Best Options for a Negative Cash Flow Property

11 Replies

I'm new at analysis and real estate investing, but I have been renting out my previous house for ~3 years.

The property is in San Antonio, TX with renters leased out to April 2020. Below are the number breakdowns:

  • Rent: $1495/mo (near the top for the area)
  • Mortgage: $1313/mo
  • Property Manager: $149/mo
  • HOA: $30/mo
  • Ins: $165/mo

Which is about -$160, before accounting for short or long term maintenance.

I was considering refinancing to buy more rentals, but I don't think it's wise to keep the negative cash flow. Right now we are considering a 1031 since we have a decent amount of equity in the house. Just wanted to see if there are better options out there or things we haven't thought of. 

Any advice would be greatly appreciated. Thanks!

-Ben

@Ben Bruckman , Adding debt on top of negative cash flow is a recipe for bad things.  I think your gut's speaking right.  Sell 1031 and go into maybe less expensive better cash flow properties.  One thing that may be tough for you is how to get at that equity when anyone who buys it with that lease in place is buying negative cash flow.  You may want to approach the tenants with a lease option scenario.

@Ben Bruckman - I agree with @Dave Foster that refinancing on negative cash flow is a recipe for disaster!

1031 is a great way to go and I recommend using Dave if you choose to go that route. He's helped me with a 1031 exchange and is very knowledgeable and great to work with. 

With that said, an alternative to that is if you've lived in your house 2 of the last 5 years, you would qualify for a section 121 exclusion which essentially allows you to sell your house tax free up to 500k in profit if married or up to 250k in profit if single. This doesn't have any time restrictions like a 1031 exchange and in my opinion would be your best option if you qualify.

If you have equity then get into an actual cash flow property.  San Antonio is an excellent cash flow market.  I have 4 pieces generating 3600 a month that I purchased for 155k.  I have an hml that will do a cash flow for as little at 3 points.  Sell the house and leverage your money for additional properties

There is barely over $100 difference between rent revenue and mortgage payment, either you're renting way below value, or you're paying outrageous interest. Whats the house worth? Is this a 30 year loan? How far into the mortgage are you? If you can't get at least 1% of value in rents, the numbers simply will never work out.

@Jerry Cloe , there was a mistake in my original post, my mortgage payment actually covers Principal, Interest, Taxes, and Insurance. I forgot that Insurance was taken care of by my escrow account. Even with this discrepancy, I'm only bringing in $5/mo and will go negative for any required maintenance (which has been ~$1k-$2k a year). I think there is some wiggle room for my insurance to bring the premium down, but I still think this is a bad rental property. 

@Ben Bruckman  

Your insurance does seem a little high.  I use Sam Sotello in Austin, or CNC Insurance in Dallas.  

Also, if you live in San Antonio I'd strongly consider managing the property yourself.  

A few questions:  

How old is the house? Based on your numbers and the HOA it seems like it would be low(er) maintenance and build a stronger case for self-management. I have a few properties I self manage and it's 1 repair call every quarter which easily justifies me saving $150+ a month.

What neighborhood?  Is it ripe for long-term appreciation (or faster than the neighborhoods you'd be buying in)?

How much equity do you think you could pull out whether doing a new loan or paying realtors to sell?  Realtor fees will take a pretty big chunk out of a $200k-$300k, and there would be a steep discount if someone is buying the property with tenants in place.

These would be the questions I would consider.  I just re-leveraged my Austin portfolio to buy in SA and I sure do miss my monthly cash flow in Austin :(

Good luck!

Kyle

With the new numbers you are showing i would refi this house you can lower the payments and become cash flowing.  In the refi you might even be able to take out some for another purchase.  Work the figures.

If you have any questions tag me and I will try to respond

my thoughts are to get liquid and wait for the right oppty- sell now at top of the market if you can- you will never regret that decision in my opinion

I don't have much to add to what others have said, but going forward, I think your insurance is much higher than I've ever paid in SA and you can find a PM for 8% instead of 10% (ask around to make sure they don't just make up for it with unnecessary "maintenance"). Adjusting both of those factors will help your SA cash flow in the future.

Thanks everyone that responded! I really appreciate the advice. 

I'm going to look into possibly managing the property myself, and lowering the home insurance. If I can make the numbers work a little closer to $100+/mo cash-flow with $100+/mo for maintenance, I think I'll try to refinance. 

Otherwise I'll start looking at doing a 1031 exchange. 

Thanks again for the advice.