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Investor Getting Cold Feet

by M. Anthony Carr

Question: I own four new townhouses. I have purchased each one over the last four years and then moved into the next one as my personal residence. I'm about to move next year to another house in a neighboring county. I am renting these out to good tenants, but I'm now worried because I put 10 – 20 percent down on each house. I have good equity and the rent covers all the mortgages. I even have a positive cash flow, but I have no other savings except my 401K and pension. I'm 35 years old and have a 3-month old baby.

My wife is tired of moving every year and now she's scared that we could lose all our equity if the houses go down in value. She's suggesting that we sell all the houses and pay off one to live in. Since we haven't lived in any of the houses for more than a year, we would be penalized if we sell now. Any suggestions?

Answer: Your situation brings all the elements of investing and how it can effect you personally to the forefront. When you are moving into investing, you've done it the way most private investors do it -- albeit in an accelerated progression.

Many investors I know purchase a home, rent it out and move into another home. It's a good way to build your real estate portfolio. Getting four properties in four years is pretty aggressive.

Your wife is growing tired of living out of boxes, I am sure. And this is one of the factors you have to take into account in your investing -- the personal toll it can take on your family if you're buying, selling and moving each time you do it.

The answers to your questions are mostly personal lifestyle choices and the level of risk you're willing to take with your investments. You definitely are heavy on the real estate side, however, you are young (anyone under 40 is young, in my mind).

You need to investigate the past performance of your local real estate market and then the future forecasts of the local economy to determine if now is the time to sell your investment properties. If you're in the real estate investment game for the long haul, then I would advise to hang on to the real estate -- someone else is making the payments for you and if the economy is growing in your area, then the homes are gaining in equity, too.

To help with your decision, I would write out some questions on a notepad and answer them honestly. Then get together with a knowledgeable Realtor who can help you with past values and help guide you on whether or not to keep the properties.

Here are the questions:

Are you in a positive cash flow?

Consider all the costs of the rental, not just the mortgage payment. How much are you paying out per month for repairs, homeowners fees, local taxes, etc.?

Is the value growing at a rate better than other investment opportunities?

Weigh this on the money you've invested, not the overall inflation of the whole property. Keep in mind that if a $200,000 property is growing at one percent a year that's $2,000 per year in growth. Now, what rate of return does the $2,000 give you on your down payment? If your down payment was $10,000, then it's 20 percent -- that's a pretty good return.

Is the property costing more to keep up than what you're able to bear financially?

Make sure to put your positive cash flow in a rainy day fund. Don't get caught without enough cash to replace the furnace, hot water heater, garbage disposal, a leaky roof, etc., when these events arise -- and they will arise.

If you sell out now, what are the real tax ramifications?

You will not be able to take the exclusions on any of them because you have not lived in them for two of the last five years, therefore, you will have to pay capital gains taxes on all of them. What's that going to cost and what will you do with the cash you have? Will it really be enough to pay off one of the houses and live in it? Talk with an accountant about this one.

Review your real estate investment goals. Are they being met with your current situation? Are they too aggressive? Too passive (which I doubt). And how are they affecting the nonfinancial elements of your life. Real estate is not like other investments where you can just let them sit and grow. It requires work and upkeep.

Finally, how's your and your wife's risk tolerance?

A few things are for certain (at least right now):

Someone else is paying the mortgage,
You're receiving tax benefits from each property,
The value of them are all growing (because you're in a growing market in Northern Virginia), and
The economy is on the upswing, so housing will be at a premium over the next several years.

It sounds like your wife needs a lot more numbers than what you're providing. Answer the above questions, talk with the professionals you need to talk with and then lay all the details out for her to see for herself. Then make a decision that works for the both of you. Don't skimp on the answers. If she needs an answer and you don't have the details then you need to know the answer, too.

On a side note: With a 3-month old, maybe you should stay up one night so she can get a full night of sleep before she weighs the above answers. Sleep deprivation could be making her more nervous and less secure -- besides facing another potential move.

Published: November 28, 2003

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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple.

Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.

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