Is it possible to salvage this deal?

Question

Hi all. Two years ago, I bought a property in the SF Bay Area with the intention of it being a primary residence. With the pandemic, I had some life events that necessitated moving out of state indefinitely, and rather than sell, I decided to rent it out to at least keep the mortgage paid. After management, CapEx, and repairs, I have been going in the hole about $125 a month on the property.

Even though property values have gone up quite a bit, rents in the area are down. I think I am probably charging more than what the place is worth currently, and it still isn't enough. I can probably afford to keep going in the hole if I have to, but if the tenants move out unexpectedly or I need a big repair in the next year or two, I will be in big trouble. Because I only lived in the home for a year, if I decide to sell, I'll have to go through a 1031 exchange.

A few real estate investors and agents I have spoken to have recommended keeping the property because of the long-term potential of Bay Area housing. On the other hand, I have been considering selling it now to get the equity out and investing in a property that I can actually make money on. A cash-out refinance may also be an option, but I am worried about raising the mortgage payment.

I thought I would post here to get some input from the community. Is there a way that makes keeping this house make sense? Or should I cut and run while I still can? Thanks for any advice or insights!

Jay Hinrichs · Answer

I just chuckle at these Bay Area threads and the folks that dont live in the Bay area that just automatically say if its negative cash flow dump it..  I know I have posted this many times.. but I fell into the same thought process when I sold my home in Palo Alto  I could have kept it but it was going to cost me about 300 a month negative  How could it possibly be worth keeping.. well sold it for 500k  and well it sold in 2018 for 3 million .. over the course of maybe 5 to 7 years it would have been 300 positive then 1000 positive then 2k positive and paid for by now.

Bay area hard to get into you sell U cant come back..  I cant come back I cant pay 3 mil for a 1500 sq ft home in Palo Alto.. but sure is one of my biggest shoulda Woulda Coulda stories..

Not saying the OP is going to have the same experience but listening to people in other parts of the country that have no clue as to the dynamics of Bay Area real estate and would just jettison a home over 1500 a year not sure i would be listening to them.     In their markets that could be the wise choice  But SF  LA Seattle  etc these are different animals.

Darius Ogloza · Answer

Of course, there are no guarantees in the investment world but a 2% increase in the value of a typical say $800,000 Bay Area home (increases have of course exceeded that rate historically) is $16,000, which means that in a given year you would be ahead $16,000 - $1,500 (i.e. $125/month) + 12 months of principal paydown.  The key of course (as you observe in the OP) is to have sufficient reserves to weather the storms.  If my goal were to build wealth, I would be focusing on how to build up my reserves to cover emergencies - friends, family, personal loan, HELOC, etc.  If the goal is to generate monthly cash, sale makes sense.

Ronald Allen Barney · Answer

If rents are down while inventory prices keep going up that's the signal to sell, especially when it's got your cash flow in the negative.

Basit Siddiqi · Answer

@Michael RayYou are getting a lot of advice to sell from people who likely don't have investments in the Bay Area or other high cost investment areas.First off - if you sell the property - you will likely lose 6%-8% right off the bat through seller commissions and other seller related costs.You would have to buy another property at 6-8% below market just to make up for it right away.Second, you have to determine what the property is appreciating at on an annual basis, while you are not cash-flowing, the value of your asset may be appreciating at a higher level than other asset classes.As much as people are saying they are leaving the bay area, there is little area's around the world with great weather and atmosphere(minus the homelessness issue) as the Bay Area.Cash flow is good as it brings in income but asset appreciation is where true wealth is created.

Andrew Freed · Answer

@Michael Ray - I would recommend reaching out to some small local credit unions or banks and see what HELOC they have to offer. You want a HELOC or RELOC that allows as much ARV as possible, has low interest, and has a 10 year interest period first before principal is due.

In reference to a HELOC vs. refinance, it all depends if you are you purchasing something right now or in the future. HELOC is a line of credit that can be grabbed whenever a good opportunity is presented, but a refinance will act as cash sitting in your account. It depends on how quickly you want to jump into your next investment.

Personally, I like having a line of credit, paying it down, and reusing it for my next purchases.

Michael Ray · Answer

Yes!! I had thought about a HELOC, and to be quite honest, I got intimated by the math.

What would be a good next step for me to explore that option? Would it be talking to a loan person? A CPA?

Having fun the numbers through some online calculators, it looks like there is plenty of equity to cash out refinance or HELOC without driving my mortgage up. But, I don't know how much to trust those. As a green investor, it seems a little "too good to be true."

Are there instances when one should not try to get a HELOC?

Andrew Freed · Answer

@Darius Ogloza - Good insight, thanks for breaking down the math.

Andrew Freed · Answer

@Michael Ray - Have you considered a RELOC or a HELOC on one of your properties to create a "nest egg" in case any of the surprises you mentioned occurred. A lot of these home line of credits are interest only for the first 10 years and you can grab up to 85% of the ARV hence you can grab funds for any life emergency very quickly no questions asked. Additionally, you can access these funds to expand your real estate portfolio while maintaining a good appreciating asset in the bay area. I do not know your circumstances, but this would be an option to consider. Please keep in mind that lines of credit are only meant to be used to purchase assets and be emergency funds, and not to buy liabilities.

Jeffrey Donis · Answer

I agree. You shouldn't come out of pocket every month, and as @Ronald Allen Barney said, it sounds like selling is your best option.

Is it possible to salvage this deal?

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