All Forum Posts by: Jeff Blankenship

Thanks to everyone for your feedback.  I really appreciate the community and knowledge of everyone on the forums.

UPDATE: I've reduced my insurance and going to refinance and keep for now.  The current tenants rental agreement is up in May, and I do not know if they will be moving or not. I have no reason to think they are, but I do not know.

I reduced my insurance premium by $15/month, and after refi my mortgage will go from $1050 to $880 (4.25% 30yr fixed).  I talked to Prop Mgmt to see if can get them to go from 10% to 8%, but not counting on that. 

Overall savings = $185 month

NEW Net = - $1780 year  (-$150/month)

The tenants have taken good care of the property, but there would be a $2000-$3000 to get the property ready to market.  My real estate agent (after inspection of the property and market analysis) said the property would list for no more than $130k in the current market.

I'm with everyone on cutting losses and moving on.  I'm a firm believer in trying to get rid of "negative energy."  With the changes I've made to the insurance and payment, I'm not far away from being cash flow neutral on the property.  Obviously this is speculation, but 3-4 years ago we were getting $1300 a month in rent, and it's not unreasonable to think we could get back there.  It is also very possible that rent could deteriorate more, but that is not the consensus of the local market.   

I'm not an accountant, so I'm trying to figure out the correct way to calculate return on investment.  

If I use equity from property 1 to invest in property 2 (purchase or refi), how do I calculate my return compared to using cash?  Is it the same? Or, since it is essentially moving money from investment 1 to investment 2, is this viewed differently?

Example 1 - if I can cash out refi property 1, and refinance property 2 and 3, to improve overall cash flow by $750 per month or $9000/yr (closing costs $3,000 per loan, $9,000 total).

So, I'm putting in $9,000 out of my pocket to see an increate in cash flow by $9,000  - how do i calculate the return on this money? - Is this a 100% return?

Example 2 - same as 1, but I put another $20,000 toward the refi, to improve cash flow among all 3 properties an additional $100/mnth or $1200/yr.  How do I calculate this return?

@Jesse T. - interesting thought - OPTION # 5 - pay down mortgage and refi.  I have considered this.  

I can pull some equity out of other properties and use some cash to make a $50,000 payment on the mortgage, then refi.  By doing that, I should be able to get the mortgage down to $630/month or $7,500/yr for a total expense of $11,800 instead of $17,000 (neither one accounting for capital expenses).

So this makes a much more attractive investment...well, attractive is relative..:)

Here would be rough number:

- Use $50,000 cash reserves and/or equity in existing properties to buy down mortgage

- Refi $127,500 @ 4.25%, 30yr fixed, $3k closing = $630 payment

$630 payment

$2000 annual tax

$1200 insurance

$1000 yr expenses (not sure if this is good number or not - HELP?) 

$1320 yr prop mgmt

---------------------

$13080 Yearly Expenses

$13200 Rental Income

Net = -$120 per year  (essentially a break even)

--------------------------------------------------------------

OPTION 1 - refi, spend $3,000 now, and loose $2500/yr

OPTION 2 - fire sell - spend $50,000, and sell

OPTION 3/4 - lease option / rent to own...my least favorite...

OPTION 5 - spend $50,000 and refi for break even cash flow

@Michael Seeker - excellent points.  Thanks for you thorough evaluation.  

HARP refi costs = $3,000.  Good point, as I had not mentioned that, and obviously that needs to be part of the conversation. 

@Jackie Chiles - Great thoughts.  

Insurance - I spoke with existing insurance company and they can reduce by $100/yr.  I'm going to get some more quotes.  

Management - interesting thought.  possibly, but I think i would first talk to mgmt company and see if they would take 7%-8% instead of 10.  I live out of state, so have an in town reputable mgmt company makes sense.  I'll look for opportunity to reduce this cost.

RE Taxes - the property is valued by Tax Assessor at $179,000.  So, if it is really $120k, as these last 2 short sales, I may be able to get my taxes down.  Not sure how successful that will be.  On one hand I'm trying to justify a $165k value for selling, and $120k for taxes...seems like a conflict;)

@Account Closed - yes, I have good cash reserves, and my other rental properties are doing well.  Lots of equity, positive cash flow, etc...

ANOTHER TWIST - so, this little neighborhood of about 30 homes is a little odd. All of the homes sold new in 2007-2009 for ~$180,000. The house across from mine sold in April of 2013 for $179,000. HOWEVER, 2 houses in the neighborhood sold in past 6 months as short sales for $120,000. Those are the last 3 comps. The market value of $165,000 is based on a 1 mile radius of same sq footage, age, build quality, style, etc...

My RE agent knows the agent who brokered those $120k deals, and he was helping an investor purchase these properties.  Bottom line, can I sell my property for $165k or $120k?  I'm going to talk this over with my agent and see if she thinks we can justify a listing of $165 or not.  

@Michael Seeker  - good point about capital expenses.  they have been minimal so far, as I purchase the house new (2007), and had excellent young professional tenants.  It is a 2000 sq ft brick home on a slab.  So far the repairs have been minor (garage door, minor a/c repair, etc..).  I would not anticipate any "major" repairs ($1,000+) for another 3-5 years.

@Joe Villeneuve - I'm trying to wrap my brain around the $17,000 expense you are referring to.  For clarity, this is:

mortgage payments + taxes + insurance + property management = $17,000 per yr

So, this is a true expense (plus any capital expense to property which have been minimal ~ ($500/yr as it is a fairly new brick house on slab).  However, these expenses would not exist if I did not own the property, which currently produces $13,200 in income every year.  So, I'm not clear on why the property has a $17,000 yearly expense instead of a $3800 expense?  (and if I refi a $2500 expense)

You mentioned that in option 2, I take the $17,000 and invest it each year, instead of spending it on the property. But I'm not understanding this - if I don't own the property, I don't have $17,000 to invest.

What if I owned the property free and clear?  I would have a $4,500 annual expense (17,000 minus mortgage payment).  Would you say - why have a $4500 annual expense, instead sell and invest that $4500 each year?  (again, I would not have have the $4500 expense without the $13,200 income, so this would not be possible).

I know you guys are way smarter and more experienced that I am, and I'm just taking a while to wrap my head around this.  I'm certainly not trying to be argumentative, or difficult, just want to understand.

Okay, so 1 vote for option 1, 1 for option 2, and a suggested option 3.  

Thanks guys!  You are giving me several things to consider in my decision.

Nope, not discouraged.  I've got/had lots of winners in past 7-8 years.  This was just a dud.  Market was hot when I purchased, but 2 major corporations pulled out, so employment status in the area changed.  It was speculation on my part at best, and lessoned learned.  

Thanks for your opinion.  Looking forward to what others have to say.