I have a rental property which has appreciated by 80-90K (according to zillow) and we bought it in 2018. Currently we are using a property manager and losing ~$250/month (breaking even without the property manager's fees). Is it worth holding onto this property? It was built in 2018 and is across the street from the beach. My wife and I can afford the $300/month, but is it worth to pay that for the eventual passive income 27 years from now? We orginally bought as our primary residence have a 30 yr mortgage with a great rate. Any thoughts would be great!
@Jay Wilson it may seem like a loss in cash flow, but with the other benefits of real estate (loan pay down, depreciation, interest deduction, appreciation etc) then it's really not losing money on paper. It really just depends what your goals are, and whether you want to keep subsidizing your rental property each month. Since it is so close to the beach, you could look into STR like AirBnB which might help your cash flow, it's require more hands on management though unless you get a PM
Also, you mentioned you bought it for a primary, and if you lived in it for at least 2 of the last 5 yrs then the gains should be tax free if you decide to sell.
There's a 2 plays. Sell and 1031 into something else. Or hold it for the long term. Location sounds great. Are you looking to scale up or hold this for the long term play? If you want to scale you can take the 80-100K in equity and use as a DP for properties up to 300-500K.
I agree with Caleb above. I look at this as there are always a couple of options and it depends on your personal situation what would be best for you. You say you bought it as a personal residence, so if you have been living in it for 2 of the last 5 years (not sure how long its been a rental), you can sell it and that appreciation should be tax free.
If you can't tax it out tax free like that, the easy way, then I agree that a 1031 exchange would be a good move to defer those taxes. There are locations and assets that you can get so that you are not having to lose money each month. I know you said that you have a good rate on this house, and that you can afford the negative cashflow but unless you have a plan for the property, why would you lose out each month unless you believe that it will continue to appreciate at that rate? Even if you have to take a slightly higher mortgage rate, interest is typically a tax write off, and a positive cash flow ensures that you are making a higher percentage then you are paying to the bank.
Unless you want to eventually move back to this house or you are keeping it for specific reasons. Maybe this is your retirement house thats near the beach and its worth the 300 a month. Then thats your reason for keeping it and its definitely worth it.
Sell it. You're losing money in bucket loads. How much is the property worth, and how much total equity do you have now? When your equity from appreciation equals the equity you bought (DP), that's when you sell. From that point forward you are losing money every step along the way.
I would of sold it when I moved out I don’t want anything which should be an investment to be costing me money
So of course I’m going to say sell it now as
Too many places to put money and actually make a profit not lose it
@Jay Wilson any property that's across from the beach should be making a killing on Airbnb as long as it's run the right way. Maybe the answer is to ditch the property manager and self-manage. Happy to show you how, feel free to DM me with questions.
You may want to consider refinancing as an option. The interest rates in 2018 were pretty horrible, so a refinance may make this cash flow positive. I would also consider self managing. Based on a property manager costing $250 for month, this property must rent for around $3000 per month. That means someone with decent income is living there, which probably means they are easy to manage.
I don't know the location, but properties close to the beach generally have good appreciation over time.
If you can't make the property cash flow positive, I would sell the property. Generally speaking you do not want a rental property with negative cash flow.
Also consider how long you lived there and the implications on capital gains. If you lived there for 2 years, the gain is tax free. If less than 2 years, there may still some partial gain exclusion if you meet qualifying reasons for moving.
Originally posted by @Jay Wilson :
I have a rental property which has appreciated by 80-90K (according to zillow) and we bought it in 2018. Currently we are using a property manager and losing ~$250/month (breaking even without the property manager's fees).
$80-$90k in appreciation will be less after 8% or so sales expenses I'm sure you know.
$250/mo for the PM is the minimum. Wait until the Maytag man is called to fix the smallest things plus overrides or you need turnover work or a new tenant placed.
I can see needing placement and lease up help for someone new to landlording but not ongoing for your old primary if you're still in the area.
This is a management problem, not an asset problem. Sell the PM.
@Jay Wilson I PM'd you
Hi @Jay Wilson ,
The golden questions!
I would first evaluate your P&L are there places you can be doing better on?
Can you pass on some costs or can you raise rents? If not is there another way the property can be making money? How did you get into the property? 0% down or pay cash? Are you paying PMI? All of these will effect your cashflow. Your monthly dollar is not a great way to judge an investment this is why we use ROI and COC calculations.
I would first evaluate your P&L are there places you can be doing better on? Then consider the cost of closing on the property. Selling a property is almost always the last choice for me. Think about a refi to possibly lower your interest and pull some cash. you could have some leverage here.
Best of Luck and have some fun!
Can the rent be raised to enable cash flow? No one has mentioned it, yet. I like the idea of air BnB by the beach. I think that will end up being beneficial to your bottom line. Would it be possible there is a heavy personal connection to the property that is preventing the outright selling to cash out tax-free, as mentioned above, for another property or multiple properties?
Not sure if ditching the PM is a feasible idea for you. If it is a higher end rental, managing it yourself is probably not as hard as you think. Getting the right tenant in it is the hardest part. If you have a good long term tenant, I would lose the PM. These days you can do almost anything with a phone call (call maintenance people out, etc). My husband and I do random spot checks on our properties just by driving by to see if things appear in order. I guess it depends on how much you want to hold onto this home.
Wow. Thank you all for your answers. This is very helpful. I will try and respond to most questions/comments.
1. This placed is attached to another unit, so AirBnB is out of question. Techincally its a condo, but there are no HOA fees. AirBnb would be a profitable endeavor if allowed.
2. I did not realize profit was tax free if we lived in 2/5 years. We bought at the end of 2018 and moved beginning of 2021, which is >2 years.
3. Raising rent may be an option and managing on our own may be as well. My wife and I just had our first child and both work which is why we went with a property manager for the first year.
Thanks everyone again for your input. After reading everyone's comments, we are leaning towards selling pending a correction in the market and/or ability to become cash flow + through raising rents.
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