Utah: Negative Cash Flow... Hold or Sell?

Question

We own a home that we purchased 3 years ago as our primary residence. After two years we purchased another home as our primary residence and began renting the previous home.

Recently I've read a couple Bigger Pockets books. Calculating the figures on a rental property got me looking into our current rental home.

I am curious whether we should keep it, or sell it. Here are some figures.

- 15 year mortgage. 12 years left.

- Mortgage $2,150 (includes taxes)

- Rent $1,800

- HOA $60

- Property Management $160

Roughly a $520 negative cash flow... Or so we thought. After reading BP books we failed to subtract all the other items... Brings it closer to $900 negative.

So now we are thinking of selling and investing in an actual investment rental property. One with positive cash flow.

Here are other numbers...

- Purchase price $274k

- Currently owe $215k

- Current appraisal approx. $325k

Home is 8 years old in Valentine neighborhood in Woods Cross. Purchased at market value, zero sweat equity. Plans to keep it as a rental at the time of purchase were unknown.

Hoping for some guidance from some veterans on here.

Keep, or sell?

Regards,

Lost Newbie investor

William Hochstedler · Answer

I agree with @Scott Bowles.  The 15 year amortization is killing you here.  If you are looking for forced savings of $900/mo, this may not be a bad option as you are probably paying down equity pretty quickly.  But with this kind of negative cash flow, you are betting that appreciation is growing more rapidly than the interest you're paying--just to beat putting $900/mo in a savings account.

On top of that, you're still in the window where you call sell this tax free using the primary residence exemption.

Using the $80K on a $350-400K multi or two $200K homes on a 30 year fixed will provide the same appreciation while having someone but you pay off the mortgage.

Scott Bowles · Answer

1000 times sell and this is a great time to do that, you can even exit with a good profit. With $80k even in this awful buyers market you could do better, that’s my opinion ;)

Joe Splitrock · Answer

@John Peterson I will offer a different perspective. Your consideration should include the tax write off advantages. Most likely you are taking a fairly large tax loss on this property against your ordinary income. You are also aggressively paying down principal on the property, so you are gaining equity. Since the property is very new, there are probably very few repairs or capital expenditures. Rents will increase at 2-3% per year, so you will keep subsidizing it less and less as you gain equity. You could refinance the property and pull out cash, while pushing it to a 30 year term to reduce your payment. Although this may not be the ideal property to purchase, that doesn't mean holding on to it is a horrible idea. Work through all the numbers, include sales price after commission. Make sure you are making the best decision.

Thomas S. · Answer

No matter how this property is financed it will never produce positive cash flow with a value of 325K and rent at $1800.

It simply boils down to how much money you are prepared to lose while you hold on.

Every month you hold it eats away at your final pay off. At some point in time circumstances will be such that you will sell at a over all lose. You may make a little bit now, you will lose money over time.

Brent Coombs · Answer

@John Peterson, is it true that "with this investment property we won't have to pay capital gains tax once we do sell it"? Afaik, the longer it's an investment property, the less capital gains exemption you'd be eligible for. Please check with your Tax Accountant!

While I'm a big fan of "never sell good real estate", I also believe it's false economy to hang onto less-than-optimum investments, just to avoid selling costs. Cheers...

John Peterson · Answer

Hello all,

Wanted to thank all of you for your thoughts and responses. We have bounced back and forth and ran multiple computations.

Here is what we decided to do. We are going to refinance.

One, it allows us to still be investing in real estate. Two, we don't have to go out looking for another deal and we don't lose 6% on the sale. Also, with this investment property we won't have to pay capital gains tax once we do sell it. Wouldn't be able to do that if we pulled money out to put into another rental property.

We will now be in a positive cash flow!!!

Thanks again for all of your input and suggestions.

Brandon Malone · Answer

@John Peterson I see a lot of people responding with a "sell" vote. I disagree. I see no reason to spend 6% to sell an asset, just to turn around and spend more money in fees to re-purchase another investment property. I am in full agreement of the people who recommend you refinance the property to a 30year mortgage to drop the mortgage and generate some cashflow.  You might even be able to leverage some of the equity to purchase another property (assuming the numbers work). Work the numbers on refinancing to a 30 year and see what your comfort level is.

Casey Christensen · Answer

I think I would definitely consider refinancing to a 30-year term. You could do a cash out refi and pull out another $25K to put toward another property and your P&I payment would be about $1,150.00/month plus you would still have 75% LTV. This would make you cash-flow positive and give you a start toward adding another rental property. However having said that I dont think the other responses are wrong about selling right now being a good idea as the market is hot and you would have good equity in it to have a good down payment on your next investment. Good luck with whatever you decide to do!

Utah: Negative Cash Flow... Hold or Sell?

Most Popular Reply