Should I sell my negative cash flow investment property?
I currently own a house that has a negative cash flow of $3400 per year. I am trying to decide if it makes sense to keep the house or to sell it. I've done some analysis of the benefits of holding it despite the cash flow loss and figured that the house gives me a "net worth" gain of about $10k per year taking everything into consideration (future cash flow, the principal being paid down by renters, the increase in the value of the house where I've assumed only a 1% increase to be conservative). The challenge is that I've never seen this played out before. Does anyone have any experience with holding a negative cash flow house long term and the economics moving in their favor? Thanks in advance.
With only 1% appreciation sell it if you can. You left out what's it worth and what you owe. If appreciation was at 8% the answer would be maybe, but at 1 it's a dog.
I owe $377k and it's worth $530k. I don't know what increase in value to forecast so I put 1% in as a placeholder. I certainly hope that the growth is more than 1%.
I'm in a similar boat. Although mine is closer to breaking even and even im consider selling.
if you can sell it, it may be worth just doing that and starting over on a new property. Yeah, over time you'll make money, but you can find a different property that will cash flow but also give you net worth gains. In my opinion.
If you can sell the house at your stated value with 7% sell cost you will have $142,000 not counting tax issues. You state that you are making $10,000 but I suspect that appreciation is more than 1%. You can calculate your current return on equity and decide if you are making enough.
Good Luck.
Bill
Quick question:
If you sell the house today, do you have to come out of pocket at the closing or do you have some equity in it? Typically, when people ask whether they should sell or not, its because they are essentially underwater on the home and would have to come to the closing table with a check to sell it.
The question then becomes whether it makes sense to lose 3,400 a year or to have to come to the table with 50k in order to sell it.
If you are not underwater, then I would definitely sell it. Why lose money every year? I realize you make more money with principal paydown, appreciation, etc, to the point that it still seems to be making you 10k a year. But thats money you can't touch. Principal paydown doesn't go in your pocket today. And 3,400 is a bit of a bite.
If you have the equity to sell, then why not do it and get an investment property(ies) that both make you money today and will make you even more money tomorrow.
To me, thats the beauty of real estate. If makes you money today and it makes you even more money tomorrow as, eventually, the mortgage gets paid off, rents go up, etc.
If you can't sell the house without coming to the table with money to cover the shortfall, then I would ask how much would you have to pay in order to sell it? Then you need to see what that looks like over time. Do you have to pay 10k to sell it? Then 3,400 seems like a lot and I'd dump it. Do you have to pay 50k to sell it? If so, then 3,400 doesn't seem like much and I'd keep it and be happy I was making 10k a year on it with all the other ways it captures profit (i.e. principal paydown).
Also, is there any chance you can refi it to a longer term (i.e. are you at a 15 or 20 yr loan and can you do 30 yr fixed?). That might change your current flow situation considerably to really help you make up your mind.
#4 All Forums Contributor
- Plymouth, MI
Run away...run far away.
If this was a poker game, you'd be looking at a "Jack High",and still feeding the pot. You can keep putting more into the "pot", but it won't change your cards.
sell sell sell
A lot depends what you tax position/liability would be on this, but you have a potentially fairly large sum of money tied up here that you could be using to MAKE you money. And right now you are using it to LOSE money.
Your answer should have something to do with the reason you own it in the first place. If that was understood your scenario would take on some meaning.
It would make sense to me to own it if I bought it at a huge discount and my profit was in the property. If that is the case then holding it for a while until everything fell into place to use the equity in the best fashion would be fine.
If you bought it in 2008 and are waiting out the increase in values to get you out of being under water then holding might be a good choice.
If you are suffering financially because of the negative cash flow then sell it.
Thanks everyone for your responses. The opinion that it makes sense to sell so I can use the equity to invest in a cash flow positive house particularly resonates. The challenge there being finding the next property and of course, overcoming the inertia associated with owning an out of state home that for the most part takes care of itself with the exception of the $3400 annual loss.
It's all about positive cash flow now. If it's not making u money then it needs to go. I would sell it and buy something that makes you money now with positive cash flow. You will still get the same benefits with another property that you was talking about, appreciation etc. To me that makes economical sense. Just saying...
After thinking about this a bit more, I'm still not sure it makes sense. Feel free to point out any flawed logic here but the transaction costs to buy and then sell a new house would add up to about $55k (assuming 10% including broker's fees and other costs on both transactions). Let's say that I then bought a house that profited $3400 per year (instead of losing $3400 a year) for a net annual change of $6800 per year. It would then take about 8 years to "break even" on the deal ($55k/$6.8k), meaning it would take 8 years for the deal to pay off in improved cash flow to offset the transaction cost of $55k to switch investments. 8 years and $55k seems like a lot of money and a long time. For those of you who advise selling negative cash flow investments, generally speaking, how do you reconcile the huge transaction costs of doing so? Thanks in advance!
Hi Elke,
If the property is worth $530k, you're in an above average appreciation market. My guess is your property has an average 4%-5% of appreciation over the last 30 years. To use 1% in your calculation is short changing yourself.
Just say "sell it" or runaway is ignorant IMO. The decision to sell depends on a lot of other factors. How long have you own it? How long has it been a rental? What was your initial basis/purchase price? How much depreciation recapture are you looking at? What is your tax bracket? How many years do you have left on the mortgage? What's the current interest rate? What's the current rent? What's the fair market rent? How's your rental market? What is your household income/tax bracket?
If your original basis is low and you previously did cash-out refi, you might end up owing taxes instead of walking away with money. I'm in the process of refinancing 3 loans with a lender, where the interest rate is 1.75% for a 1-year ARM. Terms are 1-month LIBOR + 1.56% margin. A lot of time, a refinance will solve your negative cash-flow issue.
Just remember that cash-flow pays the bills. Appreciation makes you rich. I'm a testament for owning properties in an above average appreciation market. Unfortunately, you need the immediate cash-flow to get off the rat race. If that's not your immediate need and you can wait 10-15 years to reap the rewards while watching your equity grow, I'd say keep it. this is truly depends on your personal financial situation. One size does not fit all. I wish you make the right decision, whichever it is.
Best of luck.
Thanks everyone for your replies on this. I am going to refinance the property to become cash flow positive. An easy solution for now!
Looks like @Mike H. was right on the money with his refi idea. In the end, easy decision. Certainly, $50k+ transaction costs just to to sell then buy something supposedly better might put a dampener on your day (anyone know ways to avoid such high fees?). Cheers...