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Sell or keep rental properties?

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Thurman
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Sell or keep rental properties?  Reply with quote  

My wife and I are in our fifties and live in a western mountain resort town. The oldest of our 2 daughters enters college next fall. In addition to our own home, we own 2 rental properties, both of which we rent long-term to locals. In 2009 we rolled all 3 mortgages into one to save cashflow. In Sept. 2014 we refinanced it at 3.75%, 15 year amort, $442k. I've been keeping track as if we had 3 mortgages, and our home's share is $236k, Rental 1 is $168k, and Rental 2 is $39k. Cashflow picture, including everything: Rental 1 loses $500/month. Rental 2 makes about $100/month, but doesn't have exterior maintenance built into the hoa fee. Rental 1 market value is around $4-500k. Market value for Rental 2 is maybe $175k.
Post Tue Jan 13, 2015 6:58 pm
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littleroc02us
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You mentioned cashflow on these rentals. You have -$400 cashflow, which means your bringing money to the table each month. To me it sounds like a cash drain. Does that even maintenance, management of the properties, etc???
The wonderful part is you have around $368k in equity. If it were me I'd sell them now and pay the taxes. Their not worth the loss each month. Cash out.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Tue Jan 13, 2015 9:47 pm
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oldguy
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The big factor in the Negative $400/m cash flow is your loan term.
If you had a 30 year term, the cash flow would be $1166/m better. So, instead of feeding the houses $400/m you could be receiving $750/m ($9000/yr) and investing it in an 11%/yr index fund - that would be a huge account in 30 yrs. ($2,000,000).

You have plenty of equity, you could refi to a 30 yr term?

I use only 30-yr terms on our houses. US mortgages are among the lowest cost capital in the world - most of the other 190 nations require loan resets at about 10-yr intervals. But in the US, Joe Blow can walk into a bank, ask to borrow $400k for a house - and insist on a 30 yr term - and insist on a Fixed Rate guarantee for 30 years - and walk away wit the money. And Obama just made it even easier, he felt sad that some people had to pay PMI so he lowered the rate, lol.
Post Tue Jan 13, 2015 10:22 pm
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jasonsmith
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realestate  Reply with quote  

his simple calculator gives a quick read on the economic viability of renting out, rather than selling your house.
Post Wed Jan 14, 2015 7:35 am
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littleroc02us
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I just realized you have a 15 year loan on your rental properties. Was your purpose for that to pay them down early, so that your paying less interest and increasing your equity? If that was the case then a 30 year will just set you back further on your goal and you'll be cash flow positive. Not sure if you've hear of the 2% rule in the rental property world? The 2% rule says if you can find a property priced such that the rent is 2% of the purchase price, it will cash flow. Personally I'd rather have a paid for rental property cash flowing because it creates much lower risk then a highly leveraged cash flowing property.
I have a rental duplex that cash flows $450 a month and I purchased for 180k in a great neigborhood with wonderful tenants who pay on time. It has been appraised at 220k and I only owe 132k. I sleep better at night knowing that I'm paying it off as quick as I can.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Jan 14, 2015 2:40 pm
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Thurman
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littleroc and oldguy: Thanks for your advice. Both of you have provoked some searching on my part. It's true that our motivation was to retire debt as quickly as possible. That was 2009. Unfortunately, our business has sagged in the meantime and we are suffering a little cashflow pressure in the household. I think we can make Rental 1 make money through a refi, but we would really be committing to long-term debt as a result. The good news is that if we got separate financing for both rentals and used the money to pay down our personal residence loan, I calculate that we would slash six years off our 15-year loan started in sept. 2014. This nicely coincides with our second daughter graduating college in about 9 years. Very tempting.
Post Wed Jan 14, 2015 8:43 pm
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oldguy
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quote:
The good news is that if we got separate financing for both rentals and used the money to pay down our personal residence loan, I calculate that we would slash six years off our 15-year loan started in sept. 2014.


Many people intuitively like to prepay loans - ie, get rid of them quickly. Personally, I do the opposite, anytime I can get 30-yr, fixed rate, low cost capital. I borrow it for as long as possible. And then I invest that capital elsewhere to get a higher return. I did the math about 40 years ago when I started owning rentals - the power of compounding is amazing when you see the math - ie borrow at 4% or 5% and earn 11%/yr, it really adds up over 30 yrs. Very Happy
Post Wed Jan 14, 2015 9:13 pm
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gccseo1
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Cash flow is crucial to an entity's survival. Cash outflows result from expenses or investments.




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Post Sat Jan 24, 2015 5:09 am
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