What to do: Negative cash flow rental

9 Replies

I just found biggerpockets a few weeks ago, but I have already been amazed by the wealth of information here and the spirit of community and helpfulness in the forums. You guys are amazing.

Having said that we are wondering what we should do with our 1 and only rental property. I will try to be brief with the many confusing details and factors that are making a decision difficult for us.

The house is a SFH near Seattle. We currently reside near Washington DC. The house is a 3/2, 1600sf. It was our primary residence before we moved to VA 5 years ago. We rented it out behind us. I am employed but have a desire to replace my income with rental income to fund my (hopefully early) retirement within 10-15 years.

  • Bought 2011, $255,000. (30 year mortgage @3.875%)
  • Mortgage (PITI): $1320
  • Rent: $1600
  • PM: $160
  • Utilities paid by tenant except,
  • Water: $75/month
  • Current value: ~$340,000
  • Deferred maint: needs a roof, and new carpet. Probably paint.
  • Tenants have been there for 3 years without a raise in rent. They will be moving out in March.

I think that's the gist of things.

Now my question is what do we do? I see our options as:

  1. Continue to rent it: Find another renter, raise the rent. Fix the roof and replace carpet (but we don't have cash reserves to pay for it). 
  2. Refinance to get equity out. Do the required maint. and fund another rental. (But the payment would go up pushing cash flow more negative, right?)
  3. Sell it and 1031 exchange it into another rental property(ies) closer to home.
  4. Sell it, pay capital gains, and use the rest to fund another BRRRR rental.
  5. Do something else that you suggest that we haven't thought of.

Our first inclination was to sell because it is a bit of a worry being so far away, even though it is under a property management company, and we could use the money to get out of a bit of debt and to hopefully use it to fund another rental around here. But property values are very high around here and it's difficult to find rentals that make sense that you don't have to pay cash for. 

Then I got on bigger pockets and learned about BRRRR and thought this could be a great opportunity to refinance to get to the next one.

What say ye, experts of biggerpockets?

Thanks,

Jason

Id keep it. Low interest rate. It continues to rise in value. Id imagine the rent could go up if you havnt raised it in 3 years.

I should add that we have about $25k in personal debt to family for a car and another $5k on an interest free (18 months) credit card to pay for my wife's schooling. She has another 2 years to get her MS in social work which will probably cost another $35k. Though the debt is interest free, it still weighs on us especially since it's family. We'd like to be able to pay off that debt and my wife's school in the short term. Not sure if that would change your recommendations, but it's another variable in the decision. 

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I would sell it now before it becomes a major money pit. Personal SFHs rarely ever are good investments.

Sell now while markets are high, value will not last forever. Take your money and run.

As for what to do with it I would suggest you do not invest in another income property until you learn more about investing, property management and tenant management. The fact that you have not raised your present tenants rent annually is a clear indication you are not yet ready to be a investor. 

I'm here bc I'm interested in seeing what others have to say. I'm a pretty new investor myself but if I were to give any thoughts I agree with @Thomas S. I would think Seattle area would command much higher rent than $1600 for 3/2. So rent should have been raised and PM should have been a bit better at telling you that. Also I can understand having debt to family can be weight on the shoulders and stressful. So getting as much as you can by selling could be a good idea. Especially if you plan on staying East. Although new roofs can be a real PIA when selling, you'll have expenses to sell it as well. Any chance you could AirBNB it? That usually increases cashflow better than long term rental. Best of luck...
@Jason Hunt this is a really tough question to answer as it totally depends on your goals (build wealth or reduce debt). In your post you lay out some of the common things that lead to low returns when converting a primary residence into a rental. Your choice will depend on your level of risk tolerance (holding in a cooling market) and willingness to make additional investments in the property. Only you can determine if this is something you are willing to do. Your interest rate is very attractive and you are getting multiple benefits from owning the property (income, tax break, mortgage pay down, appreciation, and leverage). Personally, I would probably find away to hold on to the property unless you had a more attractive investment opportunity. Paying down debt is a great goal but just recognize you are giving up a lot to do that. I would start with life optimization hacks first. Good luck to you.
@Allyson Edwards I hadn't thought of Airbnb. Thanks for the suggestion. The house is on rural-ish island north of Seattle so it doesn't command the same rents that you would expect from Seattle. Sorry, I could have been more clear. The location makes it desirable for retirees and people trying to get away from city life while being close enough to still have a "real job." The dynamic makes for a unique RE market where you can have a million dollar vacation home next door to a hippie commune. It's a fun place to live! But RE tends to be slow to sell and difficult to value because comps are never very similar. As I mentioned, our initial inclination was to sell it, but I'm very averse to the capital gains tax we'd have to pay on it.

This is a tough one given your family move and situation, it might feel like a lot to take on with this added burden. Myself and Russel are in the MD/DC area. There are plenty of investment opportunities out here, you just need to learn the markets and locations to invest in around DC. The local investor meet up is the 1st Tuesday of every month, so November 6th is coming up, you could come and talk shop more. Russel will have the link. 

Looking at your numbers i could see how taking the roughly $75K for a sale now to square things up would be attractive. 

I would recommend coming to the local meet up a couple of times, network, sitting on the house in Seattle and maybee selling in the spring. IDK about Seattle but our local market in MD sort of slows down from NOV-FEB and then picks back up in April. If you networked for 4-6 months you could have a good plan and turn that sale price into a couple of rental properties in our local market and be cash flowing by the end of 2019. 

@Jason Hunt, I am going to disagree with a lot of folks on here.  What you need first is information.  It sounds like you are getting that now.  You need to know what the rental market really is for your house.  Look online and the local paper to see what houses are renting for.  Call a few of the places and ask the landlord how many units he has and what he gets for them.  You would be surprised how many folks are willing to help someone starting out.  Look on BP for a member on the island and ask them for their opinions on rents.  Next figure how bad the cash flow picture is.  Negative cash flow can hurt even if it is tiny but it appears you getting nearly 15K$ appreciation a year.  At the end of the next 2 years of of your wife's schooling you would have gained enough equity to pay off the car loan in full.  If you sell it now you can kiss it goodbye.  What is the actual amount it will cost to put a roof on it and carpet it?  You can rent it with no new carpet, but if the roof leaks it could cost you a LOT.  Keep in mind you are also getting principal pay down.  You are also able to claim depreciation.

I have a few other things I am curious about.  Why did you travel across the entire U.S. to go to college?  They don't have a state university in Washington that is more reasonable?  Can you work enough to make some payments on the loan to the relatives to show good faith in paying them back?  Why are you putting college expenses on a credit card?  There are other ways of doing that that won't end up paying 24% interest when it comes due.  Can your wife get a job as a teaching aid?  Often that will allow tuition to be waived and provide at least a little income.  There are always option if you look hard enough and ask the right questions.  I cannot give you the right answer, you ultimately must decide for yourself after getting all of the information.  If you simply cannot make the extra cash flow up then you can't hold on to it.  You have to put a roof on it if it is in danger of leaking.  The AIR B&B sounds like an option but doing it well from far away is very hard.  In my local area it took over a year to start making any decent money from a vacation rental.  You need to know before you try that route.  How would you afford the furniture etc for a vacation rental.  Keep educating yourself and good luck.