How long to hold onto a underperforming property?

Question

Hey everyone, I would appreciate your advice. I have a property in San Antonio that is a beautiful 4 BD 2.5 BA in a desirable area. We bought it as our primary home at the peak of the Pandemic housing boom with a Physician Loan where we put minimal down and pay no PMI and now rent it long-term for slightly above market rent to some family friends who are perfect tenants. We had anticipated at least gradual annualized appreciation but bought in what became the fastest growing zip code in America with nearby areas getting absolutely flooded with new home supply. If we sold now, we would probably lose $15-45k vs continue renting it out and pay $500/mo of our money as a supplement to make the mortgage payment (which includes high home insurance and property taxes). Cash-flow from another solid rental property covers the difference. Currently, we are on a 4.25% ARM with 3 years left on the fixed rate portion. I’ve always considered myself a buy and hold forever kind of guy but I am concerned that our situation is not on a trajectory to improve, either with the home sale or with eventually refinancing to a higher rate. How do you know when to take a loss and seek out a better long-term opportunity or ride the storm and hope for a better tomorrow? I appreciate your perspective. Thank you.

Bill B. · Answer

If the 4.25% was 30 year fixed and you were paying down more than $500/mo in principle I’d be all for keeping it. Especially with a “friend/tennat”.

But…what happens to your payment/cashflow if you make that rate 6.50% or higher? Even if the property was “only” $500k your payment is going to increase $938/mo. If you were negative $1,438/mo today would you keep it? I didn’t think so.

Is your friend in the position to buy the property? Give them 3-5% of market value and skip the realtor, win win. If they aren’t but might be in a year or two collect $5k today or $400-$500/mo extra and call it what you want. Option money, non-refundable downpayment, whatever. Tell them they have until 6 months before your rate jumps to close or they lose the money and you’re going to sell.

Show all your cards if they’re a friend. Your losing money, you want them to stay and not have to move, you’d love to give them a $15k discount by not using a realtor, you don’t want them to lose the money so only go forward if they plan to buy, but you can’t afford for your payment to go up another $940/mo.

Hopefully you can make it work out great for both of you.

Ps. In case I didn’t mention it, you have to list it at least 6 months before your rate resets, preferably in early April and preferably empty and freshly cleaned, painted etc. (More money you save if youn friend buys it.)

Drew Sygit · Answer

Can you afford to PAY the $15-45k PLUS to sell the house?

Alyssa Marquez · Answer

I would disconnect the emotions from the dollars. Losses aren’t necessarily bad if not selling is projected to cause even greater losses over the next few years. Holding, however, doesn’t need to outweigh simply waiting out a price drop alone.

I would crunch numbers to evaluate the both scenarios; staying with the property for the last three years of the ARM verses taking the loss.

This needs to consider projected rental income, insurance, taxes, maintenance expenses, the impact of the adjustable rate, selling costs and where you might see better investment potential for your equity. If the loss projected to remain in this property after the adjustable rate resets may offset this, and opportunities elsewhere are more compelling – an investment should likely sell. It might be sensible if cash flow is manageable and prospects of more lasting prospects look promising, especially with longer long term prospects – I would always begin the process of asking my self : should the opportunity if I buy or not invest again at the current prices and anticipated cash flows? If so the this is generally a useful signal to see if retool of strategy could result be optimal

Rashad George · Answer

David, I think it's awesome that you're a physician and holding on to the property doesn't hurt as much as it would for many other professionals. That being said, I'd like to offer a few considerations which I'm not looking for answers but genuinely want to provide you with my though process. What are your goals for the property other than holding on forever? Is your portfolio as a whole netting positive? Could you exchange the equity through a 1031 into a better performing asset? How much money do you think you'd lose in the process of waiting for appreciation and rent growth? How much money are you willing to lose in hopes of appreciation?

Hopefully this helps. Ultimately, you'll have to come to that conclusion on your own but, i think it's smart to take input from the community!

Justin Brickman · Answer

Hey David I’m happy to meet with you and show you a breakdown of how much you would walk away with after closing costs and fees. And then we can run some rental and sold comps to take a look the numbers for both options.

Feel free to DM me or give me a text/ call

Caleb Brown · Answer

I think cutting the tie would be the route. Ether way you are losing but you'll continue dumping money into the mortgage payment, any repairs/maintenance, refinancing costs (if you held), etc as you hold it. The market there is soft so I would ask agents about DOM, pricing, etc. The other part is selling with a tenant. Ideally you'd need it vacant to sell. That also means getting it rent ready for the next owner unless you sold "As Is". There are many stories like yours, Texas saw a gold mine rush and then everything caught up to it.

Jay Hurst · Answer

I guess the obvious first question is the family friend paying market rent? nevere mind! Missed the slightly above market rent.

Jules Aton · Answer

Consider sunk cost fallacy. $6,000 a year plus maintenance and the liability of having a rental is more than I'd want to spend. Fortunately as a physician losing $15-$45k in a chunk while isn't pleasant is not something that will even move your financial needle.

How long to hold onto a underperforming property?

8 Replies