Confused on what to do with rental property

Buying & Selling Real Estate
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Confused on what to do with rental property

Neil Hunter
Clovis, CA · Member since 2013 · 14 posts · 0 votes

I have a home that I am renting out in central California. I owe about $160k, and its worth 290-300ish. Currently my cash flow, after all expenses, is about -$20. 

I've been weighing my options. Since I'm losing money, it seems like its a no brainer to sell.. right? I'm trying to think of reasons where selling would NOT be the better option. I could..

1) Refinance to a 15 yr fixed for about 4.3%, but that would actually increase my monthly payments (I've got 19 years left on my 30 year mortgage, currently in an ARM that has been going up and is currently at 5.125%). However, I'd save in total interest paid, but my cash flow would be even more negative.

2) Make an additional mortgage payment and pay off half of it. That would be a 5% guaranteed "return" by saving me on all the interest

3) Sell. Zillow is estimating my house to actually depreciate next year. But I don't want to pay the capital gains taxes. I suppose I could wait to sell, then take the gains and immediately use that towards the next house I live in (I can do that on a rental, right?), thus avoiding capital gains taxes.

I'm leaning towards option 2, and possibly combine it with option 1 (refinance and make extra mortgage payments).

I guess just conceptually.. if you're breaking even or have a slight negative cash flow, does that always mean trouble? I mean if you bought a house for $200,000, rented it out the entire time but broke even, your tenants still "paid" for the house, and you have a "free" house at the end of it, right? What am I not understanding correctly?

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    @Neil Hunter  First, no one can predict what the market will do, so ignore what Zillow says.  Second, if you were to sell, could you buy another place where the cash flow is better?

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    I see you're in CA, and the RE prices are high in relation to rents. So you have a almost break even cash flow even with equity of almost 50%. I'm in NY and have similar issues.

    I experienced the same problems in NY. Invested in a flip back in 1983, when interest rates were high, got it for $70K, ARV of $130K. Long story, found a buyer, deal fell thru the last minute, with plan B being I close on it and rent it out, so I got a mortgage at 13% back in the 80's and closed on it. Refinanced in 1993 to 7.75% with no cashout.

    What happened? It was breakeven cash flow for the first several years, the situation similar to yours right now. Fast forward to today, 35 years later, where am I? The mortgage is paid off, ARV of $450K to $475K, with market rents of $2,700 a month. Taxes are $800/month.

    So what's the analysis? Yes, the tenants paid off the house, and I never refi'd out, just lower the rate. I had $38K left of the mortgage 6 years ago with 6 years to go which I paid off with an inheritance, otherwise I would have kept the mortgage, and would have paid off this year. In the long run, what I got out of it was the appreciation. It was only break even for most of the first 10 years given the rise in real estate taxes and higher interest rates.

    Where am I with this after 35 years? It's a SFR 25 minutes away and involves little work on my part. Making $1,500 cash flow with almost $400K gain is not bad. Would I sell under these circumstances? Capital gains is a big issue. Though the current tenant had problems paying rent, under court stipulation, still the cash flow is great. He just paid two months rent yesterday, still behind two months.

    I'm just giving you my story where you could be if you hang on and if you believe appreciation in CA is as phenomenal as it is. I held it with the belief that long term appreciation is the big factor aside from the tenant paying off the mortgage. Of course, I could have been wrong, and the appreciation could be half of what it is, which is not bad either.

    Adding everything up, appreciation came out to more than the cumulative cash flow and with tenants paying off the mortgage. Cash flow in the later years was the bonus, totally opposite view from cash flow investors.

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