All Forum Posts by: Christopher Kelly

Quote from @Christopher Kelly:

Hello,

A little backstory on my situation. I inherited a fully paid off single family rental property in 2019. At that time, we decided to leave it as is and continue to rent to the long term tenant. He passed last month and we have spent the last 30 days updating the property as best as we can. In our market, the best we could likely do on rent is $2200 a month. Property taxes are north of $3500 a year. And the market value of home is somewhere in the $350-$375k range.

I'll be the first to admit that I'm not an expert of real estate investing and as such my math may be off. But after factoring in taxes and insurance, I'm coming up with a return of approximately 6%. After factoring in appreciation I may be able to return roughly 9% a year. Is this the sort of return that should be expected in real estate or would I be better off selling and investing elsewhere? With the stock market down, and likely to go down further, would I be better off putting that money to work on wall street and waiting for interest rates to knock down prices on a multi family? Lots to consider and all opinions are welcome!

Thanks in advance!

OK.  Forget the percent return...it means nothing.  Here's what is happening, in actual dollars.  You're losing money, and a lot of it.  You have at least $350k in a property that is worth $350k...and it's losing money by the minute...actually, since 2019 when you first inherited it.
I know you may think that it was free to you, and it was, but it started to lose money the day you started to rent it out.  You need to sell it.  Here's why:
1 - The equity you have in any property isn't worth the face value of the property...it's worth what it "buys" in cash flow and property value. 
2 - That's the great thing about REI, your cost buys much more that what you spend.  Your cost is ONLY the cash that comes out of your pocket.  When you inherited the property, the equity in that property represented what the cost of that property was because what you inherited in that equity was just another gifted form of cash...frozen, but still a form of cash, and thus a cost to you.  I know, it didn't cost you anything since it was given to you.  That's true up to the point where you received the gift.  Once it was in your possession, what you really received, was cash in the form of equity, and it represented what you spent on the property in cash.
3 - Why are you losing money of free money?  The loss comes from what that cash/equity could/should be buying.  If you sold that property and converted that equity to liquid cash, and used it as a down payment on a different property (or more), and be worth 20% of the value of the property you could now own. That means instead of a total PV of only $350k, you could have a total PV of 5 times that = $1.75M...and that's not a typo.
4 - Not only does the value of that "equity cash" become much greater, but there becomes an automatic large, VERY large increase in cash flow too.
5 - Wall Street will NEVER be able to keep up with RE as an investment.  It's mathematically impossible. Why?  A lot of reasons, starting with what I wrote above.

You said yourself that you're not an expert of real estate investing.

With that in mind, you are probably better off just hanging onto the property, collecting the cash flow every month, and raising the rent a bit every year. Finding a new deal is one of the hardest parts of real estate investing, so you'll be faced with quite a challenge if you sell.

If you need access to that equity, either get a HELOC or wait a couple of years and do a cash out refinance when rates come down a bit.

Here is what I would do. You have a fully paid off house which can extremely benefit your future in investing and get you off to a great start. So take the cash flow that you will receive with this home. Its fully paid off so most of the monthly rent will be cash flow. 

Then (you have to be slightly familiar with your market but a couple of hours of studying should get you close enough - then talk to an investor/agent) Find your cash flow if you were to sell the home, and put 25% down on as many investment properties that you can get( run your #s with properties on the MLS in your market). This will likely give you a very conservative number of your expected cash flow but I would use this equation to determine if selling is the best option.

Then if you sell the home, buy your first deal with a cosmetic rehab and probably a conventional loan, fix it up and rent it out - I would expect a modest amount of cash flow. 

After the first deal, start gradually getting into more extensive rehabs each deal or scale up to multi family using Brandon Turners doubling method. You should be able to recycle the $ and have significantly more cash flow than the beginning equation.

The other safer option is to take your monthly cash flow and put it into a savings account that you will use to invest into more real estate assuming you want to invest in Real Estate.

Also you can take your extra 1500/month and just have a nice vacation a couple times a year if REI isnt your thing!

The big question is what do you want to do?  Do you want to have rentals or would you rather put your money elsewhere?  Assuming you want to stay in real estate, run the numbers and look at the $ amount you'd make each month on that rental.  Then look at if you sold it and bought a different rental (eg duplex, another single family in another area), how much would you make with that?

If the house was fully paid for when you inherited and you are renting it for $2200 a month, after your taxes and insurance plus maintenance, factoring in vacancy...how much money are you getting each month?  the percent of return for your situation is a bit different as it was an inheritance. Most people will look at how much they used for the down payment to estimate their rate of return.