Is a rental property in NoVA worth the pain? (McLean: real estate, foreclosure)

[vauser]

We bought one 6 years ago. Price right now is at least 20% lesser than what we paid for it. We've had 100% occupancy but not without issues. Had multiple non-tenant related maintenance issues, and add to it the time spent on fixing on those issues in addition to the money spent, it begs the question, "is it really worth it?".

We wanted to invest in real estate thinking it was a "safe haven" but have learnt it the hard way (as immigrants) that land is not the same everywhere in the world, and while there are countries where it appreciates almost every night (literally!), there are places where they simply don't. That's reality.

Now, for some numbers. It is a condo, and we just about break even (considering the tax deductions and mortgage interest). So, it is not a clear positive revenue every month. There is condo fee of over $300 and that could keep increasing, it is located in Loudoun county (so it is not in DC or McLean, from a locational superiority standpoint), and is about 20 years old.

Question I have is - if we were willing to spend time, energy and money and maintaining this for the next 10-15 years, would we have gained anything or would we be better off simply getting rid of it now?

[pcity]

Originally Posted by vauser

Question I have is - if we were willing to spend time, energy and money and maintaining this for the next 10-15 years, would we have gained anything or would we be better off simply getting rid of it now?

If you're breaking even, that means you're gaining equity in your condo for free. The longer you wait to sell, the more equity you'll build.

Only you can weigh that against the time it's taking and the money you could be making if you sold the condo and invested the cash.

[FCNova]

Good question. I own a townhouse in a good location(tysons corner) which I should be able to rent for about what the mortgage is or maybe slightly more when we move in 2-3 years. I often think the possibility of renting it out sounds good with everything going on in Tysons, but then I think about the potential headache being a landlord could be. Lots of people do it so it can't be that bad right?

[airjay75]

Seems to me that if you're just breaking even, then it isn't the best investment because the only return you're getting is the increase in the property's value, and, historically speaking, the appreciation in residential real estate in the U.S. does not produce a rate of return much greater than the rate of inflation. Sure, certain years will see high rates of appreciation but other years will see depreciation and, on average, I think you just barely beat out inflation making it a pretty poor investment vehicle. That said, you are getting that return on the full value of the home, which would not be the case if you sold it and invested the equity you currently have in the house in something else.

Personally, I've always been pretty risk averse to the rental property business. I've met a lot of people who think it is just so easy to, when you go to buy your next home, keep your current home, rent it out, and, after a few years, you'll make some big bucks. I actually think a lot of this kind of thinking started during the real estate bubble of the past 10-15 years - people saw how quickly housing was appreciating, and they just thought they would be totally foolish to ever sell a piece of real estate. The more traditional rule of thumb (pre-bubble) that I've always heard is that unless a property can fetch a monthly rent equal to 1% of the property's value, you are looking at a somewhat risky investment, and one that will not necessarily pay off. Most of my friends I've ever said this to say that's ridiculous, but I have found when I dig a little deeper, they usually feel that way because they are banking on the notion that property values will increase at rates far in excess of the rate of inflation. That can happen, but that's what I call the the property speculation business, not the rental property business. Plus, when you think about that money being invested in one, single asset, I think that adds to the level of risk, and I would personally feel much safer with my money in a diversified portfolio of stocks and bonds.

So, if I were in your shoes, I would probably think about selling sooner rather than later, but, as others said, a lot of it comes down to your individual risk preferences. I'm pretty risk averse to investing in real estate, unless it is through a broadly diversified mutual fund of some kind.

[michgc]

Originally Posted by airjay75

The more traditional rule of thumb (pre-bubble) that I've always heard is that unless a property can fetch a monthly rent equal to 1% of the property's value, you are looking at a somewhat risky investment, and one that will not necessarily pay off.

Where is this kind of rent possible? You are saying that a house worth $500K in NoVA should rent out for $5000 per month for it to be a worthwhile investment? I cannot imagine that anyone's home rents out for 1% of its property value.

[FCNova]

That rule of thumb must be extremely outdated, like the one where you should only purchase 2.5 times your income or whatever it is. Maybe it's from a time when interest rates were very high and property values were much lower. I don't see any way a property is going to rent for 1% of it's property value these days. People with that type of housing budget could easily just buy the property.

[oneasterisk]

Originally Posted by michgc

Where is this kind of rent possible? You are saying that a house worth $500K in NoVA should rent out for $5000 per month for it to be a worthwhile investment? I cannot imagine that anyone's home rents out for 1% of its property value.

I've read the 1% rule and when I was looking for my rental property I followed it. I bought it for 162k and I'm able to rent it for $1695. Now for 162k, it was a foreclosure and I had to put some sweat equity and repairs into it. I ran the numbers over and over again to make sure it'd be profitable before I jumped in. My PITI is $966 and even paying property management I'm still able to clear over $500 a month and have been able to have a positive net operating income. In the past though I've been making 11-12% of my initial investment so that's a lot better than if I had kept that money in the bank. This year won't be as good as I had to replace the furnace/ac but at least I'll be able to depreciate those units for a few years.

So if the property price can't meet that 1% "rule" then it's not a good buy at that price to be able to positively cash flow. As I've read, you make your money when you buy a property not necessarily when you sell it. If you can buy it at the right price, then chances are good you cash flow it and then sell it for a profit. It usually means you'll be buying ugly houses though, and not the ones listed as "shows pride of ownership".

This has just been my experience. I'm not an expert rental property owner and only own the one. I've thought about buying another one, but it'd drain a lot of my savings and I'd rather have the cash in the bank with all the talk of sequester etc.

[FCNova]

^ That makes sense for investors looking to buy and immediately rent out a property and cash flow. I guess I was thinking more along the lines of people who are upgrading and don't need the equity in current house and decide to rent it out..

[airjay75]

Well, it's just the rule of thumb that I have heard of in the past. If you google "1% rent rule of thumb," you will definitely see sites coming up discussing it. Here's one I just found.

Income Property - How to Know If This House Is A Good Investment. | Afford Anything

It may be a somewhat outdated rule - I've never really gotten too in to the numbers myself, but I think the rule does reinforce the fact that it is not very easy to be successful in the rental business. There can be a lot of costs associated with rentals - dealing with bad tenants, maintenance, periods where the home is vacant and you are taking in zero rent, costs of finding a new tenant, costs to upgrade the home just to make it appeal to a new tenant, insurance, etc. I think many people underestimate those costs and have quite lofty expectations of property appreciation. I guess, for me, unless I was confident that the property was actually going to produce a net positive cash flow, I wouldn't see any point to keeping the property. Maybe you don't need a rental rate quite at 1% for this to be the case, but I would think you need at least 0.5% and possibly more.

[airjay75]

Originally Posted by FCNova

^ That makes sense for investors looking to buy and immediately rent out a property and cash flow. I guess I was thinking more along the lines of people who are upgrading and don't need the equity in current house and decide to rent it out..

I guess my question would be why do this if you aren't going to have some kind of positive cash flow from the property? I think the answer for a lot of people who do this is that they are simply counting on the property to have significant appreciation, and, to me, that makes it a very risky investment. One, I think home values historically have just barely surpassed the rate of inflation, and, two, you are investing a significant amount of money in a single asset. Is there a chance that home will have double digit appreciation and you will have some decent returns when you eventually sell it? Sure, but its a pretty risky bet in my opinion.