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!
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.
Ah so you are holding your old townhouse as a rental. :) Generally a bad idea IMO. I think you get better leverage with more doors, esp near Bay Area. If you really want to invest in real estate, your townhouse in MtnView isn't it! I owned a townhouse downtown MtnView but sold when we bought our house.... look for a duplex or fourplex, even if it is further away.
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? :(
I don't think there's anything wrong with admitting that you haven't made all perfect decisions with your finances; important thing is that you're trying to do something about it and that's great. You came to a good place to get a diverse group of usually good opinions.
I agree with the people that say $2000/month loss is just too much to gamble on growth. Yes, you may take a loss if you sell now considering agent's fees and so on...but it sounds like you're almost guaranteed to lose $24,000 in the next year just if you keep it (not counting how the value of the property may go up....or down!). So personally, I wouldn't worry about the loss, I'd just try to get something I was more comfortable with and I prefer positive cash flow over betting on growth.
Let me ask - why is it so important to find another place in the Bay Area? It will still be tough to get good cash flow. For the approx $500,000 you have in equity...why not buy two $250,000 townhouses in Vegas area (just an example) and maybe end up around $2500 cash flow positive?? That would be a quick turn-around from minus $2000 to plus $2500 (again, not exactly what you may find, run your own analyses and look at other locations and what other folks have to say).
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? :(
Gotcha, totally understand. Now looking forward, here are a few outcomes:
1. Keep it and market continues to go up. You sell and make some money on appreciation because renting it will still make you bleed money. But after all fees, commissions, negative cash flow, etc, the net profit is not all that great.
2. Market stays flat, you sell for what you bought it for, lose some money on fees, commission, etc but you move your money into a property that produces cash flow and can do value add appreciation.
3. Market slides downward, you lose ALOT more money in value and cash flow is still negative.
Yes you may have made a mistake in keeping it expecting to make money instead of selling it after you moved out, but don't make more mistakes going forward and potentially compound the problem. Mitigate your risks and exposure. As many know, Bay Area is an extremely difficult place to find cash flowing deals. You're best bet is to the take the time selling the property and educate yourself on MF investing, analyzing deals, identifying what's a good one and what is bad, network with brokers, lenders, etc. Once you do, the picture will be clearer on where to invest and what to invest in. It will also help in focusing your goals - ie. you want 100 MF units that cash flow or 5 SFH, etc. This will help narrow your strategy going forward.
I've been where you are. I also have a property in Mountain View I bought back in 2000. I lived there for a time and then moved. When I moved property values were down and I owed more than it was worth... plus the rent didn't cover the expenses. I kept it anyway. It's worked out okay for me because right now it's worth much more, but there were many years it was costing me every month. Now 19 years later I'm going to sell this summer and reinvest out of the area. Properties I'm looking at will triple my monthly cashflow, since you're already in the negative you could do much better than that by selling and buying elsewhere. I probably should have done it years ago, but there were other circumstances that prevented me from being able to sell before now.
If there is nothing preventing you from selling I would sell now and stop the bleeding. Just looking at your purchase price and the price you think it would sell for you are dangerously close to being upside down if the market shifts and that isn't even considering the $2000/mo it's costing you.
On a side note, don't rent to friends and give them a "deal". If they're your parents, or a child, that's one thing, but owning rental property to supplement someone else housing costs is not a good investment strategy. Hire a property manager if you don't have the nature to be tough on this one.
@Jim D. Jim, having a rental property in the Bay is just easier for us to manage, and I have to admit that we barely know anything about OOS investment. I was inspired so much from BP website and eagerly trying to figure out what my goal is! A LOT of research need to be done!!! Appreciate your input!
@Paul Choi Thanks, Paul!! Totally agree and totally understand!
@Maria D'Aura Thanks for the advise! We were not thinking it through when we moved in and our friend needed a bedroom at that time, and here we are now with the "discount price".
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.
Forgive my ignorance but how does a 1031 apply when selling a property at a loss?
There's also this article on CNBC posted 25 minutes ago. Now, I'm not one to rush to judgments based on one single data point, that would be silly....but it does support other posts advising to think about (among many other things) whether expectations for future growth will continue at the same pace.
San Francisco Bay Area home prices fall for the first time in 7 years
"Before last month, the median sale price had risen annually for 83 consecutive months since April 2012"
There's also this article on CNBC posted 25 minutes ago. Now, I'm not one to rush to judgments based on one single data point, that would be silly....but it does support other posts advising to think about (among many other things) whether expectations for future growth will continue at the same pace.
San Francisco Bay Area home prices fall for the first time in 7 years
"Before last month, the median sale price had risen annually for 83 consecutive months since April 2012"
We have seen price cuts and the market is cooling down starting end of 2018. It will grow eventually but I highly doubt it could be the same pace as last few years. As many mentioned above, this is a gamble and I don't even trust it myself... It is not too late now before we take further actions...
Are you able to post here the sq footage of the townhouse, how many bed/baths and the rent you get?
Right now you are doing long term rental, before you decide to sell be creative and consider Corporate housing or long term airbnb rental. You will most likely be able to breakeven. You don't have to do it yourself, you can have someone do it for you. Mountain View is an amazing location to explore Corporate Housing. I am tagging @Ethan Cooke & @JD Martin whom I met at a conf recently who are doing this very successfully.
If you sell you will loose quite a bit in agent fees and you might never buy again in a prime location like Mountain View, You seem fairly young and have long investment horizon, if you are able to hold on to this long term you will most likely reap the benefits like its doing for @Maria D'Aura
I work with an investor in that area who not only has his property full furnished for monthly corporate rental but he went above and beyond to make it a "wellness" property. He is getting more rent than his neighbors and has a waitlist.
@Huimin Zhang rents seem very low with that kind of equity in the property. You should never give a friend and family discount. It is no longer a rental property and is just a second home at that point. IRS has rules about undercharging rent. In fact, given the fact that it loses so much money, I doubt you could even keep claiming it on your taxes - if it is your only rental. I think you need to either raise rent to fair market or dump the property.
Just a word of caution on converting to an Airbnb model, read your CC&R’s and make sure you are allowed to do this. Most have minimum 30 day rental periods. My hoa is considering changing this to allow Airbnb, but it will take a lot of money in lawyer fees and a majority vote from the membership to get it approved.
Great question @Huimin Zhang ! The good news is, you have significant equity in the townhome already. The question is, can you do better with that equity?
Here is how I would approach the question.
You say you are losing $2,000 / month now. Suppose you were to sell and reinvest.
Let's say you could net $450k ($1.2M value, $700k mortgage, $50k closing costs). Could you re-invest in a market that cash flows better? It's not unusual to get 10-12% Cash-on-Cash returns in many cities across the US (just avoid the coasts!). 12% Cash-on-Cash is 1% per month (easy to calculate). On $450k equity that works out to $4,500 per month positive cash flow.
You are currently at -$2,000/month negative cash flow. If you were to keep the townhome, to match the $4,500 positive cash flow you'd have to get $6,500/month in appreciation. That's $78,000 per year. On a $1.2M property that's 6.5%. Do you think you can get 6.5% per year appreciation on your townhome?
That sounds high to me. I too live in Silicon Valley. Cash-flowing here is just too hard. I went through a similar analysis for myself about a year ago, and decided that out of state investing is the way to go.
@Stephen Flynt I believe The gentleman was talking about negative as in negative cash flow monthly not upside down, there is equity on the property where his loan is at 700k and Valued at $1.2 mil.
@Huimin Zhang. SELL!! Get rid of that negative 2k a month! With that much equity you could easily sell and create 2k in positive cash flow with a decent purchase of a 4plex or similar
@Huimin Zhang
Market is not going to improve that much for the loss you are incurring today.
I would say sell and invest somewhere else.
@Huimin Zhang depends on what you want, look at this thread :
Read responses from @Dan Heuschele, excellent read.
If I were you I would do both, keep the bay area home and put more cash you have to invest OOS. You have a negative cashflow that you can compensate with OOS flows. Also try changing your mortgage to interest only, you can get a 10 year IO, so your 2K a month loss is lot lower, but you still get a big depreciation benefit to offset positive rental cashflows. Ultimately all depends on how much you can hold, longer term nothing will beat bay area not even all the cashflows people talk about in BP, history is an indicator of it, refer to Dan's responses in above thread.
If I was in your position I would sell and purchase a property in the east bay where the market is a little friendlier to investors. Duplex-4plex could be great in the right areas. With the equity that you have available to invest, even single family can cashflow 2k+ monthly. There may be better options out there but this is what Im familiar and experienced with so this is just my personal opinion from my personal experiences.
@Stephen Flynt
All that matters is the property you're exchanging into is at least the same price and preferably more so there isn't any issues. For example, their mortgage is 700k so if they take the hit on equity they can sell at a discount of 900k so all they need to do is buy a property at 900k or more. My numbers are only an example and definitely not 100% accurate but you'll get the idea. The 150k leftover after selling expenses can go towards the down payment on the new property, tax deferred. They will be losing some equity but way better than bleeding cash every month.
@Huimin Zhang
I would sell and put that money into OOS if I was in your situation. There is so much opportunity for good cash flow that you cannot find in California anymore. I got lucky buying houses near the Bay Area that cash flow good and appreciated quite a bit. It was all because the timing was right, 2007-2013. The numbers didn’t make sense anymore so I stopped buying in California.
Just recently I got back into the game and started buying again. There are a lot of good markets OOS that pay the 1% rule or better. For example if you buy a house at 100k, you should be getting 1,000/mo rent at least. I will be closing on my 4th house this week since I started buying OOS about 8 months ago. This is mostly for cash flow, I’m not looking for appreciation even though some areas do appreciate, but the cash flow isn’t as good.
My most recent house was acquired for about 56,000 and will rent for 1050/mo. This is in Michigan. I also buy in Alabama. I’m looking at Illinois next, or Florida. Lots of good markets out there....
If you put that $500K into 5 passive syndications, you would probably have $70K-$90K of tax-deferred income annually, plus the opportunity for significant appreciation on the back end. There are other, riskier things that you could to make even more than that, and you could spread your risk around. No one has a crystal ball, but I'd sell it.
@Huimin Zhang - How much of a discount are you giving your tenants? Would market rental rates offset your negative cash flow?
If not, I would suggest selling and looking for a Duplex or Triplex that has the ability to cash flow.
Another thing we look for is a single family home in an overlooked area that is family friendly and also has the ability to cash flow.
I grew up in Cupertino and know the area well so I'm not sure the South Bay would be the place to focus on.