Hold or sell? Bay Area townhome

Newark, CA · Member since 2019 · 13 posts · 6 votes

Hi everyone, I’m new to BP and feeling thrilled to discover this site! So, I got a problem that has been concerning for a while. We have purchased a townhome in Mountain View, California last year, and the final price was 1.18m with mortgage of 700k. This is not our primary house and our cash flow on the townhome is negative $2,000. I’m unsure if I should sell it and put the money to OOS investment or hold it until the market is HOT again?? Please help! Thanks in advance!

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Frank Wong

Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes

Sell it today and ask questions tomorrow. -$2,000 a month is painful. This is what investors who only buy for appreciation will realize. It's PAINFUL to watch real money leave your real checking account every month. They all say I can withstand the negative cash flow each month. Are you sure? Hold negative and then finally capitulate and sell in 3yrs for a negative cash flow loss of $72,000.

I see this all the time in the Bay Area. I talk so many of my clients out of buying these type of deals. This is not investing, this is called gambling when you play for appreciation for deals like this.

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
7y
If you are trying to be a rental property owner you probably need to take your lumps and sell, but if you are okay holding and hoping for appreciation you can do that but it will be a gamble as to how long you have to wait just to get your money back.
1 Reply
Dylan VargasPro Member
Rental Property Investor · Chico, CA · Member since 2016 · 625 posts · 336 votes
7y
@Huimin Zhang Welcome! What is the size of the home? What is the home worth today?
1 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Dylan Vargas It's 1200SF 2b2.5b and it's worth 1.2m today (a year from when we purchased it)...
0 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Aaron K. Thanks Aaron, yes, this is a decision for us to make and decide what our main goal is.
0 Reply
Dylan VargasPro Member
Rental Property Investor · Chico, CA · Member since 2016 · 625 posts · 336 votes
7y
@Huimin Zhang Are you negative $2000 per year? Per month would be rough. How is the market in your opinion? Mountan View is a great area of course.
0 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Dylan Vargas it’s $2000/month, and it’s tough! We are living somewhere else. If we were living there, the monthly cash flow would be negative $3500. The market is doing okay right now, and the location is great (close to google, almost no vacancy). 1.2m for a 2b2.5b townhome is already very high and we are unsure if the market can skyrocket again to make our loss back. :(
0 Reply
Alex Mao
Rental Property Investor · San Francisco, CA · Member since 2018 · 37 posts · 18 votes
7y
@Huimin Zhang
Hey Huimin, if your investing goal is to accumulate cash flow, then OOS will provide much higher (or in other words, infinitely higher) returns than your current situation.
On the other hand if you're banking on appreciation, well that all depends on your outlook of the Bay Area altogether (many brokers I work with seem to think we're fast approaching the peak of the market).
If your goal is cash flow, probably best to sell and invest elsewhere. There are many solid and growing markets where you can cash flow positive with turnkey investments. The Bay Area is not on that list.
Consider your problem a good one though, as you've accumulated two MFU is the Bay Area which is quite the feat in itself!
1 Reply
Dylan VargasPro Member
Rental Property Investor · Chico, CA · Member since 2016 · 625 posts · 336 votes
7y
@Huimin Zhang Ok, I guess I am not seeing the numbers to understand negative $2000 per month. 700k loan plus say 400 per month HOA plus tax and insurance. Rents are 3500 to 4000? Obviously the market is changing but your location is unique. Have you spoken to a local Realtor to fine tune your price point to re sell? Losing 24k a year I am sure is challenging. If you are losing sleep at night might be best to sell and move along. If you want to gamble a little this could be a long term payoff but must being able to deal with the monthly loss. Not to be condescending but you have checked all rates on your loan and rents to see if the pencil can be sharpened? Sorry if I am not much help just trying to ignite some thoughts to spark and idea.
2 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Alex Mao Thanks for the input! Yea, our main goal now is to figure out which direction we would like to go, cash flow or appreciation. I have heard a lot regarding Bay Area housing prices reaching its cap soon, and I’m thinking the same to be honest. Thanks again for the input and we will try to learn more on BP and talk to a realtor when we are ready to make a step further!
0 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Dylan Vargas you are definitely a help! We are renting to a friend so it’s “friends discount”. If we could rent it to a family, we would collect higher rent for sure ( I’m thinking at least $200 higher per month). I would definitely check if there is anything we can do right now while we are doing more RE research!
0 Reply
Robert C.
Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
7y
@Huimin Zhang, $2000/month is a bit rough. If it were a few hundred, I'd be more on board. Have you considered doing furnished or short term corporate rentals to see if you can get more money back? One nice thing is that you are in the "sweet spot" as far as liquidity/affordability ($1mm - $1.5mm). If you feel tight at $2k per month loss, though, I would probably sell in favor of some other investment. Even locally, I think you can do better than that on a buy and hold.
3 Reply
Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
That depends on over all economy. Google will move parts of employees to downtown SJ Google Village. The craze in home price seems to have stopped in MV at least right now.

0 Reply
Pratik P.
Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes
7y
I would definitely sell asap. Even if it did appreciate over the next few years, I highly doubt the gain would make up for the 24k annual loss.
2 Reply
Leo Kotschenreuther
Rental Property Investor · Mountain View, CA · Member since 2017 · 34 posts · 24 votes
7y
@Pratik P. The house would have to appreciate 2% per year in order to zero out the 24k annual loss. 2% appreciation is rather low, compared to what we have seen in the last years.
@Huimin Zhang I would ask myself how much return on investment I wanted to have. You know how much money you put into the property and you also know your yearly cash flow of -24k. From there you can figure out how much the property would have to appreciate for you to achieve your goal (Also consider your monthly loan principal). Once you got there you can ask yourself how likely it is to get such an appreciation.
The tricky thing is, nobody has a crystal ball. All we know is that the market will very likely not forever appreciate 7% per year but we don't know when it will stop. I recently listend to some BP podcasts from 2015 and a recurring theme is Josh saying that the market is already very high and people thought it might crash soon afterwards. Now we are in 2019 and it has gone up a lot further.
5 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
@Leo Kotschenreuther yea, I having seen older posts saying the Bay Area market is cooling down, but it’s still growing. Good houses sell fast and people are willing to add $$ to outbid others. Thanks for your input! The main thing would be us figuring out what we want.
0 Reply
XIAOHUI TAO
Member since 2018 · 2 posts · 1 vote
7y
@Huimin Zhang
Do you feel that your rental pricing is a bit low, given that it has no vacancy?
How much is the HOA? IMO if it is a SFH I would rather keep it but since it is a townhouse...
1 Reply
Rob Massopust
Real Estate Broker · Santa Ana CA [South Coast Metro] · Member since 2016 · 459 posts · 202 votes
7y
Property values, like trees do not grow to the sky.
You have $500k tied up yielding negative cash flow.
Makes very little for the argument of hold for value, the price would have to come down to $700k for it to be a break even for an investor. Owner occupied buyers might be ok with that but its cheaper to rent even in CA high price areas.
Prices are only as good as the underlying fundamentals. Rents, job growth, interest rates, affordability etc.
Everything is up in the air and in 10 years pricing might be up but the negative cash flow to get there is rough.
https://wolfstreet.com/2019/04/17/house-prices-fall-year-over-year-in-12-of-the-16-most-expensive-california-coastal-counties/
https://www.recode.net/2019/3/19/18256378/tech-worker-afford-buy-homes-san-francisco-facebook-google-uber-lyft-housing-crisis-programmers
2 Reply
Steve Graves
Rental Property Investor · Lancaster, CA · Member since 2015 · 103 posts · 55 votes
7y
1031 exchange it for a multi unit property and start making some money. Dump that place. I've done the negative cash flow before and it's a huge take out of your expenses every month.
5 Reply
Ken Tsai
San Bruno, CA · Member since 2019 · 26 posts · 8 votes
7y
@Steve Graves 100% agree with you on this lol
2 Reply
Frank Wong
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
Sell it today and ask questions tomorrow. -$2,000 a month is painful. This is what investors who only buy for appreciation will realize. It's PAINFUL to watch real money leave your real checking account every month. They all say I can withstand the negative cash flow each month. Are you sure? Hold negative and then finally capitulate and sell in 3yrs for a negative cash flow loss of $72,000.
I see this all the time in the Bay Area. I talk so many of my clients out of buying these type of deals. This is not investing, this is called gambling when you play for appreciation for deals like this.
11 Reply
Pratik P.
Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes
7y
@Leo Kotschenreuther That may be true, but I really don't see future appreciation to continue like the last few years. This just doesn't make good financial sense an investment....Think about it, even if the appreciation negated her 24k annual loss, she's still not making a return on her money. She'd make a better return by selling and putting it all into an index fund..
0 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@Huimin Zhang, I love the comparative point that @Leo Kotschenreuther. makes. If it takes 2% appreciation just to zero out your loss then you only get a potential return of anything over that. So good news is at 2% appreciation you're breaking even (bleeding cash but increasing equity) . Great news would be if appreciation is more than that you're making money (in equity only - still bleeding cash). Bad news would be a stagnation or retreat in prices and then you're bleeding cash and losing equity.
You live in one of three places in America where this would be a tough decision. Break out that crystal ball.
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2 Reply
Paul Choi
Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes
7y
So from a cash flow perspective it's a $24k/a year loss. You bought it 1 year ago for $1.18mil and you think it's worth $1.2mil today, so you still made a loss when you calc in appreciation. It's a lose-lose.
Does your monthly loss calc in PITI and maintenance/repairs?
If you want to grow your rental portfolio, you are swimming upstream holding assets that lose money every month/year. You are funding it's operation with other funds, instead of it producing capital for more acquisitions. Market appreciation like some have said is a gamble.
BUT value-add/forced appreciation is a great way to increase value and create cash flow. We have purchased 60 units of multifamily properties within 2 hours drive of San Francisco Bay Area within the last year and they have been going great.
Sell the townhome, turn your money into smart money and move your capital to properties that produce yield. You will sleep better at night :)
1 Reply
Huimin Zhang
OP
Newark, CA · Member since 2019 · 13 posts · 6 votes
7y
We bought this place to live at the first place. Nice location and it is reverse commute for me everyday. Great restaurant nearby and safe neighborhood. So at that time, it was fine even we are losing money or we don't see future growth. And then, we got a chance to buy a second house and it is way bigger (of course worse traffic, okay community), and we moved out from the MTV property. Now, it became painful to see and finally realize we are losing money every month. If we sell the MTV property right now, possibly could only sell it at the price we bought it, it is a big loss with all the misc fee and our monthly losses. It is hard to admit, but we are unwise with our money, way too less planning. Before we go ahead and sell it, we need to find another place to put the money. Any suggestions in the bay area? :(
0 Reply
David Andrzejek
Member since 2019 · 11 posts · 8 votes
7y
@Huimin Zhang I agree with other posters, you are making a big bet on price appreciation in Mountain View. I live in and own a home in Mountain View, and I own rental property in San Jose. I am very bullish on Silicon Valley... I see continued strength in the tech market and continued failure of local govt to keep up with housing (although Mountain View itself is bringing A LOT of inventory to market). However if this is purely investment (is no plans to move in after some time), you need to objectively do the math on your expected return given what you think price appreciation will be over the life of your ownership ( @Leo Kotschenreuther makes an excellent point) , weighting the risk of a downturn and your ability to continue to fund this investment, and compare that to using your 500k +2k/month to fund any other investment (Amazon stock, bonds, passive investment in a syndicated deal elsewhere.... )
We are holding our San Jose MF, but I've stopped looking for my next deal in silicon valley... property here is all priced for perfection (ultra low cap rates, neg cash flow, smells like 06-07!), which is fine if it keeps going up but if there's a hiccup for any reason (ie 2008/9), people will be massively upside down and will need to be able/willing to fund their properties for years. Totally fine if you can continue to fund for say 5-7 years, but as we saw in 08/09, lots of people expected endless price appreciation and when rents softened they were washed out (how I bought my MF).

Long post I know but you need to be OK funding 2-3k/month for 5-7 years. As Leo points out, with the leverage you have, at some level of price appreciation your investment will work out ok... but your time horizon needs to be 5-7 years of 2-3k/month if there's disruption in the market.
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