What should I do? Sell or continue to own a cash flow condo?

Buying & Selling Real Estate Discussion 38 Replies

Hello bigger pockets members!

I’m seeking some advice. I purchased a condo in West LA in 2013 for $500,000 and now it’s worth about $680,000. I moved out of the condo last year to purchase a townhome, also in West LA. I converted the condo into a rental property. Rent is about $3,000/month and it cash flows about $400 per month. I’m loving being a small business owner and learning lots about real estate. I want to purchase more real estate and my next goal is a multi-family in West LA. Should I continue owning the condo or sell? If I sell I’ll get about $270,000, what should I do with the money? If I keep it, for how long? Any advice or options would be greatly appreciated. Thanks in advance. 

Byron Enamorado CPA | [email protected]

Hi Allan, no I haven't found one yet.  I looked on redfin but everything is crazy over price in LA right now.  Don't think I would be able to get something that would cash flow unless I put a large downpayment. 

Byron Enamorado CPA | [email protected]

@Byron Enamorado Well, you need to run it 100% financed and see if it actually cash flows, 50% or 100% dp and saying it cash flows doesn't really count. Wait for a while until when you think is peak, then sell high, buy low.

@Byron Enamorado have you thought about doing a 1031 exchange? never done one myself but you can sell (obviously following the 1031 exchange rules dictated by the irs) and use the upside to buy a larger property with more cashflow.

Yes Rigo a 1031 exchange would be a great option.  Need to do some more research on that.  I know the rules but never applied for my investments.  

Byron Enamorado CPA | [email protected]

Hi @Byron Enamorado

It sounds like you have owned the property and lived in the property as your primary residence for at least two years out of the last five years, so you would qualify for the 121 Exclusion ($250,000 tax-free if you are single, $500,000 tax-free if you are married).

You actually have a three year window after you moved out of the property during which you would still qualify for the 121 Exclusion.

Medium exeter 1031 clr cntr bBill Exeter, Exeter 1031 Exchange Services, LLC | [email protected] | (619) 239‑3091 | http://www.Exeter1031.com

If your condo has $270 K in equity and assuming cash has a opportunity value of a minimum 10% your dead equity is costing you $27K per year in lost income.

In the real world of investing you are defiantly not cash flowing. You need to seriously think about selling.

I'd sell and capture your equity. I don't think a 1031 exchange is smart when all of the replacement deals are overpriced. By having to exchange up, and into a bad deal, you are magnifying the potential future loss if the market turns. All of my own cash is sitting on the sidelines in safe, financial alternatives. I'm waiting for the market to become sane again before I take on "equity" risk. 

Private lending may sound risky on the surface, but it's actually a very safe, secured position. The investor borrowing the money is taking on the risk. I'm either going to make a very nice, risk-adjusted return or I'm going to inherit the collateral securing the note.

Medium irs logo tagline v1Thomas Rutkowski MBA, Innovative Retirement Strategies, Inc. | [email protected] | 561‑676‑8982

@Byron Enamorado , no need to 1031.  You can sell and take the gain tax free with the Sec 121 primary residence exclusion.  Best of all you've got until sometime in 2019 to make a decision.  so if you want to wait for some additional equity.  

You want to make sure if you want the money tax free that you sell when you can still document that you have lived in that property for 2 out of the 5 years prior to the sale.  And you will have to recapture a little depreciation.  But that's it.

If you end up keeping it longer then you can always do a 1031 anytime after that.

Medium ergDave Foster, Exchange Resource Group | [email protected] | 850.889.1031 | http://www.erg1031.com

Sell.  

If I invested $270k in cash (that you will be receiving) I would be expecting WAY more than $400/month.

"Whens the best time to sell an investment? Never." -Warren Buffet. Have you considered speaking to a bank and removing equity to continue expansion? The others are correct in that you have lost opportinity holding the equity in the property. However, if you sell the property you will no longer have a 680k asset that will continue to produce income and appreciation.

nice job Byron - just keep in mind that if you want to buy another property in the Los Angeles area, $270k might not get you much these days as the market is pretty crazy.

Originally posted by @Bill Exeter :

Hi @Byron Enamorado, 

It sounds like you have owned the property and lived in the property as your primary residence for at least two years out of the last five years, so you would qualify for the 121 Exclusion ($250,000 tax-free if you are single, $500,000 tax-free if you are married).

You actually have a three year window after you moved out of the property during which you would still qualify for the 121 Exclusion.

Thanks Bill for the info!  I've never sold a home but I'm glad this is an option.  I just hate the idea of selling.  I just don't like the transaction costs. I believe in the LA market and it will only continue to increase in the long term.  

Byron Enamorado CPA | [email protected]

Originally posted by @Bradley Chiakas :
"Whens the best time to sell an investment? Never." -Warren Buffet.

Have you considered speaking to a bank and removing equity to continue expansion? The others are correct in that you have lost opportinity holding the equity in the property. However, if you sell the property you will no longer have a 680k asset that will continue to produce income and appreciation.

"Never sell" is tattooed in my brain and that's why I don't wanna sell. I did take a HELOC for $80K last year and I used it as a downpayment on my current place. But now that's been paid off.

Byron Enamorado CPA | [email protected]

Originally posted by @Ryan Kinsella :

Sell.  

If I invested $270k in cash (that you will be receiving) I would be expecting WAY more than $400/month.

The cash flow is ok but not the main factor.  The learning and doing part is also a factor.   I'm learning property management, leasing, maintenance, etc. Tax advantages also help. But another way to look at it.  If I sell and invest in a REIT that pays 5% dividend then I'll be making $1,125/month.  So my real estate education is costing $725 per month.  

Byron Enamorado CPA | [email protected]

Originally posted by @Thomas S. :

If your condo has $270 K in equity and assuming cash has a opportunity value of a minimum 10% your dead equity is costing you $27K per year in lost income.

In the real world of investing you are defiantly not cash flowing. You need to seriously think about selling.

 Great point Thomas! I've been questioning, is this the best use of my money?  Should I be doing something else! Like Brandon Turner said on the podcast “analysis by paralysis”. I think I have that now.  

Byron Enamorado CPA | [email protected]

Originally posted by @Thomas Rutkowski :

I'd sell and capture your equity. I don't think a 1031 exchange is smart when all of the replacement deals are overpriced. By having to exchange up, and into a bad deal, you are magnifying the potential future loss if the market turns. All of my own cash is sitting on the sidelines in safe, financial alternatives. I'm waiting for the market to become sane again before I take on "equity" risk. 

Private lending may sound risky on the surface, but it's actually a very safe, secured position. The investor borrowing the money is taking on the risk. I'm either going to make a very nice, risk-adjusted return or I'm going to inherit the collateral securing the note.

 I agree that prices right now are a little crazy.  How did you get into private lending?  Any courses you took?  

Byron Enamorado CPA | [email protected]

Without knowing all the details, on property with a cost of $2,600 a month, $400 in cash flow is not that much. A 30 day vacancy has you 7 to 9 months upside down.  Selling and doing a 1031 exchange and then buying in better cash flow markets is an option.

Medium turnkey logoAlex Craig, Memphis Turnkey / Little Rock Turnkey | [email protected] | 901‑848‑9028 | http://www.memphisturnkey.com

Originally posted by @Alex Craig :

Without knowing all the details, on property with a cost of $2,600 a month, $400 in cash flow is not that much. A 30 day vacancy has you 7 to 9 months upside down.  Selling and doing a 1031 exchange and then buying in better cash flow markets is an option.

 Hi Alex, so far vacancy is zero.  LA is a hot rental market.  My current tenant has a lease till June 30, 2018 and I collected first, last and security deposit.  If I invest in a cash flow market, will I get the appreciation I would get in west LA?  Good question.  I'll run some numbers.  

Byron Enamorado CPA | [email protected]

I say keep doing what you are doing. Your side biz so far increases your networth 3k a month plus cash flow. When you find an off market plex you can figure what is needed along side or to sell, exchange etc... It is not like West LA demand is going down or any way to increase standing inventory much. Coming your way sort of is two NFL teams, likely Clippers stadium and Olympics plus much more. 

Good luck!

Your investment has had ~$3,400/mo total return (slightly more than that actually if you also add in mortgage pay down and tax savings). Can you find another investment with a return of $3,400/mo on $270k invested?

Your investment has had ~$3,400/mo total return

Not in the real world it hasn't. Appreciation is no more than smoke and mirrors. It is a fictitious/imaginary number.  It does not exist until it is cashed out. Even then if the market turns you are upside down.

His real profit is $400/month minus the opportunity fee on $270 K.

The entire reason we are having this conversation is because of the appreciation ... there would be no conversation to be had if it were he bought a property in Ohio for $50k and today it is worth about $50k :)

It is not electrical engineering, we are not dealing in imaginary numbers, like the square root of negative one ... the profits he has are real, if he sells or cash out refinances them then they spend just the same as cash flow or any other profits ... if he goes through the drive through and orders a hamburger, they don't say "Wait a second, did this money come from appreciation? Sorry, we can't accept that." LOL.

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