Ever keep a negative cashflow property?

18 Replies

Are there ever reasons to keep a negative cashflowing property? I have a decision to make.

Here is my situation...

Purchased: 2005 (We are 10 years into 30 year mortgage)

Reason Rented: Moved to new home.  This is our original home, we were upside down in our loan and knew we could carry the shortfall by buying a less expensive home. We originally wanted to get our original down payment back by renting it for a few years.

Current situation: 

Cashflow: Negative cashflow. I am able to cover mortgage, taxes and insurance through the rent. But not enough to cover maintenance, vacancy, missed rents or property management (which I do myself).

Tenant: Nearly 4 years with one tenant. Sadly, things have broken down and they will have to leave in June. 

Home Value: We could sell this summer and be done with it. No negative cashflow, but also no cash out. We might have to chip in a 1-2 thousand to close a deal.

Other rentals: Two positive cashflowing properties. Looking to purchase one more this year (regardless of what happens with this one)

If your breakeven is that close then I would want to get rid of the " dead debt " raising up my DTI ratio, costing me ongoing monthly maintenance costs etc.

It would be a negative drain for my portfolio on my other properties generating positive returns.

Sometimes a negative return makes sense if it is land or an old building for re-adaptive reuse where you will cash out higher later on.

If this is a house in a subdivision it sounds like selling off will allow you to buy other properties with the reduced DTI and if you pay 1k to 2k to breakeven to sell then take the loss off of taxes if your situation allows it.

No legal advice given.  

Get rid of it.  There is no reason to keep it.  It's bleeding you dry.  If all you are going to lose in a couple thousand when you sell, vs. "how much are you losing every month"?

This should be a slam dunk sell, sell, sell ...ASAP.

You're continually adding to a pot in poker, with a bad hand.  Lose the hand, stay in the game, and bid on the next one.  I assume that with other positive rentals, you would add more.  How, if you keep this one?

For me, it would matter greatly what type of home this is, if it is in a prime location, good for renting, etc.  We were in a similiar situation once (talked about pretty extensively in my BP Podcast 80), and decided to sell.  Ultimately, it was the right decision for us, but it is not cut and dry by any means.  

If I were in your shoes, I would look forward 10 years. Do you see the property location being especially desirable and something you would love to own in the area?  

It sounds like you have options and are able to proceed with buying more regardless, which is a wonderful thing!  

Jonna

Jonna Weber, Real Estate Agent in ID (#SP41257)
208-608-4884

We are in a similar situation.  My wife bought our old home months before we met in 2006. She had put 20% down, but later that year, we took a home equity loan to do some home improvements and contribute to our wedding costs.  The market collapse after that left us upside down on the home (not even counting the thousand of dollars we put into the home from cash).  We're now at the point where we hope to be able to sell it without having to put in more money (setting aside the $3,000 we spent to get it ready to sell after the last tenant moved out).  It's been on the market for about 45 days and vacant for about 60 days.  Carrying the mortgage and home equity loan without any rent isn't fun.  Even with the rent, we were losing about $500 in cash each month, with an even bigger tax loss.  If we can unload it, we'll get an enormous tax refund next year from all of the suspended passive losses that have been carried forward.  If we don't get a buyer in the next few weeks, we'll be left to rent it again and carry the loss for probably another couple of years.  It's a crap situation.  My advice would be to sell at almost any cost that you can cover.

What about refinancing? You already know the history of the property. No need to run away. Just need to make it work!

@Account Closed , a couple things to think about.  What quality do you think this house is?  A, B, C, or lower?  Is it higher or lower quality than your other rentals?  Does it rent easier or harder than your other rentals?  Is it appreciating faster or slower than your other rentals?  What kind of shape is it in, excellent, good, average, poor?  How long until you retire?

    The reason that I ask these things is to see how it fares versus other houses in your market area.  Generally if you can get a better cash flowing house you are ahead to sale and buy a different house.  I have bought 2 houses that I knew would not cash flow, and while they pay mortgage, insurance and taxes, I pay for all maintenance and repairs out of my pocket or from other property income.  Here is my reasoning.  First getting the 20% down payment is one of the hard parts for me to keep expanding my portfolio.  Both properties were bought with no money down and owner financing the 20% down a bank wanted via a second mortgage with a 5 year balloon at 2% interest.  Both were bought on a 15 amortization, so at the end of 5 years I could refinance for another 15 year loan and pay off the balloon with change to spare.  Third, they are top quality houses, superior to any other rentals I own.  When I retire I will keep these they are very easy to rent, and I can get great tenants.  Both are likely to appreciate much faster than my lower class rentals.  They are newer construction so wiring and plumbing will be less problems.  Some of my other rentals are 60 years older.  Last I will be able to raise rent on these houses at a faster rate than my other rentals because they can rent to a different class of people.  They will also be less work when I retire because the rent is 25% higher than my other rentals.  Assuming I spend the same amount of time per rental, one that grosses $800 per month is the same amount of work as one that grosses $600 per month.  As to exit strategies these 2 houses will sell faster and appeal to more buyers than my other rentals.  Both are in excellent neighborhoods.  I do not need the cash flow right now.  If I put If I put $100 to $200 per month into a savings account for down payment to buy another house it would take me 5 to 10 years to build up enough to pay 20% down.  In 15 years these houses will be paid off for me.  

Selling may well be the right thing to do, but look carefully at all of the information before you decide.  it is not debt to income that keeps me from getting more houses, it is getting the 20% down payment, this one is already bought.  Just my 2 cents.  Good luck with whatever you decide.

@Joe Villeneuve

 Thanks. The "pot in poker" is the issue I am probably most concerned about at this point. While we can "make things work" right now (we built losses into the budget when we moved), a softening of the economy would hurt pretty bad. Saving it for equity growth is a gamble. Even with tenant paying the 11+ years of a mortgage, the growth seems speculative and if the economy shrinks, we are stuck again. Plus, now that we have moved into seeking growth in cashflow, we realize how this holds us back from that goal. Our change in goals may lead to change in holdings. Thanks again.

@Jonna Weber Thanks. Rentals are doing great in my area. Value of rent just can't get quite high enough to cover everything right now, but I'm getting close. It's a good home in a good area. Nothing is great, but it's good. Listening to #80 now. Thanks for the connection.

@Stephen Chittenden  I call this home my "education" and it's been worth it, but I don't know I could swing it at the price you are paying! I hope you get that worked out soon.

@Brandon Barnic

I have been thinking through the possibility of a refinance. I am at less than 20% of home value, so I don't know how to do that. I'm probably at about 5-10% LTV.

Account Closed

Sean, it looks like you should sell your property and cut your losses.  It's better to do it now when the market is doing better then to wait and have to sell it when the market turns, or don't have a tenant and you become desperate.  Any lost you take when you sell the property, you might be able to get a tax deduction to offset your other income.   Please consult your CPA.  

I would rather not own a property that bleeding money each month, so I can sleep better at night.  Just my 2 cents.

-John

@Jerry W. Thanks! I see your long-term philosophy. For me, everything about this home is average. Average house in an average neighborhood. Home is almost 40 years old. It will rent easily given our location, just not quite enough that I need to cover maintenance, vacancy, missed rent, and property management.

@John Tu Nguyen Thanks! It looks to me like the market is strong here. Houses are selling quickly.  It looks like this may be a good time to sell it before market conditions change. With the guessing game of the future of the economy, I am concerned about losing this opportunity with a price drop and really being stuck.

We probably have a few that don't cash flow, or at least don't cash flow particularly well. But we have none that are so bad that they really irk us to sell them. We have enough going on that this would just be another hoop to jump through and the added funds wouldn't really help us expand because we have enough private lenders. In your case however, I don't see a big advantage to holding. If you can get out of it without losing much money. I would probably sell and look for something that does cash flow.

Burn it to the ground, collect insurance.

Account Closed Take advantage of the opportunity the market is giving you right now.  We don't know what's it's going to be like a year from now, but all indications is pointing to higher interest rates.  This will probably cool down the hot real estate market because it's going to drive up cost to own.  It sounds like you have it figured out.  Best of luck to you.

-John

Originally posted by Account Closed:

@Brandon Barnic

I have been thinking through the possibility of a refinance. I am at less than 20% of home value, so I don't know how to do that. I'm probably at about 5-10% LTV.

 Force appreciation with a kitchen /bath remodel. 

I have a negative cash flow property that I have no intention of selling.  (Actually, as of this month we will start eating $43 a month, but I shouldn't even mention that because we just did $2,500 of MA and upgrades).  We plan to pay this property off in 10 years and at that time use the cash flow to invest in our child's education.  It's in a hot area that rents easily.  My husband lived in this home before we met, at the time we decided to keep this property as a rental our mindset was not to be real estate tycoons and we easily justified the negative cash flow.   We just wanted an investment.  I believe I am wiser now, but it was 2008 when we began renting this property.... no scenario was fabulous at that time.  

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