Get rid of low cash flow properties?

Question

I currently own 3 single family homes in Dallas Texas. My first purchase did not have the best cash flow (learning experience) and currently has an 18 month lease set to end in 2021. When I say not the best i am referring to about 50$ when you take out expenses. It’s also a brand new house that was built last year. The property is in good school district and a B+ neighborhood. Thinking about getting rid of it for two reasons. 1. With my new knowledge of investing I could use that money and find way better properties. 2. If s*#t hits the fan and my tenant leaves won’t be ideal.

If I sell it I would take a very small loss (10k on a 370k house)

What are your thoughts?

If I sell it I would take a very small loss (10k on a 370k house)

What are your thoughts?

Dave Foster · Answer

@Jake Celler, In a neighborhood like that with a longer than normal lease you might just find that the tenant could be a candidate to purchase the house from you.  This would give you some wiggle room on price and timing for the sale with the buyer already in the house and the ability to sell without realtor fees.

If so you then want to follow what @Parker Massengill suggests and do a 1031 exchange if the profit and depreciation recapture justify it.  Your cash flow on that one is awfully tight to withstand any kind of surprises.

Jake Celler · Answer

@Dave Foster

great idea on potentially selling it to the tenant. Hate to rely on appreciation but for what it’s worth while I have only had the property for 6 monthes and it hasn’t appreciated much, the area is definitely on the upside especially cause there’s no more room to build. Thinking I hold on to it for a while. Luckily it’s a new build with warranty so no big surprises in future with roof or hvac. Could always take over prop management to improve cash flow!

Maybe when the tenant gets closer to end of his lease and asks to renew I can throw out the offer.....

Parker Massengill · Answer

I agree with Sarah, there are several options that seem better than selling at a loss. How is the appreciation in your area? If the property is appreciating well and you're still cash flowing, then you're investment is growing, I would personally hold onto that vs taking a loss. If you do sell, I suggest looking into a 1031 exchange in order to not take a big hit on the taxes.

Sarah Brown · Answer

Have you explored other options?  How long have you owned it?  Would it be worth financing to reduce the payment (rates are extremely low right now), and increasing that cashflow vs. taking a loss?  If you are under rented, would it be more worth it to suck it up for now until the lease ends and then raise the rent appropriately?  There are other consequences with selling come tax time, so I think it's important to consider all options and consider what risks are worth taking for you.

Get rid of low cash flow properties?

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