Should I sell my losing SFR rental or continue to hold on

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Should I sell my losing SFR rental or continue to hold on

Sameer Kh
Wholesaler · TX · Member since 2016 · 41 posts · 8 votes

Hello BP folks,

I have an interesting situation for one of my rental property which I purchased in Feb 2016 for $109K.

The property has now appraised for $130K and I expect it to appraise at the same rate. I put down $30K on this deal and rest is financed.

I have been losing money on this property since my gain from rental income is too low to offset maintenance/repair/PITI/HOA/property management costs. Last year, was the only year where I made $1200 in profit.

I had a long term renter since I purchased it and apparently they left the property 2 weeks ago due to financial crunch. Their contract technically renews in April.

The property management company did a moveout inspection and found the total cost to get in the market (mostly paint and patch) will be $6100 (I feel this is high).

My question is should I invest $6100 to get another renter in place and wait till I get it appraise upto $200K and sell? If I spread that $6100 I will be making no money atall on this rental for next 3-4 years.

OR should I sell it for $132K and do a 1031 exchange into another deal?

OR should I sell it pay taxes and invest in Fundrise or Holdfolio or Cardone Capital?

My ultimate goal is passive income.

Thanks

Sam

2Reply
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Soh Tanaka
Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
6y

I'm not trying to be funny here, but if your goal is "passive income," not "passive expense," then I see no reason to hold on to it. Sometimes we get into this situation where you are not cash flowing AND don't have any equity. Fortunately you have a decent equity, so I would definitely do 1031 exchange. I can't speak for the other options you mentioned (Fundrise or Holdfolio or Cardone Capital) as I never used them. 

Best wishes to you.

Soh

 

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  • Sarah Brown
    Real Estate Agent · Nampa, ID · Member since 2017 · 439 posts · 361 votes
    6y

    Can you do a different kind of rental and make more money?  Perhaps furnished or short term? 

    1Reply
  • Soh Tanaka
    Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
    6y

    I'm not trying to be funny here, but if your goal is "passive income," not "passive expense," then I see no reason to hold on to it. Sometimes we get into this situation where you are not cash flowing AND don't have any equity. Fortunately you have a decent equity, so I would definitely do 1031 exchange. I can't speak for the other options you mentioned (Fundrise or Holdfolio or Cardone Capital) as I never used them. 

    Best wishes to you.

    Soh

     

    5Reply
  • Joseph Walsh
    Brookfield, WI · Member since 2016 · 191 posts · 108 votes
    6y

    Also, assuming you have income somewhere else like w-2 income, those loses can offset some of that income.  So, it might not be a "loss", only on paper.  I have a property like that, I am waiting until my long term renter decides to vacate then going to spend the ~2k to get it ready for market and list.  Sounds like you just got that window of opportunity.  you can sell and no lose too much money, and look for a good investment, since it sounds like you paid too much relative to rental income  (mine is the same, but it was not bought as an investment, just my last house in a market that crashed so I couldn't sell without pain)

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Sarah Brown:

    Can you do a different kind of rental and make more money?  Perhaps furnished or short term? 

    Yes. I do have a short term rentals and that certainly is option. 

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Soh Tanaka:

    I'm not trying to be funny here, but if your goal is "passive income," not "passive expense," then I see no reason to hold on to it. Sometimes we get into this situation where you are not cash flowing AND don't have any equity. Fortunately you have a decent equity, so I would definitely do 1031 exchange. I can't speak for the other options you mentioned (Fundrise or Holdfolio or Cardone Capital) as I never used them. 

    Best wishes to you.

    Soh

     

    I agree I don't want to drag this too much and sell to reinvest where it's actually generating income 

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Joseph Walsh:

    Also, assuming you have income somewhere else like w-2 income, those loses can offset some of that income.  So, it might not be a "loss", only on paper.  I have a property like that, I am waiting until my long term renter decides to vacate then going to spend the ~2k to get it ready for market and list.  Sounds like you just got that window of opportunity.  you can sell and no lose too much money, and look for a good investment, since it sounds like you paid too much relative to rental income  (mine is the same, but it was not bought as an investment, just my last house in a market that crashed so I couldn't sell without pain)

     Due to my income level I cannot offset the loses but I do see your point in taking advantage of the open window 

    2Reply
  • Tyler Jahnke
    Rental Property Investor · Oakland, CA · Member since 2016 · 341 posts · 643 votes
    6y

    Hey @Sameer Kh - spending $6,100 on repairs seems like you'd basically be spending 5 years of cash flow (considering you finally made some money this year in the amount of $1,200).

    So, it looks like you're betting on appreciation, which is always risky. I think you need to consider selling / 1031 exchange.

    Best of luck Sameer!

    -Tyler

    1Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Sameer Kh

    I won’t keep it..... however unless you can find another property that is worth investing, I would keep some dry powder for 2022 or 2023...

    If you sell it at $130K, there is no real taxable income.... you won’t be paying much of any tax

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Sameer Kh did you buy this through a turnkey company? What’s the current rent? What does that 6100 include? How big is the house? 6100 seems very high unless there’s a lot of damage or it’d a large house.

    Personally I would say sell and not invest in any of the things you mentioned.

    4Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    6y

    If the property is constantly losing money and it's not a one-off sort of problem (i.e. big turnover or roof replacement, etc.) and you can pull out some money selling, I would recommend selling.

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    1Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Caleb Heimsoth:

    @Sameer Kh did you buy this through a turnkey company? What’s the current rent? What does that 6100 include? How big is the house? 6100 seems very high unless there’s a lot of damage or it’d a large house.

    Personally I would say sell and not invest in any of the things you mentioned.

    Yes I did buy this from a local turnkey. The rent is 1280 and the property manager charges 10%. 6100 includes lot of paint work, minor ceiling repair, cabinet and minor blind fix. The house is not too big only 1200 sqft. I agree the quote is lot higher. I dont see a lot of damage and all the work is mostly paint and finishing 

    2Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Tyler Jahnke:

    Hey @Sameer Kh - spending $6,100 on repairs seems like you'd basically be spending 5 years of cash flow (considering you finally made some money this year in the amount of $1,200).

    So, it looks like you're betting on appreciation, which is always risky. I think you need to consider selling / 1031 exchange.

    Best of luck Sameer!

    -Tyler

    Yes. Good point though Houston market is strong but again I don't want just the appreciation I do want the passive.

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Andrew Syrios:

    If the property is constantly losing money and it's not a one-off sort of problem (i.e. big turnover or roof replacement, etc.) and you can pull out some money selling, I would recommend selling.

     Thanks Andrew

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Diane G.:

    @Sameer Kh

    I won’t keep it..... however unless you can find another property that is worth investing, I would keep some dry powder for 2022 or 2023...

    If you sell it at $130K, there is no real taxable income.... you won’t be paying much of any tax

     Hmm not even in sales tax? I was trying to see if I could save that by doing an exchange

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Sameer Kh, I don't believe that the 3 options you list are 1031 compliant.  You can certainly sell your current property and invest in those but you would pay tax on the profit and depreciation recapture.  It's not all that much but it's probably about as much as your tenant rehab would be.  So fixing and keeping or selling and paying the tax are about a wash.

    So if you want the better finance decision it would be to sell and 1031 exchange into a vehicle like a DST or TIC if you want passivity and fractional interests. Or, just thinking out loud but it sounds like you're a high earner with multiple properties. You're a prime candidate to make the leap and move into NNN wholely owned properties. They're as passive as your turn keys but more stable. the barrier to entry is price. But you could bunch the sale of a few of your rentals and use the proceeds as one down payment on a good NNN with a 15-20 year lease.

    Either way I vote with everyone else - a dog now isn't going to stop eating food.  Sell.

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    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y
    Originally posted by @Sameer Kh:
    Originally posted by @Caleb Heimsoth:

    @Sameer Kh did you buy this through a turnkey company? What’s the current rent? What does that 6100 include? How big is the house? 6100 seems very high unless there’s a lot of damage or it’d a large house.

    Personally I would say sell and not invest in any of the things you mentioned.

    Yes I did buy this from a local turnkey. The rent is 1280 and the property manager charges 10%. 6100 includes lot of paint work, minor ceiling repair, cabinet and minor blind fix. The house is not too big only 1200 sqft. I agree the quote is lot higher. I dont see a lot of damage and all the work is mostly paint and finishing 

    you are being way overcharged at 6100.  What’s the name of the company you bought it from? 

    3Reply
  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    6y

    From what you described for work and what the price is they gave you, it sounds about double what the cost should be or more. Now that it is vacant, fire your manager, find a few local contractors to get you bids and get it ready for showings. Sell the place and sit on the cash until you find a better deal. Right now you will 100% lose money for a long long time on this property with $6k for turnovers and $1200 cash flow best case. 

    1Reply
  • David Braut
    Rental Property Investor · Grass Valley, CA · Member since 2010 · 69 posts · 21 votes
    6y

    @Sameer Kh sell

    0Reply
  • Keaton M.
    Austin, TX · Member since 2017 · 75 posts · 39 votes
    6y

    @Sameer Kh

    I think betting on appreciation is risky. They’re turning every pasture out there into a new neighborhood which is going to increase your competition. I don’t think a 6% increase each year is amazing, especially with how fast the market is growing. So if you’re going to hold it, I would look at getting a new property manager and look at the area to see if it’s appreciating like new stores, Whole Foods, HEB, or something else getting built.

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Keaton M.:

    @Sameer Kh

    I think betting on appreciation is risky. They’re turning every pasture out there into a new neighborhood which is going to increase your competition. I don’t think a 6% increase each year is amazing, especially with how fast the market is growing. So if you’re going to hold it, I would look at getting a new property manager and look at the area to see if it’s appreciating like new stores, Whole Foods, HEB, or something else getting built.

     That's a good point. I am looking at selling it. 

    0Reply
  • Sameer Kh
    OP
    Wholesaler · TX · Member since 2016 · 41 posts · 8 votes
    6y
    Originally posted by @Bryan Devitt:

    From what you described for work and what the price is they gave you, it sounds about double what the cost should be or more. Now that it is vacant, fire your manager, find a few local contractors to get you bids and get it ready for showings. Sell the place and sit on the cash until you find a better deal. Right now you will 100% lose money for a long long time on this property with $6k for turnovers and $1200 cash flow best case. 

    Agreed! 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    @Sameer Kh  Was the long term renter in since 2016?  If so, what kind of damage did they do that it will cost $6100 to get it rental ready and why wasn't some of that taken from his security deposit?  From the list you posted, no way it should cost that much.  Either fire your PM and get another one or better yet, hop on a plane/in a car, look at the place for yourself, spend the weekend painting it and list it.

    1Reply
  • Angel Medrano
    Member since 2020 · 21 posts · 5 votes
    6y

    @Sameer Kh

    I’ve flipped properties for 10k

    Painted a whole house laminate flooring throughout

    Vanities and toilets minor patch work and new appliances

    So 6100 sounds crazy for a turned over unit if there was so much damage why wasn’t the security deposit kept to help off set repairs?

    1Reply
  • Adam D Rinehart
    Investor · Houston · Member since 2019 · 153 posts · 139 votes
    6y

    @Sameer Kh small world, I grew up in Richmond, TX. Where is this property?

    0Reply
  • Nick Barlow
    Warsaw, IN · Member since 2017 · 229 posts · 270 votes
    6y

    @Sameer Kh do you mind me asking your loan terms? A 30 year note would be about $600/month at 5.5% based on numbers provided and an educated guess at HOA. If you're in a 15 year note, I assume you'd have a decent amount of mortgage pay down after 20% of the payments made.

    Is refinancing the remainder of the balance to longer terms an option you’d consider?

    I’ve seen enough people regret selling a few years later here on BP to at least raise the idea of looking at as many creative options as possible before pulling the trigger and selling.

    Have rents appreciated in 3 yrs? Can you prepay insurance or change deductible and get better rates? Could rent to own work in this scenario?

    Just food for thought. I hope it helps, good luck!

    4Reply
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