Sell or not sell? Los Angeles, CA area.

13 Replies

Hello BPers,

Due to recent rise in the market, I wanted to run the potential options to see what other “long buy and hold investors” are doing. What are your thoughts on potential strategies below? Appreciate your input!

Background/Note: I bought this 1 bedroom, 1 loft, 1 bathroom, and 2 parking spaces condo in the Pasadena, CA area. Purchase piece was 300k and now a recent unit sold for 500k. This property is on a 20 year loan, I’m paying 3.37% and it’s costing me $300/month. Bought back in 2014. Refi made it into negative cash flow, was paying 4.126%

Potential Strategies:

1) 1031: I was thinking about 1031 this to 2 single family in San Antonio area. A or B class areas that cash flow.

2) Just Keep It: I know this area inside and out. So, my thought is to just keep it, eat the $300 a month and ride the appreciation train since this area has done well for me.

I’m leaning towards #2 but it’s not cash flowing. It should in 3 years? I’m up on equity though.....

Long term goal should be to invest in units/multifamily. Now is a great time to 1031 it if possible. Cash flow out of state is great but you need to know the market you want to invest in and wont appreciate as much as California. FYI, I love Pasadena area for drinks and dinner on a night out.

@Allen Wu

@Allen Wu

It’s costing you $300 because of a cash out refi. What would it be making you if you didn’t take out the equity? Also, if it was a 30 year loan instead of cash out refi-ing into a 20 year loan, that would have helped to not force a negative cash flow property.

I wouldn’t judge the property based on its negative cash flow because it is only negative due to the choices made in refi.

@Dan Hunter

Thanks Dan. Prior to BP i was sold into refi-ing under a lower interest rate. Had I kept it the old rate, i would be positive and maybe netting a couple bucks after capex, accruals etc. good point though!

@Jerome Caldito

I do not need cash flow at all right now. But, just starting to review cash flow after reading various books preaching “cash flow”. I rather hold onto this property long term as shortage of affordable housing continue to rise and there is no where in Pasadena to build besides going up. New builds will be expensive, so rather ride this one as there is “value” for renters.

@Allen Wu , cash-flow isn't everything. I sold a 3/2 condo in Long Beach with banging sunset views within walking distance to the beach just over a year ago because it wouldn't cash-flow at the time. Had I held onto it, it would cash flow now and have appreciated nearly $100k. Granted, home prices are exaggerated right now but the point remains. Long-term holds outweigh short-term gains in my opinion. Pasadena has a lot going for it that makes it a solid investment, always. There are a lot of people moving to Pasadena from the Westside because you get way more for your money without sacrificing the quality of living. Since you know the area inside and out, you must know that it's a great place to buy and hold.

@Allen Wu My wife and I were faced with this same dilemma with our property in SoCal when we recently moved to Gilbert AZ. The market is high and the comps were very tempting, but we wanted to hold long term. We ended up getting a specialized 1st position Heloc on the property, referred to as an "Offset Mortgage" overseas. It allows us to access 80% of our equity, increase our cashflow and thus our peace of mind. It's a Zero balance sweep checking account tied to the line of credit, so every deposit made lowers our principle balance, and with cashflow is creates a large snowball effect as the balance and  interest cost drop together.  It's been great so far, the house has continued to appreciate, cashflow, and we'll simply stroke a check off our line to purchase our next property when the market turns. 
I'd definitely recommend exploring it as an option if you're on the fence, but leaning towards keeping it. 

Originally posted by @Justin Phillips :

@Allen Wu My wife and I were faced with this same dilemma with our property in SoCal when we recently moved to Gilbert AZ. The market is high and the comps were very tempting, but we wanted to hold long term. We ended up getting a specialized 1st position Heloc on the property, referred to as an "Offset Mortgage" overseas. It allows us to access 80% of our equity, increase our cashflow and thus our peace of mind. It's a Zero balance sweep checking account tied to the line of credit, so every deposit made lowers our principle balance, and with cashflow is creates a large snowball effect as the balance and  interest cost drop together.  It's been great so far, the house has continued to appreciate, cashflow, and we'll simply stroke a check off our line to purchase our next property when the market turns. 
I'd definitely recommend exploring it as an option if you're on the fence, but leaning towards keeping it. 

Thanks for the note. The strategy sounds complex and very alternative type of approach. I’ll do some research first and then reach back out of any questions or interest. 

 

@Allen Wu It's definitely a much different way of thinking about your money and your mortgage. With that sweep account you can set everything on autopilot. All of my Direct Deposits hit that account along with my automatic bill pays. The only thing I do is watch my balance drop and my credit line available increase ;)

@Allen Wu sounds like you have your mind made up. Ride the appreciation train if that fits best with your longterm goals and comfort level. If cash flow is not your priority in the near term and you want to own this property 10 years from now then by all means hold!

Originally posted by @Allen Wu :

@Jerome Caldito

I do not need cash flow at all right now. But, just starting to review cash flow after reading various books preaching “cash flow”. I rather hold onto this property long term as shortage of affordable housing continue to rise and there is no where in Pasadena to build besides going up. New builds will be expensive, so rather ride this one as there is “value” for renters.

Sounds like you already have your answer then. It'll eventually cash flow, either through raised rents or a refi event back to a 30 yr loan. I like the strategy of using a HELOC to access the equity so you're able to have it work for you. I'd do like others have mentioned and just hold it. Eventually, when it makes sense, I'd think about a HELOC on your condo to make a down payment else where like San Antonio.

 

So, here's my "2 cents."
I would take some time to get clarity on what your ultimate goals are, then you can look at your current situation, while keeping them in mind. In other words, if you decide your goal is to buy an apartment complex that will provide you x amount per month cashflow, in 10 years, then you have a specific goal to navigate toward and make todays decisions to help you grow towards those goals. Example: you may decide to pay off the condo in 10 years, and if it appreciates an average 5%/year, you'd have a $750k asset with no loan, that you can tfr into a multi-family that would get you toward your goal. That's a simplified example.

But, also, understand that having any negative cashflow limits your choices today. Even if you don't need the cashflow today, you are limiting your choices, including how many properties you can have with a negative cashflow. If every property you have has a negative cashflow of $300, and you acquire 10 rentals, now you have an additional expense or forced savings (depending on how you look at it) of $3,000/mth, plus the potential of additional repair/maintenance and cap-x costs. I'm not sure if you are taking the other potential costs into account (repairs, maintenance, vacancy, collections, etc). For anyone with landlording history, those are all real costs. So, if you are only $300 negative, based on the mortgage and HOA dues, that will quickly change when there are any moderate to major maintenance concerns. Example - an HVAC repair could cost you thousands to repair or replace. It's already 7 years old or more. Just be aware of any unaccounted potential expenses, a lot of people seem to ignore those.

My first rental was $150 positive with a total of $4k acquisition cost. That's a gross return of 45% ....which disappeared after I had to replace the AC condenser for $2,500 the second year I owned it. And the house was only 5 years old, and the condenser had a 5 year warranty!

No matter what your goals are, my choice would be to check into another refinance, into a 30 year loan. If you refi'd into a 30 year loan, you can still pay the extra monthly principal payments to pay it off in 20 years, but you always have the choice to pay the less amount and possibly cashflow, if you wanted. Usually, a shorter term loan only acts as a forced early payoff schedule, and doesn't really benefit you much otherwise. It actually, will hurt your qualifying for future financing, since the minimum payment will be used to calculate your borrowing capacity.

The "effective" interest rate is typically very similar for either term loan, if additional principal is paid monthly.