Negative Cash Flow Property - Hold or Sell?

17 Replies

So, a couple years ago I bought a condo in downtown San Diego that we planned to live in as out primary home for at least 5 years. Fast forward a couple years, and I've bought a SFR in San Diego and am renting out the condo. Unfortunately, I've got a pretty hefty negative cash flow on that property. However, San Diego tends to be a great market for appreciation so I wonder if I should just keep holding it for the long term. I own one other property in San Diego that has had great appreciation and does cash flow. I am torn between being patient and dumping this place. If I sold at this point, I would likely (hopefully) break even and be able to pull out my original down payment after fees. I have been looking to do some OOS investing, and while I do have cash for this, the extra cash could be helpful.

But my ultimate goal in real estate is to own great properties that both cash flow decently and have some appreciation. 

For someone looking to get started in OOS investing in a more affordable area, what would you recommend? Keep in mind I don't need the money from this condo to fund my OOS investing. I also have a well paying job that enables me to easily cover the negative cash flow and still sock away more money for future investments. 

Thanks for any insight!

Talk to an accountant about tax implications.  If you've been living in it and turn it into a rental and hold it long term, there may be tax implications.  If there aren't, then look at how the market has been appreciating and decide if it is worth holding onto it for a year or two and then selling it.  I don't know how much you are paying into it every month or what you could get with the money if you sold it.

What exactly is 'hefty'?  What type of interst payment do you have?

To be honest, if I liked the property, and I wasn't negative by much (and the amount was mostly due to principle reduction which isn't really a 'cost' in the way interest is) I might just keep it.  At least until / unless you find something that requires you to access that equity you have (I assume you have equity -- if even from your down payment)

So I say hold, as long as the negative isn't too great and doesn't impact your lifestyle.  But if/when the time comes that you need $ to buy something that cash flows, dump it. 

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Hi @Danielle Wolter -

I see this same situation in the SF Bay Area all the time ... here's the process that I would use to help think through this:

Since I don't know your exact situation, I'll make up some numbers that may or may not be close to what you're dealing with ... my guess, though, is that they'll be in the ballpark:

- let's say you bought for $500k ... the PI on your loan might be around $2100/mo
- condo in downtown SD ... you might have a $450/mo HOA fee
- prop tax ... in the range of $525/mo
- insurance ... maybe another $75/mo
- sub total: $3150/mo (and I'm excluding repairs, prop mgmt, etc)
- potential rent: $2400/mo
- cash flow: -$750/mo ... -$9k/yr

You're looking for appreciation, so let's say you hold the property for the next 10 years ... you could be $90k in the hole from negative cash flow at that point (I know that's unrealistic, but this is just an example :).  If that were to happen, you'd need your property to appreciate 18% just to break even. While SD might experience massive appreciation, your wallet won't see it.

Now, compare that to another growth market like the Raleigh metro ... that same original $500k can be split into 2 townhouses that will kick off $400-500/mo in positive cash flow ... use a portion of the $90k that you were going to sink into the negative SD condo and pick up a third unit.  Your total property value goes from $500k in SD to $750k in Raleigh - plus, you're looking at $600-750/mo in positive cashflow.  Even if Raleigh appreciates at half the rate as SD, your total return is going to still be superior.

The kicker to this example ... you're making good money in CA - you're paying a minimum of 9.3% in state income tax, maybe more ... in NC, you'll have a flat income tax at 5.25%.  So, even if the the SD property was generating the exact same positive cash flow as the Raleigh one, you'd be seeing 4.05% less of it.

Hope this helps...

      @Theresa Harris Thanks for the input!

      @Cody L. I'm paying almost $1K into it each month...$12K/year. I do really like the property, and with the growth and improvements being made to the downtown area I see a lot of opportunity for appreciation. Thanks for the input!

      @Brian Sparr Your numbers are pretty close. I'm negative almost $1K/month. I totally see what you're saying. There is also the chance that I won't get the appreciation I'm hoping for, and then I'd really be stuck. While it's great to own property in San Diego, I may just have to cut my losses and look elsewhere. Thanks so much for your help!

      @Danielle Wolter I would hold it TBH. Real estate is not purely a numbers’ game and there are a lot of trouble owning OOS properties which will eat up all your time(you make good money at work so you know how much your time is worth). Also you mentioned you already have money for your next OOS property so I won’t considering selling this property until you have good success in OOS investing and then need money to scale. Also as someone mentioned earlier there are equity pay down so you are not REALLY losing money.

      SD is the crown jewel of US cities and negative 12k cash is a bummer. I see investors buy these but they put a sh#$ ton down so it's positive. What might happen is looking back, is many ask themselves why did I sell that as now it doubled in rent and value ( years later). Whatever fits best for you fiscally speaking is understandable. Good luck!

      This is a no brainer. Sell. 

      This is a bad investment. If you tried to sell the property with these numbers, nobody would buy it as an investment. If someone tried to sell you a property with these numbers, you wouldn't add it to your portfolio. Appreciation is but one aspect of real estate investing and youre banking on that bailing you out of this bad investment.   

      @Robert Comstock a refi wouldn't help unfortunately. I bought it as my primary residence - if I refi it will have to be as a rental which means more money down and a higher interest rate. The additional money down may help the payment, but the higher interest rate would negate much of the benefit. 

      @Matt R. I've definitely thought about re-casting the mortgage and putting enough money into it that I would be positive. But then I'm out all my cash and would have no money for more investing. I totally get the looking back too - that's why I'm torn! On another note, my boyfriend's grandma used to live in Sherman Oaks and we went up there a lot. Nice area!

      @Peter S. Thanks for your input! I definitely would not be able to sell it to another investor - they would look and run the other way LOL! My only chance would be to sell it to someone who wants to live in the city. Thanks so much for your input!

      Hi @Danielle Wolter - I am listening to @Brandon Turner 's book again and thought it would be good to got down the 4 benefits of REI that he mentions:

      1. Cash Flow

      2. Debt Paydown

      3. Appreciation

      4. Tax Incentives

      I believe he says having 2 OR 3 of the 4 is a good investment. So while you're losing the cash flow on this property, are you still achieving these other benefits? Appreciation may be slowing down in San Diego (?) - you'd know better than me but I still see tax incentives and debt paydown. 

      Looks like your on the path towards keeping it but just wanted to offer some additional food for thought.

      @Alexander Zurn Thanks so much! I do have 3 out of the 4. Appreciation has slowed down a little in San Diego, but I'm also in the game for the long term. Plus, I expect appreciation to speed up in this part of the city in the next few years. Good food for thought!

      Originally posted by @Danielle Wolter :

      @Alexander Zurn Thanks so much! I do have 3 out of the 4. Appreciation has slowed down a little in San Diego, but I'm also in the game for the long term. Plus, I expect appreciation to speed up in this part of the city in the next few years. Good food for thought!

       Sometimes a good thought experiment is this:  If you didn't own it, and this property came up for sale at the same price you could sell it for now, would you buy it?  I find most people that will hold onto a property worth $x, wouldn't be willing to buy that property for $x

      So I say "okay, pretend you drank to much, and in a drunken stooper, you sold the property to someone at it's fair market price.  The next morning, when you realized what you did, would you go to them and try to convince them to sell it back to you?"

      If both are "no", then sell it.   Being a holder of a property worth $x == being a buyer of that property at $x

      @Cody L. I definitely would not buy this property as an investment at the same price. Unfortunately when I bought it it was a personal residence and I let emotions come into play. Might be time to sell and invest cash elsewhere. Thanks for the input!

      Originally posted by @Brian Sparr:

      Hi @Danielle Wolter -


      I see this same situation in the SF Bay Area all the time ... here's the process that I would use to help think through this:


      Since I don't know your exact situation, I'll make up some numbers that may or may not be close to what you're dealing with ... my guess, though, is that they'll be in the ballpark:


      - let's say you bought for $500k ... the PI on your loan might be around $2100/mo
      - condo in downtown SD ... you might have a $450/mo HOA fee
      - prop tax ... in the range of $525/mo
      - insurance ... maybe another $75/mo
      - sub total: $3150/mo (and I'm excluding repairs, prop mgmt, etc)
      - potential rent: $2400/mo
      - cash flow: -$750/mo ... -$9k/yr


      You're looking for appreciation, so let's say you hold the property for the next 10 years ... you could be $90k in the hole from negative cash flow at that point (I know that's unrealistic, but this is just an example :).  If that were to happen, you'd need your property to appreciate 18% just to break even. While SD might experience massive appreciation, your wallet won't see it.

      Now, compare that to another growth market like the Raleigh metro ... that same original $500k can be split into 2 townhouses that will kick off $400-500/mo in positive cash flow ... use a portion of the $90k that you were going to sink into the negative SD condo and pick up a third unit.  Your total property value goes from $500k in SD to $750k in Raleigh - plus, you're looking at $600-750/mo in positive cashflow.  Even if Raleigh appreciates at half the rate as SD, your total return is going to still be superior.

      The kicker to this example ... you're making good money in CA - you're paying a minimum of 9.3% in state income tax, maybe more ... in NC, you'll have a flat income tax at 5.25%.  So, even if the the SD property was generating the exact same positive cash flow as the Raleigh one, you'd be seeing 4.05% less of it.

      Hope this helps...




          Some items about this analysis:
          - 18% over 10 years is only 1.6% annually. San Diego has not had such low RE appreciation over a 10 year stretch in over 50 years.
          - Over the last 7 years San Diego rents have appreciated more than $100/month per year on average. Using the $12K negative cash flow but decreasing it $1.2K annually would provide $60K negative cash flow.
          - Appreciation necessary to counter the negative cash flow would be 1.15%/year. That is a very low RE appreciation rate for San Diego.
          - This does not include equity pay down and tax benefits of RE.
          - Cost to sell approaches 10% (mostly realtor fee).

          I have confidence that 10 years from now the return on this RE will have been decent. The question really is "Can you do much better?" I would not purchase it as an investment because I can find better. I am not sure that I would sell it because of the cost to sell. Evaluate your other investment options. Consider if you still qualify for the tax exclusion (did you live in the home 2 of the last 5 years?) and how it affects any decision to sell.

          Good luck