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Sell Rental Property w/ negative cashflow to pay off debt

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fooyay
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Sell Rental Property w/ negative cashflow to pay off debt  Reply with quote  

Hi, my wife and I are trying to make a decision on whether or not we should hold on to a rental property that we have. The property currently has a negative cash flow when we factor in management fees and lawn maintenance. My assumption is that if it has negative cash flow, it's not a good investment property (makes sense to me), but are there other intangible benefits such as tax write-offs and depreciation that would outweigh the out-of-pocket expenses we are currently paying? (It has only been rented for the past year, and we have not filed taxes since then, so I won't know how a lot of this works until it comes time to file, so forgive my ignorance).

Here is our picture:

Home 1 (Occupied by tenant):
Down Payment: $0 (VA Loan)
Mortgage: $353,000
Interest Rate: 3.25%
Remaining: $330,000
Improvements: $14,000
PITI: $1985
Rental Price: $1905
Cash Flow: -$80
Estimated Sale Price: $410,000

Home 2 (Primary Residence):
Down Payment: $32,500
Mortgage: $155,000
Interest Rate: 3.25%
Remaining: $153,000
Improvements: $0
PITI: $980

Student Loans: Approx $30,000
$1,800 @ 5.25%
$4,700 @ 5.00%
$8,600 @ 4.63%
$7,300 @ 4.63%
$3,100 @ 4.25%
$3,000 @ 4.25%
$1,000 @ 2.33%

A few key considerations:

** WITHOUT selling, we could realistically pay off the student loans by early 2017.
** We would not pay capital gains on the home sale because our move was due to military orders.
** Including repairs and maintenance, our rental property is costing approx $1,500 annually
** The rental home's maximum value was in 2007 at $490,000
** We are both steadily employed. Both vehicles are paid for. No debts other than homes, student loans, and minor revolving credit. Approximate $220,000 in investments (including Roth IRA and TSP).
** There is a 25-50% chance that we may move back to the area of Home 1 due to military orders within the next 3 years.

So on the surface, it sounds to me like selling the house is a no-brainer. The only questions I have are whether or not the tax benefits make it into a positive enough passive income to outweigh the out-of-pocket expenses and costs of our student loans.

Thanks for reading and any insight.
Post Wed Dec 23, 2015 12:16 am
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oldguy
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quote:
My assumption is that if it has negative cash flow, it's not a good investment property (makes sense to me), but are there other intangible benefits such as tax write-offs and depreciation that would


This may be your best investment, it sure sounds like a 'keeper' to me. I was a landlord for 40 years, (just sold our last house in Sept). I often refi'd houses to release the equity (and to get better rates). I used the equity for other investments, some times for more houses. You have what I tried to get for 40 years - ie, 3.25% fixed rate 30 years loans. The bigger mortgage sometimes caused my cash-flow to be zero - but rent inflation & appreciation always fixed that in a few years.

US mortgage loans provide some of the cheapest capital in the world, all other countries require periodic 'resets', usually at 10 yrs. You have 3.25% capital locked up for 30 years. And it is a one-way lock, ie, the lender cannot ask your for a higher rate or an early payoff - but if rates dropped to 3% or 2% in the next 30 years, you have the option to refi for a lower rate.

Depreciation is a virtual cost. Eg, if you spent $5000 for a new roof, it is a tax deduction of about $1000 - so your real cost is $4000. But depreciation is virtual, if your house depreciates $11,000, that gives you about a $2000 tax break, but with no expense. (until years later when you sell the house). In your case, your depreciation tax break is about $150/m - so your cash flow isn't really $-80, it's $70 - and you can change your W4 to actualize that in real time.

Houses typically double in 12 to 15 years. So when the house has doubled to $820,000, you'll owe about $250,000, ie a $570k equity. And you will have raised the rent from $1905/m to $3000/m. The mortgage will still be fixed so the cash-flow will be higher.

quote:
WITHOUT selling, we could realistically pay off the student loans by early 2017


Why hurry, the rent on the $30k is about $1500/yr - I would keep the loans and retain the use of that capital. Get used to directing your income stream to its highest and best use - and I can assure you that directing it to prepay a 2.33% loan is NOT the highest and best use. (But if paying interest annoys you, you could prepay some of that 5.25% money - altho I don't, I keep <5.5% loans full term and invest that money elsewhere.)

Good job on the $220,000 investments and on the cars. A key factor is interest rate. If you use a longterm 11%/yr investment, your $220k, will be >5,000,000 in 30 years. But if you use 5.5%/yr investment, it will be only $1,100,000. As you can see, it is not linear, you get almost 5 times as much when you only double the interest. (And as Einstein said about the most important equation, it's the power of compound interest.)
Post Wed Dec 23, 2015 2:08 am
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