All Forum Posts by: Tyler M.

Hi,

I'm having a hard time deciding if I should sell or continue to rent out a home in Texas. 

Option 1: sell the house now and put it in cash currently 4.8% while waiting for an opportunity to buy in Washington State

Option 2: keep the Houston home and rent it out for another 5 years 

The section 121 exclusion is starting to expire so soon I'll be paying the 15%+ tax on equity gains if I keep the home. On the other hand I have a low 3.125% interest rate and strong cash flow so it's hard to let go of that low interest rate mortgage.

What would you do??????

Here is the analysis work on 5 year ROI with assumptions at the bottom

Option 1 (Sell in October 2023):

Total Return: $198,200 (Future value after investing the proceeds from sale at 4.8% APR for 5 years)

Option 2 (Rent out for 5 years and then sell):

Total Return: $213,700 (Combined return from renting and selling in 2028)

Assumptions:

1. 1. Mortgage:
   • Remaining mortgage as of today: $271,000
   • Mortgage originated in April 2021 for a 30-year term
   • Mortgage interest rate: 3.125%
2. 2. Insurance:
   • Annual home insurance cost: $3,000/year
3. 3. Taxes:
   • Annual home tax: 2.25% of total home value
4. 4. Purchase:
   • Original purchase price: $340,000
5. 5. Sale:
   • Capital gains tax (if sold in 2028): 18.5% on profit (sale price - purchase price)
   • Assume selling fees: 6% of sale price (standard real estate commission)
6. 6. Rent:
   • Monthly rent for 2023: $3,000/month
   • Rent increases yearly with inflation (let's assume an average inflation rate of 2% unless specified differently)
   • Monthly property management fees: 6% of rent
   • Tenant switching cost: $3,000 every 2 years
7. 7. Maintenance:
   • Monthly maintenance and repair expenses: $400/month
8. 8. Appreciation:
   • Annual appreciation of the house: in line with inflation (2%)
9. 9. Current home value:
   • $440,000

@Chris Sparrow I paid down the mortgage to 20% to get rid of PMI. Then moved to a higher paying job on the West Coast, leased out that one TX town home, and now back to looking for housing investment opportunities! Hoping that covid creates some investment opportunities by the end of the summer

@Jason G. Just read through this great thread! What are your main take a ways on which types of properties to purchase and has your strategy changed since you started? In terms of quality, age, purchase price, neighborhood type, market, duplex/SFH. Also, how much time do you spend on your existing properties and how much time looking for new properties each month?

@WillPritchett Thanks for the advise. I like the idea of putting your eggs in one basket just temporarily to really focus on one thing. I have found it difficult to focus with so many options for investing (cities, multi vs. SFH, condos, etc.) and that has been a major factor in my proportionally huge cash position right now.

I have looked into San Antonio, but I am a little concerned with the valuations in the area. I have seen San Antonio pop up on a few overvalued real estate market lists. In my search it looked like there were some nice deals in my price range in the Northeast side, but I am concerned about the rental and vacancy rates in that area. However, I do love the growth prospects along I-10 and along the San Antonio-Austin corridor and I am especially interested in San Marcos. That whole corridor is such a great place to live!

@JosaneCumandala thanks for the feedback. I have explored investing out of state, but mainly through turnkey type companies like HomeUnion and Roofstock. I am not ready to take bigger risks by investing out of state completely on my own. 

I realize that the MLS does not have the best deals, but at this point in my path I feel like there is less risk in MLS listing and I do not yet want to spend money and time marketing for deals. I hope to eventually have a good network to learn about deals that are not on the MLS from avenues I trust. I like the idea of sending in low offers that meat my investment criteria for MLS listings that have been on the market for many days. I was able to get home #1 for a great deal by taking this route.

Here is a quick snip of how my Dashboard looks with the property price and potential monthly cash flow under the location marker. The color of the marker indicates COC return. One problem I'm dealing with is that everything in Houston is skewed due to Harvey..... At this point with my low experience I do not intend to purchases flooded properties. Although I would be interested in purchasing properties that have flooded and then been rehabbed. It will be interesting to see if these properties still sell at a discount.

And here is a quick snip of the spreadsheet. Nothing too fancy, but you can plug in your numbers and I think it gives a pretty good indication of where you're headed. I'm using this to track progress to Financial Independence, which I define as having enough net worth to afford my current budget plus 3% expense growth per year at a 3.75% withdrawal rate. At that point I feel like I could leave my job, commit to real estate or starting a business full time or take more risk in my career while paying off most of the bills and still living somewhat frugally. 

This is a long post, but I figured I would post my situation and a decision I am trying to make along with a spreadsheet I made to track financial independence. See link below. You should be able to copy and paste into another Google Spreadsheet to use with your own numbers.

https://docs.google.com/spreadsheets/d/1yW5uegKTvfssA1Abzyuloe7GtdCZAuKY-LkcaBAvmO0/edit?usp=sharing

Premise:

• Age: Upper 20s
• Income: 90-105k engineering background
• Cash on hand: >$50k (over $80k including cash in Roth IRA)
• Current assets: 1 townhome I live in and rent 2 bedrooms out to tenants. I have the option to remove PMI by paying down $40k more of the mortgage to save >$5k a year

Questions: 

• Given my situation above what is the best option for using this cash? 
• And what is the best option for using >80k cash in Texas if I were to forgo paying down PMI?
• If I pay down the PMI and no longer have much cash can I move to a new home and put 5% down while keeping townhome #1 as a rental?

Background:

I become somewhat obsessed with financial independence and more specifically doing so with real estate mainly because of the advantages of leverage early in life (I'm under 30). I have been following BiggerPockets for awhile now and I read Scott Trench's Set for Life book among other real estate and business books. I have a relatively high paying W2 job that I like so I lean towards an investment path that are on the lower risk and time consuming side. I like the idea of keeping my W2 job for awhile as I get started with investments in a low maintenance way to diversify my income and gain leverage. Many years from now I would like to have the option to live off of my investments, be a full time investor, or otherwise be able to take more risk in my career knowing that I have some passive income to support me. 

So far I have purchased one townhome in a trending part of my city that I am "house hacking" by renting out 2 of the rooms to friends. This situation has worked out very well so far despite a few major repair expenses. I plan on keeping this house long term as a rental after I eventually move, and I think it would have decent cash flow if I were to rent it today. 

Now I am looking into what the next step should be along the path toward financial independence. I have accumulated quite a bit of cash and now over a third of my net worth is cash. I have been looking for the next investment step......

Seeking Advice:

I am weighing two options for using this cash. Option 1 is to use most of my cash to pay down my mortgage from the original 5% down to 20% to remove PMI. I did the math and because my house appraised higher than the purchase price the return on paying down my mortgage to remove PMI would be a 13% return annually for 7 years (after those 7 years I would be off PMI anyways). And I guess that means that despite having a low interest rate on the mortgage I am essentially paying credit card type interest rates on that portion of the mortgage due to PMI. The main reason I don't like this option is that I am removing leverage, which I wanted while I'm young.

Option 2 is to invest the cash in another real estate purchase (I want leverage). I have read many RE blogs, books and other sources including looking into out of state investing and turnkey investing options like HomeUnion or RoofStock, but I've decided that the best option for my second purchase would be a local investment hopefully in an B+/A- area with either a great location walking distance from attractions and prime for low maintenance young professional tenants or in an area with great schools (right next to where I work). It would be much easier to get into the next investment by using all or most of this cash reserve, but I think I could still get a home up to $150k with cash that will be left over after paying down the mortgage on home 1. $150k does not look like it will cut it for the type of investment I am looking for….

I suppose I could invest this cash in the stock market or something else with high risk/returns (currently have just 1% net worth in crypto), but I generally feel that the nearly all markets (stocks, bonds, EM, etc.) are too high and overvalued even after this weeks drop. I am probably biased in this view because I have been in cash for so long. I just have my 401K in the market and I plan on never touching my 401K portfolio other than re-balancing and portfolio adjustments based on age.

Real Estate Search

Along my real estate investment search I looked into programs online that can help find cash flowing homes like Mashadvisor, but I decided that I would be more comfortable doing the analysis myself. I built a dashboard map that allows me to throw in assumptions (occupancy, maintenance costs, taxes, etc.) and then see prospective returns on a map using MLS listings and Zillow rental data (I average Zillow rent estimates by zip code with Zillow rent estimates by square footage by zip code). Using my financial independence spreadsheet I have decided that it's not worth investing unless the cash on cash return (not factoring appreciation) is over 7% and by using my dashboard I have found that it is very difficult to hit 7% COC….. And I think that I'm in a better market than most, Texas. Given that this return seems difficult to achieve right now and the market may be on the higher side maybe it is worth waiting for opportunities later?

Spreadsheet Assumptions

 I tailored this spreadsheet based on my own situation, but I think it can be manipulated easily for other situations especially for others with W2 jobs. I added the option to add up to 6 real estate investments in 6 consecutive years. Activate a particular real estate situation by adding a 1 instead of a 0 on the On/Off row. As a long term investor I assume that the appreciation for any real estate purchases would be 2%/yr. I am believer that over the long term real estate for the most part just increases with inflation (which is plenty after factoring in leverage). 3% may be a better assumption, but given that I believe the market is on the higher side I’d like to stay conservative. I threw the spreadsheet together in one afternoon so there may be some issues. I'd like to eventually tailor the spreadsheet to capture the tax difference of investing in a before tax 401k vs. an after tax Roth, but for now I am just evaluating financial independence based on net worth without factoring in taxes after FI. The values listed in the spreadsheet are not for my finances. I jumbled the numbers.

I'd appreciate any feedback on the spreadsheet too.