Looking for perspective on 'sell/hold' for one-off rental property
June 30, 2024 3:41 AM Subscribe
In the middle of financial transition and trying to properly evaluate what seems like a complicated set of risks and time-value issues. [details inside]
I'm not a professional property manager or investor and have a solitary holding that is a 3-unit property in Somerville, MA. At a crossroads where I'm trying to make a detailed assessment of whether it's better to hold the property (and likely make some capital investments) or sell.
The key action that's impending is the conversion of a Home Equity Line that's expiring its ten-year open period. I believe these are the relevant financial metrics:
Property details:
Purchased in 2011 for $535k (5% down)
Current mortgage balance is $365k @4%
Gross annual rent is $95k
Annual NOI tends to be between $20-$25k depending on maintenance and cost escalation
Estimated market value is $1.4M
My estimate for the walk-away value of a sale is ~$750k after capital gains
Other debt:
The expiring HEL has a balance of $70k @prime
Car loan of $30k @8.2%
Residence mortgage of $265k @4%
Considerations:
- This is located in metro Boston, which like other places is curious about the future of its downtown commercial areas post-COVID/remote work
- This is located in Somerville which just opened a transit station near it and is seeing rapid, but perhaps not sustainable growth in value
- We've renovated one unit (when we got the HELOC), but there is potential to do further renovations with attendant cost, but likely increased rents
- Old boilers mean likely replacement costs in the $5-15k range
- As this HELOC converts, we're likely going to get another HELOC in order to (i) have liquidity to meet any surprise expenses (ii) make pro-active investments in the property and (iii) retire the existing HELOC
Ultimate Question:
If we compare holding it and value the risks and benefits of regular rental income and appreciating (hopefully) property value, versus selling the property and reinvesting / retiring debt, what should our metrics of valuation be (so far I've been doing a pretty simple IRR)? What other investments should we compare against (so far I've been considering CDs as baseline and Index funds as likely market returns for any savings).
What are we missing and should be considering?
I'm not a professional property manager or investor and have a solitary holding that is a 3-unit property in Somerville, MA. At a crossroads where I'm trying to make a detailed assessment of whether it's better to hold the property (and likely make some capital investments) or sell.
The key action that's impending is the conversion of a Home Equity Line that's expiring its ten-year open period. I believe these are the relevant financial metrics:
Property details:
Purchased in 2011 for $535k (5% down)
Current mortgage balance is $365k @4%
Gross annual rent is $95k
Annual NOI tends to be between $20-$25k depending on maintenance and cost escalation
Estimated market value is $1.4M
My estimate for the walk-away value of a sale is ~$750k after capital gains
Other debt:
The expiring HEL has a balance of $70k @prime
Car loan of $30k @8.2%
Residence mortgage of $265k @4%
Considerations:
- This is located in metro Boston, which like other places is curious about the future of its downtown commercial areas post-COVID/remote work
- This is located in Somerville which just opened a transit station near it and is seeing rapid, but perhaps not sustainable growth in value
- We've renovated one unit (when we got the HELOC), but there is potential to do further renovations with attendant cost, but likely increased rents
- Old boilers mean likely replacement costs in the $5-15k range
- As this HELOC converts, we're likely going to get another HELOC in order to (i) have liquidity to meet any surprise expenses (ii) make pro-active investments in the property and (iii) retire the existing HELOC
Ultimate Question:
If we compare holding it and value the risks and benefits of regular rental income and appreciating (hopefully) property value, versus selling the property and reinvesting / retiring debt, what should our metrics of valuation be (so far I've been doing a pretty simple IRR)? What other investments should we compare against (so far I've been considering CDs as baseline and Index funds as likely market returns for any savings).
What are we missing and should be considering?
How much time and energy are you willing to dedicate to earning these returns?
You mention renovations - that normally means significant effort even just to project manage.
If the post tax numbers are favourable without renovation that still means you have to spend time and energy being a landlord. Do you have the bandwidth to keep doing that? Would the numbers still work if you had to use an agency to do it for you?
My point is that you invest in an index fund and then you do absolutely nothing. Maybe track taxable income so you can do your tax return. That still is a lot less effort than maintaining records for your property income.
How important that is depends on how time rich or poor you are and how much you enjoy doing that kind of thing.
posted by koahiatamadl at 6:27 AM on June 30
You mention renovations - that normally means significant effort even just to project manage.
If the post tax numbers are favourable without renovation that still means you have to spend time and energy being a landlord. Do you have the bandwidth to keep doing that? Would the numbers still work if you had to use an agency to do it for you?
My point is that you invest in an index fund and then you do absolutely nothing. Maybe track taxable income so you can do your tax return. That still is a lot less effort than maintaining records for your property income.
How important that is depends on how time rich or poor you are and how much you enjoy doing that kind of thing.
posted by koahiatamadl at 6:27 AM on June 30
Response by poster: if I had 750k in cash - would I invest this in this property
Buying into this property at current interest rates would be a very different cost structure. Is that part of what you're trying to get at with this line of thinking?
To me a big part of the value of the current situation is (i) it's cash positive, so even though there's an investment of time and attention, there's a regular positive dividend and (ii) we benefit from the local appreciation in RE values for a highly leveraged asset (now over a million with only a $30k-ish up front investment).
posted by Reasonably Everything Happens at 8:45 AM on June 30 [1 favorite]
Buying into this property at current interest rates would be a very different cost structure. Is that part of what you're trying to get at with this line of thinking?
To me a big part of the value of the current situation is (i) it's cash positive, so even though there's an investment of time and attention, there's a regular positive dividend and (ii) we benefit from the local appreciation in RE values for a highly leveraged asset (now over a million with only a $30k-ish up front investment).
posted by Reasonably Everything Happens at 8:45 AM on June 30 [1 favorite]
Money market accounts are getting ~ 5% so that would be $37,500 with no work on your part.
posted by MadMadam at 11:58 AM on June 30 [1 favorite]
posted by MadMadam at 11:58 AM on June 30 [1 favorite]
Also not a professional
4% rate seems great, I dunno if those post GFC to Covid era rates are ever going to be seen again. I know some have rates in the 3's, but 4 is still excellent.
Comparison-wise, I'd look at this as fixed income. How does your return stack up against the 4-5% long term rates we see today. I would expect leveraged appreciation to crush today's risk free return but did not run the numbers.
Property is an inflation hedge, and inflation is still to some extent "out of the bottle". You'd at least have a hedge against it running away again. Not an expert on the US fiscal situation, but I think I would like to be hedged against structural inflation being a long term problem. I don't think we'll know if we've actually killed inflation until the next downturn/govt stimulus story plays out. There are strong arguments for both sides of structural disinflation vs structural inflation as our current secular trend.
How's the sea levels in Boston? Kidding, sort of.
You also have already gone through being a landlord, so no psychological adjustment needed there as opposed to being a first time investor.
If I run the numbers for MY situation, this is a keeper. I'd look at it as a sort of pension-like retirement. Low risk, but not no risk.
posted by Team of Scientists at 12:10 PM on June 30
4% rate seems great, I dunno if those post GFC to Covid era rates are ever going to be seen again. I know some have rates in the 3's, but 4 is still excellent.
Comparison-wise, I'd look at this as fixed income. How does your return stack up against the 4-5% long term rates we see today. I would expect leveraged appreciation to crush today's risk free return but did not run the numbers.
Property is an inflation hedge, and inflation is still to some extent "out of the bottle". You'd at least have a hedge against it running away again. Not an expert on the US fiscal situation, but I think I would like to be hedged against structural inflation being a long term problem. I don't think we'll know if we've actually killed inflation until the next downturn/govt stimulus story plays out. There are strong arguments for both sides of structural disinflation vs structural inflation as our current secular trend.
How's the sea levels in Boston? Kidding, sort of.
You also have already gone through being a landlord, so no psychological adjustment needed there as opposed to being a first time investor.
If I run the numbers for MY situation, this is a keeper. I'd look at it as a sort of pension-like retirement. Low risk, but not no risk.
posted by Team of Scientists at 12:10 PM on June 30
Essentially, risk free return over the next 17 years would turn that 750k into $1.6M.
If you assume a modest 3% annual appreciation, the property will be worth $2.3M at the end of the next 17 years.
Assuming a breakeven on your forward NOI (also conservative), you're outperforming the risk free return by over 40%.
Caveat: I just plugged this into ChatGPT, did not check the math.
posted by Team of Scientists at 12:32 PM on June 30
If you assume a modest 3% annual appreciation, the property will be worth $2.3M at the end of the next 17 years.
Assuming a breakeven on your forward NOI (also conservative), you're outperforming the risk free return by over 40%.
Caveat: I just plugged this into ChatGPT, did not check the math.
posted by Team of Scientists at 12:32 PM on June 30
Sorry, that assumed you break even on net operating income MINUS the mortage payments.
posted by Team of Scientists at 12:41 PM on June 30
posted by Team of Scientists at 12:41 PM on June 30
Mod note: One removed, an answer that is basically just "do not participate in capitalism." In Ask Me, the policy is to remain dialed in on helpfully answering the OP's actual question rather than expanding the topic to a larger conversation. (ie, don't answer a question about recipes for beef stew with a plea for the OP to become vegan.)
posted by taz (staff) at 11:26 PM on June 30 [2 favorites]
posted by taz (staff) at 11:26 PM on June 30 [2 favorites]
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posted by IAr at 6:27 AM on June 30