Investor · Chandler, AZ · Member since 2012 · 18 posts · 4 votes
Hello BP community!
I've been lurking on the site for some time, but this is my official first post.
I own a SFH in the Phoenix area, was my old primary home, and decided to keep it because I knew it would finally make me stop sitting on the sidelines about owning rental property.
I am looking for some advice on the direction I should go regarding my current rental and the next rental properties that I purchase.
My current rental is cash flow negative and also currently underwater. I am able to manage the negative cash flow with my day to day job, although it would be nice if the cash flow was positive.
Would you recommend aggressively paying down the current rental loan, so I can at least break even? Or would you continue to look for your next deal and acquire properties that are cash flow positive to make up for what your losing on the first rental?
Thanks in advance..
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y
@Michol Murray, of the two options, I would go out and find another property that cash-flows. Then you hopefully have a real estate portfolio breaking even while the loans are paid down, and you can hang on to the underwater property until it recovers, or you've paid the loan down enough to refinance or sell.
Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
9y
You should buy more rentals, not pay off your current one, in fact, I'd look into options of getting rid of it. You should never be cash flow negative.
Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
9y
@Michol Murray, of the two options, I would go out and find another property that cash-flows. Then you hopefully have a real estate portfolio breaking even while the loans are paid down, and you can hang on to the underwater property until it recovers, or you've paid the loan down enough to refinance or sell.
What kind of strategy you have? If you want to grow your portfolio I would see if its a way to refinance to lower your rate if high. Look into change in insurance and maybe raise rents if possible.
Investor · Chandler, AZ · Member since 2012 · 18 posts · 4 votes
9y
Jeff Schneider: It's in a great area in Chandler, and the only way to make it cash flow is to pay down the loan.
I refi'd it once before, but was told I can't refi again because it is underwater.
I'm a buy and hold investor looking to have all my properties paid off by the time I retire.
Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
9y
I understand your willingness to want to be in the real estate game by keeping your primary residence as a rental. However, if it's cash flow negative and underwater, it seems like you are going backward and not forward. Maybe it would be better to sell it and start over?
Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
9y
Michol Murray their are many wealthy investors who believe one should never have a property fully paid off unless it is your primary residence.
Leverage is one of the key benefits of real estate once you pay off a property your return on equity will suffer drastically.
A good formula for those of us who are conservative is too keep investments leveraged at 40%. Look at all the large apartment owners once they raise their NOI and can take another 1 million out of the property in a refinance they do it asap. They do not leave that equity sitting in the property earning them a 0 return.
I would not pay down that loan even if you paid it down and no you were cash flow positive but what is your return on equity?
Buy more properties so you can spread the loss out over more investments.
Sometimes it is better to sell a property at a loss then to keep being negative every month (if the loss isn't drastic).
Residential Real Estate Agent · Phoenix, AZ · Member since 2016 · 154 posts · 117 votes
9y
Just a thought, but if it's not cash flowing now, wait until you have to put a 5K air conditioner on it.
I would run it through different scenarios on paper. What's it going to cost you to keep it for the next 5 years? What current values are, is it still under water since the last refi? What's the cost of ripping the band aid off, selling it at a loss and picking up a cash flowing property? If you sell what's your break even point with 1, 2 cash flowing properties? How fast can you get back in the game after selling at a loss? What is the comfort worth of getting rid of a liability? If you choose to pay it down, will it perform as well or better than what you can get on the market right now? Etc, etc.
Investor · Chandler, AZ · Member since 2012 · 18 posts · 4 votes
9y
It was purchased with a loan greater then the value of the house, in order to do repair work that was needed.
When your talking about selling it at a loss, what are my options? I'm familiar with short sale, but that would impact our credit and add a negative mark on my spouse's U4 potentially jeopardizing their job. Are there other ways to sell at a loss without having to come to the table with cash?
How painful is the monthly negative cash flow? If you have good income/cash flow and the pain is manageable then maybe you consider another property since your objective is long term hold.
The negative cash flow/value property should recover in time as Chandler is such a good area. Buying the 2nd property will help offset the cash flow issue and in the end you are closer to your long term goal.
Disposing of the current property would either deplete cash or damage your credit via the short sale path. The short sale path would also eliminate a new conventional loan for years.
I manage a few properties in Arizona as a result of owners being upside down and electing to keep the property at least until they are whole. The market took a brutal correction!
Residential Real Estate Agent · Phoenix, AZ · Member since 2016 · 154 posts · 117 votes
9y
I was thinking more of coming to closing with a check vs. short sale. You would need to run the numbers though.
Also look at alternative methods that may make it cash flow like lease to own, owner finance etc. You would need to run the numbers to see if the alternative methods worked and if they fit into your risk tolerance.
I've been lurking on the site for some time, but this is my official first post.
I own a SFH in the Phoenix area, was my old primary home, and decided to keep it because I knew it would finally make me stop sitting on the sidelines about owning rental property.
I am looking for some advice on the direction I should go regarding my current rental and the next rental properties that I purchase.
My current rental is cash flow negative and also currently underwater. I am able to manage the negative cash flow with my day to day job, although it would be nice if the cash flow was positive.
Would you recommend aggressively paying down the current rental loan, so I can at least break even? Or would you continue to look for your next deal and acquire properties that are cash flow positive to make up for what your losing on the first rental?
Thanks in advance..
I suggest you use that money you have to buy cash flowing rental property in a solid area that will help offset the rental you have that is underwater. If you buy the new property with 20% down or higher that way you aren't too leveraged, you'd still be in a conservative scenario. That would allow you to have another property building equity and cash flow instead of just having you throw more of your good money after a not so great deal in the house you already own.
I don't know how underwater you are every month but maybe the new property will cash flow enough to offset it, that way you can use that money to pay the mortgage off over time and getting you back to even on your first property, without having to put money out of pocket for your job. You could also re finance the new property you buy in a few years and cash out and use that money to pay down the old house mortgage if you get a good deal.
Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
9y
@Michol Murray, I'm assuming you bought or refinanced in 2007 with a very low down payment to be underwater in Chandler current day. I would say in a year or so if things don't go completely haywire, you should be no longer underwater. (All guessing of course)
Also is there room to raise your rents as Chandler rents have really gone up in the last 15 months. Stuff I was renting for 1100 3 years ago are renting for 1400. I would consider raising your rents to cover the deficit, or at least some of it.
I generally agree with all above that you aggressively paying off your debt isn't the right play. Unless you can pay all of it off, you will still be in the current situation (unless you refi etc etc etc). Buying a second property may also not be a good play as the current market in AZ is not yielding great returns. I'm not sure you can cashflow $200 in Chandler/Gilbert right now. 200K homes renting for 1300. You can invest in other parts of the valley and get $200 but that's a different game than SFH in EV.
Investor · Chandler, AZ · Member since 2012 · 18 posts · 4 votes
9y
@Stone Jin, Yes, I did buy with very little down and it wasn't a smart investment at the time!
Great points though regarding cash flow and SFH, I'm actually looking in to MFH and open to any place in Maricopa, Pinal, or Pima county. For years I thought I wouldn't go the MFH route, but after being on this site, listening to podcasts, and reading a number of books I'm more comfortable and see the potential with including those types of properties in my portfolio.