

Account Closed · Answer

Thanks, Joe.  This is kind of what I was thinking but I hoped there was a simpler solution.  Both properties have close to a year left on their leases.  Hopefully I can buy something else properly in the meantime to get some experience.

Account Closed · Answer

@Tyler Gibson I probably have room to increase rent on the condo when the lease is up.  I think I'm doing pretty good with the house.

@Mark Bosworth That's a great question.  I assume with more experience I could do much better with the capital.

Account Closed · Answer

@Mark Bosworth Some quick math tells me that if I were to sell the house I could pull out approximately $55,000.  At 3% per year that's about $138 per month while the property is currently increasing my net worth by $230 per month.

Account Closed · Answer

@Tyler Gibson  I've looked at refinancing the house.  It looks like I can add $160 per month of cash flow.  The current loan has 24-years left at 4.75%.  If I were to refinance with a new 30-year it looks like I could get a 4.50% rate for approximately $2,400 in closing costs.  Interestingly this only changes the increase to my monthly net worth by $9 because the mortgage paydown would reduce.  I'm struggling to determine if this is worth it.

The condo was refinanced in 2012 at 3.75%.  I think it would be tough to find too much money there.

Mark Bosworth · Answer

@Alex Bloemer Then it looks like you are getting about double the return on your real estate that you could get by putting it in the bank.  Lots of people report making much higher returns on their real estate investments - so your return could be improved.  But you gotta ask yourself how much time you have to put into it and what options are available.  For a fun thought exercise, I'd look at what kind of a real estate investment you could make with a $55,000 investment.  What return would you get?

Joe Villeneuve · Answer

Sell both of them.  Take whatever cash you can out of it, and buy properties that DO cash flow.  You'll recover your loses, and then some.  If you don't, you will continue to lose.

Don't get emotional about any property, or your money.  Money is just a tool that must keep moving to work properly.  Money is a verb, not a noun.  When it becomes a noun...you lose.

What To Do With Homes Not Purchased As Investments?

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