Rent out for a negative cash flow vs sell house at a gain?

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Rent out for a negative cash flow vs sell house at a gain?

Minka Sha
Investor · San Diego, CA · Member since 2014 · 79 posts · 17 votes



Which option would you pick, and WHY?? Also, if you can think of Option C, you are a rock-star! :)

So, condo is 2 BR, 2 BA in North Pacific Beach area in San Diego, CA. Great location, walkable to the beach. I bought with only 5% down, and my monthly payment (principal, insurance, taxes) $2700/month + HOA is an additional $400

Option A. Keep as a rental, probably rent for $2700-$2800/month, so a negative flow of $400-$500/month

Option B. Sell it now, net gain about $40-$60K after taxes, commissions, listing price, etc

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

@Minka Sha

Option C - Stay in the house and get a roommate to share some of the payment until you have lived there for 2 years.  Then sell and take the $40K tax free using the sec 121 primary residence exclusion.

for bonus points, Air BNB it for weekends at the beach. Have friend you can stay with for those occasional weekends (HOA willing of course). But keep it as your residence per option C.

Do I win? :)

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  • Nicholas Lohr
    Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
    6y

    not an option C but a modification to your Option B. 

    1031 exchange it into another property, hopefully one that cash flows this time, and avoid the taxes part of your option B. 

    6Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    6y
    Originally posted by @Minka Sha:



    Which option would you pick, and WHY?? Also, if you can think of Option C, you are a rock-star! :)

    So, condo is 2 BR, 2 BA in North Pacific Beach area in San Diego, CA. Great location, walkable to the beach. I bought with only 5% down, and my monthly payment (principal, insurance, taxes) $2700/month + HOA is an additional $400

    Option A. Keep as a rental, probably rent for $2700-$2800/month, so a negative flow of $400-$500/month

    Option B. Sell it now, net gain about $40-$60K after taxes, commissions, listing price, etc


    1031 exchange and sell your condo for a cash flowing property! 

    3Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y
    Originally posted by @Minka Sha:



    Which option would you pick, and WHY?? Also, if you can think of Option C, you are a rock-star! :)

    So, condo is 2 BR, 2 BA in North Pacific Beach area in San Diego, CA. Great location, walkable to the beach. I bought with only 5% down, and my monthly payment (principal, insurance, taxes) $2700/month + HOA is an additional $400

    Option A. Keep as a rental, probably rent for $2700-$2800/month, so a negative flow of $400-$500/month

    Option B. Sell it now, net gain about $40-$60K after taxes, commissions, listing price, etc


    Forecasting that unit at -$400 because rent - PITI - HOA is $400 shows you have a lot to learn about rental expenses. There is vacancy, cap expense, maintenance, typically you allocate for property management even if self managing because 1) You may change your mind in the future 2) it takes time and effort and you should be compensated for it. My estimate the initial cash would be closer to -$1k/month. On the positive, that area has outstanding historical appreciation. I suspect in 5 years there is a good chance that this will no longer project negative cash flow

    Does your condo HOA allow short term rentals (STRs)? That could be an option.

    If it is not able to be used for an STR, my recommendation would be to keep it.

    • Historically it has outstanding property and rent appreciation.  This historically has produced an outstanding return as evidenced by your equity accumulated with only 5% down. 

      prop 13: you are paying a reduced prop tax rate. 

    • Property near the beach is precious especially in Southern CA there is virtually zero available for further development. 

      Real estate sales commission is typically 5 to 6% but total cost to sell is typically 8 to 10%.  
    • My recommendation is you keep it.

    good luck



    4Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    $400-500 a month to pay someone to live there is a lot.  You mention netting $40-60K, how many years did that take?

    1Reply
  • Minka Sha
    OP
    Investor · San Diego, CA · Member since 2014 · 79 posts · 17 votes
    6y
    Originally posted by @Theresa Harris:

    $400-500 a month to pay someone to live there is a lot.  You mention netting $40-60K, how many years did that take?

    1 year

    0Reply
  • Kenneth Donaghy
    Real Estate Broker · San Diego, CA · Member since 2016 · 355 posts · 195 votes
    6y

    That's a tough one, because you need to know what are your short term and long term goals. Only you can answer that. 

    0Reply
  • Nabil SuleimanBusiness Member
    Real Estate Agent · Los Angeles, CA · Member since 2016 · 596 posts · 299 votes
    6y

    @Minka Sha

    Hi Minka, few questions that will either make some of the above options, not options at all, and maybe some alternative options to think about. 

    1. Is this your personal residence currently? if So 1031 is not an option.

    2. Is there a reason you are needing to rent or sell (i.e moving away, found a better place etc)

    3. have you looked at refinance options? not sure what your rate is currently, but maybe there are alternatives such as ARM's you could consider to make renting it make more sense until you have it rented long enough to qualify for a 1031.

    4. If you do end up staying for a total of 2 years in it as your personal residence and then sell it, you can keep all your profit tax free (its up to 250 for an individual 500 couple but you already stated your profit margin) 

    5. If you have to sell it and have no other idea what to do and you have capital gains to deal with you can look at opportunity zones as options to invest those gains, make tax free money on the investment, and pay those original gains 10 years from now. 

    No order to the thoughts above. Good Luck!

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  • Account Closed
    Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
    6y

    @Minka Sha don’t forget 3 very important things.

    1) your principal pay down, is probably $400-500/month.

    2) rent growth - PB is very desirable and rents will likely continue to go up over time

    3) appreciation - coastal CA will always be in demand which will fuel appreciation

    You bought it with 5% down so have very little skin in the game. $1000/month loss like @Dan Heuschele calculated is tough to swallow but I’d guess you’re breaking even if you include principal pay down and appreciation.

    Rent growth is why long term prime CA real estate is a great long term bet. It makes so-so investments (like this one) great investments in 10 years.

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

    If you are in a market that is increasing quickly (or was) which it sounds like, hold on to it for a year or two until the market starts to stabilize or you find something else.

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

    @Minka Sha

    Option C - Stay in the house and get a roommate to share some of the payment until you have lived there for 2 years.  Then sell and take the $40K tax free using the sec 121 primary residence exclusion.

    for bonus points, Air BNB it for weekends at the beach. Have friend you can stay with for those occasional weekends (HOA willing of course). But keep it as your residence per option C.

    Do I win? :)

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    7Reply
  • Jon W.
    Investor · Matamoras, PA · Member since 2015 · 111 posts · 32 votes
    6y

    Re-do those numbers. You will have to sell at a loss

    0Reply
  • QuoVadis Gates
    Investor · Chicago, IL · Member since 2019 · 32 posts · 13 votes
    6y

    Option B, then 1031 it into something that cash flows. 

    Option C, figure out if a roommate situation can work where you'll rent the rooms separately to two individuals to squeeze out some profit or even break even. 

    Option D, if it's close to a hospital monthly rental to traveling nurses. If it's close to an airport contracts for flight attendants and pilots. If close to a college, tap into the college roommate market.

    Hope these ideas help, good luck

    - Quo - Investor - Broker {Chicago} 

    0Reply
  • Bill Goodland
    Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    6y

    @Minka Sha I’d recommend looking at the return you’re getting on the equity you have in the property. If that’s acceptable to you given rate of return you can get elsewhere than go for it. Likely if you could sell at a gain, or keep for a monthly loss, it makes sense to sell

    0Reply
  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Minka Sha if you can try to make it work by keeping it, you’ll be happy you did down the road since You only out 5% down. Are you upgrading? Or moving elsewhere?

    Maybe you can keep it furnished and rent it out for a higher monthly amount that way.

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  • Alvin Uy
    Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    6y

    Im in a very very similar boat in SoCal.  But mine is not in beach area (more in the hillside in an upcoming neighborhood in Los Angeles county)... and its a house not a condo.     I originally planned on flipping mine...  but now contemplating keeping it.   I bought house and rehab “all cash” but want to cash out my capital investment (which is about 75% ltv)... but will be negative about $300+ per month since even the highest rent in the area is not enough to cover the mortgage

    0Reply
  • Bryan Trelegan
    Rental Property Investor · Hyannis, MA · Member since 2016 · 19 posts · 18 votes
    6y

    A walk to the beach location North Pacific Beach is about as good as it gets. Do you know who regrets selling their property in Malibu ? Everyone who has ..

    Other people have made some great suggestions on ways to increase rent. There will likely be downward pressure on rents also. But lets assume your loss will be fixed at $500 a month for the next 3 years. That will be an $6K loss per year ( RE tax write offs aside ). You recently gained $50K appreciation in one very good economic year. 

    Great locations can be hard to acquire. Keep it for now because swapping investments in the middle of a storm may be tricky. Upper income people will always want to live somewhere special and NPB is special.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    6y
    Originally posted by @Minka Sha:



    Which option would you pick, and WHY?? Also, if you can think of Option C, you are a rock-star! :)

    So, condo is 2 BR, 2 BA in North Pacific Beach area in San Diego, CA. Great location, walkable to the beach. I bought with only 5% down, and my monthly payment (principal, insurance, taxes) $2700/month + HOA is an additional $400

    Option A. Keep as a rental, probably rent for $2700-$2800/month, so a negative flow of $400-$500/month

    Option B. Sell it now, net gain about $40-$60K after taxes, commissions, listing price, etc

    To properly and adequately answer this question, one would need to know your strategy and goals.

    Strategy A is based on cash flow to support living expenses.

    Strategy B is long term wealth building - appreciation (market and forced) combined with principle pay down, depreciation, etc.

    If you strategy is A, then you should sell as this will not turn out positive for several years down the road (unless you utilize some sort of house hack play, vacation rental to increase income, or any combo of increasing income and reducing operating expenses - which by the way you skipped a lot of those in your analysis so your negative monthly cash flow is actually greater than you explained.)

    If your strategy is B, then by all means keep it and enjoy the likely future appreciation, amortization and depreciation deductions to offset your actual loss each month until the unit goes cash flow positive. The 2-3 years you experience negative will likely be outweighed by the gain in value.

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  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    6y

    Keep it. You only put 5% down. So negative cash flow is expected. Second, 50K net may not even be that much and its not enough to change your life in any meaningful way. Third, you have only owned it for a year. Thats not the way to play RE. Its a long term game (unless you planned a flip). Be patient. Rents will go up and negative cash flow will diminish. Value will go up. And as an A class property (and a condo) your actual expenses will be pretty close to PITI + HOA. And you will have better quality tenants and predictable income eventually when you need it.

    3Reply
  • Jerid Meagan
    Real Estate Agent · Albany, NY · Member since 2019 · 66 posts · 36 votes
    6y

    I was hoping I would be first but others were quicker:

    Option C - utilize the condo as your primary residence for 2 out of the 5 years to avoid tax on the gain. 

    Option "D" - improve cash flow by putting more equity into the property...assuming this is an option. This would improve the cash flow problem allowing you to take advantage of the appreciation until you find a more suitable alternative.

    Option "E" - get rid of the HOA fee so that you break even - totally kidding.

    I am not an advocate for negative cash flow, but seeing as how you have it, use that loss to offset taxable income elsewhere. Factor in the principal pay down when analyzing your losses..likely small, but it is part of your return. 

    Cheers

    0Reply
  • Alan McClainPro Member
    Rental Property Investor · Columbus, OH · Member since 2019 · 32 posts · 12 votes
    6y

    @Minka Sha

    Please do not even consider option A as you are purchasing a liability. Assets put money in your pocket, not take money out! Have you considered what would happen if the market slows and you cannot sell it for the price you think (2008)? What if your income drops and can’t afford to pay the additional $500? Not to mention all the other risks you are taking to lose money each month such as liability, assessments, repairs, etc.

    Sell the property, live in it and rent it out as a house hack, turn it into an STR if it can be profitable.

    1Reply
  • Randy Rodenhouse
    Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes
    6y

    @Minka Sha

    I would never sit on a negative cash flow properties hoping that it continues to appreciate. You can take your $40-$60,000 in profits and put it into another investment that has a positive cash flow or a passive investment like buying a note which will produce a positive cash flow of $400/mo instead of negative cash flow of $400/mo. As others have said the 1031 exchange is an option.

    0Reply
  • Stone Saathoff
    Investor · San Antonio, TX · Member since 2019 · 576 posts · 307 votes
    6y

    That sounds like something you would want to sell. If you can take a profit and put it towards a better property that can give you at least break even or positive cash flow you should do it.

    0Reply
  • Tenzin Tomcho
    Member since 2019 · 11 posts · 7 votes
    6y

    @Minka Sha

    I’m not sure why you would want to keep this.

    1: You are already- $500 a month or -6000 a year in cash flow.

    2: you are forgetting the 10% of the rent usually goes to upkeep/repair and your time.

    In the end, you are losing about 800 to 900 a month. And rent is not gonna go up by $900 in few years. Maybe 10 years later.

    Now imagine, if you did 1031 and plus put that $900 that you are losing into new investments. And run some numbers..

    So before doing anything, i would redo the cost of keeping the place. And actually time and cost. You lost will be a lot higher

    and it’s not worth the stress. Especially when market prices are dropping already.

    0Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    6y

    I'd vote for option A.  Pacific Beach is a superb area and long term quality real estate.  If you lose 6K a year, the asset probably will appreciate more than that amount.  In time, the cash flow shortfall may shrink with rent increases.

    A wise post on this thread mentioned you may not be including all the real expenses of owning a rental condo.  Still, I think you can overcome this.

    Go long on this one.

    0Reply
  • Shae Green
    Real Estate Agent · Salt Lake City, UT · Member since 2018 · 19 posts · 12 votes
    6y

    @Minka Sha

    I think it depends partially on what the rest of your portfolio looks like and what your goals are. If this is your only investment property and you don't really mind the negative cash flow because of the appreciation and you have a lot of healthy reserves... Then maybe it's not an issue to keep it. Or if you have a lot of cash flowing properties that make up the difference for this one. But if you are somewhere in the middle and trying to scale, then maybe keeping it at the current numbers won't work. For me personally, having a negative cash flow like that would really hurt my DTI and I don't think it would be worth it.

    However I agree with option C that you find a way to increase rents- either with it 100% an Airbnb, or better yet still live there, airbnb out both rooms and sleep on the couch ;) not the most glamorous but hey I'd do that to live steps from the beach!

    0Reply
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