Should I sell my 1year old investment property.

Question

Hi Bigger Pockets.

I am a new investor that purchased an investment property last year in LA. I had some cash on hand and was ready to get into the investment market and I hoped that the rates would come down in a year or two given how high they crept up. So I purchased a property that rented quickly and for a great price ($6000/mth) but I still had to cover a portion of the mortgage (close to $2000). My thought was that I could refinance once the rates came down and at least get closer to breaking even, and in the long run, cash flow. I am regretting this purchase now since my guess was wrong and it probably wasn’t a great investment to begin with.

Unfortunately, our family situation has changed. I have a new baby and although we currently have a fairly new single family home in a nice community, it’s does not have yard space and the 3 levels is not helpful for the potential of aging parents visiting or even moving in. So we would like to purchase a new single family home with more outdoor space and less floors. We purchased our current home during COVID at a great price and have great equity in the home as well as a sub 3% interest rate so we are not inclined to sell this home as it would rent easily and cash flow right away.

The LA home market is pricey so we need some cash to get a new primary residence with a solid down payment and will likely have to sell one property. Should we sell the investment property (8% interest rate and requires $2k/mth out of pocket), sell the primary residence (3% interest rate, >$400k equity), or use some other means to get the new primary residence (HELOC, take money out of index funds/retirement,refinance and don’t sell anything) , or just wait?

Tyler Thorson · Answer

Congrats on the baby!  My advice would be to take your lumps and sell the investment property.   It's a bummer to make a mistake but it happens to all of us.

Is it a single family?  If so, you may want to wait until the lease expires first (so you can kick out the tenant and maximize the sale price).

Sheronda Smith · Answer

Thanks Theresa.

That’s sounding like the only reasonable option at this point. Thanks for the feedback!

Allan C. · Answer

Your sub 3% interest loan is one of your best assets, so keep that until you have more than 60% of your principle paid off.

I agree with others that you should sell your 8% rental. If that is a SFH, I don't think you performed proper underwriting since you should not be $2k out of pocket each month. Did the property tax escalate more than you expected upon purchase, or were you expecting $2k out of pocket? Typically in socal you'd expect to be negative cash flow for a few years, but I'd say between $5-10k. It wouldn't be out of ordinary for a 4+ unit property to be $20k/yr negative CF, but it doesn't sound like you have a MF property.

I'm inquiring about your underwriting because you might find yourself in a similar position if you don't fix any issues you had with this last investment.

Seth McGathey · Answer

Just adding my vote for selling the underperforming rental, buying a new single family home for yourselves, and renting the old one. Seems like the safest and fastest way to get yourself in a better financial and living situation.

And as stated by Theresa, don't count on 3% interest rates. If we are lucky, they might come down to 5%. But even that is going to be considered the new low most likely. 7% is pretty "normal" over the long term. On a more general starategic side, never buy a property with the assumption you will get to refinance at a lower rate. The safest thing is to always assume you are going to be stuck with current rates or higher. This protects you from getting stuck with a underperforming property that you are forced to sell.

Caleb Brown · Answer

Agree with Theresa, I would sell the rental. It is tougher to sell when it's rented so if it can be vacant do that before selling. Will you have enough equity when you sell to buy another primary? If not I would not do a HELOC or cash out refi on your primary, I would just continue to save. Might be tight space wise but HELOCs aren't cheap and you don't want to refi to lose that 3%.

Sheronda Smith · Answer

Thanks Caleb.

That’s great feedback about the HELOC and refi. It’s just as important to know what not to do in this situation!

Theresa Harris · Answer

The lower rates were just that-really low and current rates are where they normally are.  I don't see 3% mortgages happening any time soon.

Why not sell the rental and use that money to buy a new home, then rent out your current home with the lower interest rate?

Theresa Harris · Answer

It is also likely to get easier to get the current tenant out of the rental because you are moving in rather than selling.  At least that is the case where some of my rentals are in a very tenant friendly.

Sheronda Smith · Answer

Thank you!  Being a mom is awesome!  Now I have to give my little girl a home so thank you for the advice.

Should I sell my 1year old investment property.

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