One of the plans for generating income after I quit my corporate job is rental properties. We have a 4 plex and our previous home is also a rental. 2012 didn’t work out all that well because we had a negative cash flow of about $3,600. You can see the 2012 details in the April 4 plex update. This year is looking better and we should have a small positive cash flow. I haven’t written an update in a while, so I thought this would be a good time to do so.
- 2012: We had $3,600 negative cash flow
- 2013: After 10 months, we are at $600 positive. It should be over $1,000 by the end of the year.
- 2014: We need to paint the exterior of the rental house, so that’s already one big expense.
These days, I’m feeling like I’m not very good at the whole rental property thing. I read articles about people purchasing rental homes and they are making money right away. On the other hand, I also read that some properties can take quite a few years to turn around. I guess it’s really dependent on the local market. I’m getting impatient because it seems like I could put the money in the stock market instead and start making more cash flow right away. There will also be fewer headaches to deal with.
The only thing that kept me going over the last couple of years was the property appreciation. Let’s look at the 4 plex.
- Acquired in October 2011 for $300,000 with 25% down. That’s $76,400 investment in total because we had some closing cost credit from the seller.
- Current value according to Zillow: $391,000. I know they tend to overvalue properties, but let’s just go with it for now.
- If we can sell at that price, then we’d net around $150,000 after paying off the mortgage and sending 6% commission to our real estate agent.
That’s about 100% gain for 2 years of headache. It’s not too shabby if it all works out. I’m sure it will be less than that though because Zillow can be overly optimistic sometime.
We could sell both properties and add the fund to our dividend stock portfolio. This would almost triple our dividend income and improve our monthly cash flow quite a bit.
Here’s the thing we have been ignoring so far. We’d have to pay long term capital gain tax on the gain from the rental property sales. That’s 0% for the two lowest tax brackets and 15% if you’re above that. We are actually right on the border of the 15% tax bracket so 2013 or 2014 might be a good time to sell and avoid paying 15% to Uncle Sam. I need to sit down and do taxes early this year.
Lately, I have been thinking about an alternative way to avoid paying all the long term capital gain tax above. We could sell the two properties and use the 1031 exchange rule to buy a house we’d like to live in. We’ll have to rent out the house for two years, but we can move in after that.
This way, we’ll avoid the long term capital gain tax. The 1031 exchange seems quite intricate and we’ll have to consult a tax professional to pull it off correctly.
Give it a couple more years
I still want to give the rental properties a couple more years. The apartment vacancy rate in Portland is 3.1% and that’s one of the lowest in the nation. I need to raise the rent over the next few years and see if the cash flow will improve. Hopefully, we’ll be able to get our cash flow to about $800/month at some point. We did improve quite a bit from 2012 to 2013 and I would need to see incremental improvement every year to keep going with the rentals.
Anyone in the rental business? How do you decide when to walk away?
When was the last time you checked Zillow to see your property value?
A scary comment from a reader (Dividend Mom) who needs some help -
The last tenant was there for 6 month, stopped paying rent in October, had to evict him.
The bad part is he has vandalized the property so much, its all in a mess(ceiling coming off, doors ripped apart, electrical wires pulled, holes everywhere etc). I wanted to get red of this and wanted to sell it, but to rehab the property would take another $50k.
I am not sure what to do. I can go to small claims court(don’t want to handle all the hassle that come with it), I have called insurance and claims adjuster has to come and see it. Can I put in market AS IS not sure what price I will get? Can I contact a sales agent to put the house AS-IS without doing any rehab. The current zillow rate is $260. I am in a very bad situation now, hope I will recover from it. Just putting it in words to seek solace from peer readers.
Any one out there with suggestions?