$800 Negative Cash FLOW Per Month Should I Still Hold?

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$800 Negative Cash FLOW Per Month Should I Still Hold?

Ben Payano
Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes

Hello,

I'm in a tough situation and need your suggestions: I purchased a property (Loft) in Downtown San Diego 2016 and recently got transferred overseas for work--I'm scheduled to return to San Diego in 2020. Since purchased, the property has appreciated $110K not taking account of the post purchase remodel of the kitchen and bathrooms. Considering how much I pay in mortgage, HOA, insurance, tax, and how much it may rent it for, I'm looking at an $800 negative cash flow per month (while rented). The property is beautiful and in a very desirable location--a block away from Petco Park and a few from the Convention Center. With rising interest rates, I'm not sure I'd get the same deal in the future.

STRs is not an options due to recently passed laws.

Can I afford the negative cash flow? Yes, but its still $800 a month.

I'm a very optimistic guy and I sometimes tend to focus on the upside on things such as the continual uptrend in home value and rent prices. Want to get your honest opinion and wisdom on this. I've read previous posts but they're not as unique as my case. Here is a link in case your interested in taking a look: LOFT

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Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
8y

I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

36Reply
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  • Joe Hines
    Investor · San Jose, CA · Member since 2017 · 118 posts · 108 votes
    8y

    @Ben Payano

    I'd say it depends on your view of it as an investment.  If you want to move back to SD and make that your primary home and you can take the monthly hit, I'd hang onto it.  I'm in a similar situation in a house in Ft Lauderdale.  It's a great place and renting until I get ready to retire and move there means somebody else is paying my equity.  I'm also an active investor in several areas of Florida, so I can deduct the travel expenses.  It still costs me about $500 a month, though.  

    If you have no intention of moving back into the unit and you see it as an investment only, I think it's time to bail out.  I'm sure you would never keep an investment in stocks or other instruments if the broker or advisor sent you a monthly bill of $800.  

    Looks like a beautiful place!

    10Reply
  • Nate Burgher
    Olympia, WA · Member since 2017 · 91 posts · 80 votes
    8y

    Ask yourself "Will this $800 / month for two years be a big deal to me in 15 years?". I think that will answer your question.

    Bummer that Short Term Rental's aren't an option, that thing would kill! The other option I see is a refinance if you wanted to pull a bunch of capital out and invest that somewhere else to make up the difference.

    11Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

    36Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    8y

    I would STR it until the regulations go into effect, currently July 2019. I suspect there will be legal challenges, an initial lack of enforcement, etc. so that the regulations likely will not be enforced until even later than July 2019. As an STR this unit would be a good investment with what I suspect would be significant positive cash flow.

    Then I would sell it. I am not convinced of the continuing outstanding appreciation in the short term. I am convinced of on-going rent appreciation, but $800 negative cash flow is likely going to take ~8 years to hit cash neutral and that is only if I am correct about continued rent appreciation. 8 years of negative cash flow is one thing but you also need to take into account the lost opportunities that would produce better ROI for those 8 years.

    So I would keep it until the STR regulations are enforced, then I would sell it. I would look to 1031 exchange it to postpone paying any taxes on the gain.

    Good luck

    12Reply
  • Hai Loc
    Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    8y
    Originally posted by @Dennis M.:

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

    I am sure you can take that equity to the midwest and turn -$800 to +$800 a month

    12Reply
  • Nik Moushon
    Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    8y
    Originally posted by @Dennis M.:

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

     I would agree under a normal situation but the guy is overseas. Unless you are already set up for long distance rental practices its would be very tough to find your "Core 4" AND another property to 1031 into. By the time you have that all set up (and hopefully no bumps in the road) how long has passed? 6 - 12 months if your starting from scratch, IMO. So you really are only saving 12-18months of negative cash flow. If Dennis is planning on coming back and staying there then I would agree to just hold on to it. The continued appreciation will cover the losses at the end. 

    I will say that I would try to find some way to cut into that negative cash flow. Can you up the rent? Make them pay for utilities if they aren't already. You're losing almost $10k/yr. Even if you can afford it try to cut it down somehow. 

    8Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    8y

    Here is my 'test' when I'm considering selling:  If I were drugged, and woke up one day to find out I sold the property and the cash was now in my bank, would I try to use that cash to buy the property back?

    Meaning, if you DIDN'T own the property and had whatever cash you would have in the bank if you sold, would you go out and try to buy this property?   Not likely.  So sell it. 

    26Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Originally posted by @Nik Moushon:
    Originally posted by @Dennis M.:

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

     I would agree under a normal situation but the guy is overseas. Unless you are already set up for long distance rental practices its would be very tough to find your "Core 4" AND another property to 1031 into. By the time you have that all set up (and hopefully no bumps in the road) how long has passed? 6 - 12 months if your starting from scratch, IMO. So you really are only saving 12-18months of negative cash flow. If Dennis is planning on coming back and staying there then I would agree to just hold on to it. The continued appreciation will cover the losses at the end. 

    I will say that I would try to find some way to cut into that negative cash flow. Can you up the rent? Make them pay for utilities if they aren't already. You're losing almost $10k/yr. Even if you can afford it try to cut it down somehow. 

    Thats a valid argument given his unique situation . I’d find a way and get a property manager on board . No way i personally would sit on dead equity that’s costing me 800 bucks plus we are at the top of the market . Sale prices are peaked out . I’d get while the gettin is good ! However I’m just one mans opinion and I’ve never managed from abroad 

    5Reply
  • Marci Stein
    Rental Property Investor · New York, NY · Member since 2011 · 956 posts · 510 votes
    8y

    No - sell it . An investment shouldn’t cost you. it should be an asset not a liability. Take the profit and run . 

    6Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    @Ben Payano Unless you're planning to return to the SD area, I'd sell it, take your profit and save yourself headaches. $110k is great appreciation, who knows what will happen in the next couple of years.

    6Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    8y

    I was in a similar situation.   Owned a Condo in Sunnyvale CA, great market.   I had health issues and got laid off at the same time and moved back to Colorado for what was supposed to be 6 months.   Found a great property management company that did everything for me for 8% of the rent.   I was losing $1000 a month.   It had $150,000+ in equity.

    Did I mention it was 2008?

    So, after I worked through the health issues (a little more than a year later), I ended up getting a job in Pennsylvania for 30% less salary.   Condo was now underwater, but I had enough from my job to carry it.   So I did, for 2 years.  $1000 a month.    The worst part was that $1000 was not eating into the negative equity at all.

    So when my tenet was moving out, I finally decided to sell it, short, and all the problems that come with it.    I did sell.   2 months later I was laid off again.   I can't tell you what a relief it was to not have to worry about that $1000 a month.      I was able to get a new job, back in CA, at a 50% raise in pay and bonus in a month.   So I would have been ok financially if I had kept it, but I did not know that at the time.   Side note, because I had not lived in it for 2 years it was considered an investment property so the write off loss on the short sale was "income" and I had a 20,000+ tax bill for the privilege of  ruining my credit for 7 years.   It took 5 more years for it to cross the positive line if you consider I would have still had to pay $1000 a month for those 5 years.   now 7 years later, I just saw the short sale drop off my credit score and I am back to 830 and the property is 3x what I owed.  Got to love CA real estate

    I realize this is just 1 story, but I thought it was topical so I would share it.   I would sell now, no one ever was sorry to make a 110,000 profit on an investment.   Even knowing what I know now, that if I had stuck it out I would have made a profit after 7 years, I am still happy with my original decision.   The weight of that payment every month was crushing.  Take the money.

    10Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    I would normally advise selling. In this case, due to the fact that there is nothing normal about CA,  it makes no difference what you choose. Neither option is right or wrong if you choose it.

    I don't believe money has anything to do with your decision.   

    2Reply
  • Brett Goldsmith
    Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
    8y

    If $800 is a drop in the bucket for you and if you want to hold the property another 10 years+ or move back in in 2020 then I'd consider holding. Long term it's likely a good hold but the question is do you want to cover the gap for potentially years to come and capital expenditures that pop up. 

    It's impossible to know if we are nearing a local top in the RE Market ( many people think we are ) and if a correction is looming within the next few years so if you think there is a correction coming or if you want to cash out, now isn't a bad time to sell, prices have never been high in many areas. 

    I personally don't like negative cash flow properties when occupied unless if you see massive appreciation within the next few years and if you have sufficent reserves to weather a storm if it comes.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y

    Sell it and use the cash to move forward into a positive CF property.

    9Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Dennis M.:

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

    if he lived there the last two years as an owner occ there would be no tax. no need to 1031 and be stuck into having to buy another property.. he could then be the bank and have true passive income. 

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    13Reply
  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
    8y

    @Ben Payano 

    So, these people telling you to sell it haven't even asked for the numbers, all they hear is negative cashflow & freak out. Some of the highest IRRs in real estate are going to come from negative cash flowing properties that have great appreciation.

    Before making a rush judgement, we need to see the whole picture. The hold scenario, with purchase price, current value, projected income, projected expenses, current financing & a market analysis of San Diego & your sub-market. The sell scenario, with all costs associated with selling it ... which no one has mentioned, if it is a $500K unit, the broker fees alone will cost more than $800/month negative cashflow for two years (not to mention that some of the "negative cashflow" is debt amortization).

    However, if you want an opinion without giving out the details, I'd say if you love the place & plan to move back in 2020, keep it, no brainer. If you don't, then I'd say @Jay Hinrichs has the right idea. Sell it, bank your profits, put it in a MM/savings account at 1.5-2% while you catch your breath with the move, then go from there. There are few things as peaceful as going to bed with no debt and a healthy bank balance.

    6Reply
  • Rob Hoffman
    Oakland, CA · Member since 2016 · 104 posts · 47 votes
    8y

    I have a property in Oakland, Ca that will cashflow $800 and Im thinking of selling.

    1Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    8y

    @Ben Payano I was in nearly your exact same position nearly 20 years ago.  Before you think about holding or selling you need to go talk to your HR and your boss.  If they are moving you temporarily for work, you should be able to negotiate a package to offset your costs during your deployment.  In my case I negotiated to have them offset my mortgage and absorb the difference in my taxes.  I was moved to Japan, so they also paid for my housing and transportation there!  During my absence I also rented out my town house.  I had the trifecta: they paid my mortgage, they paid my housing in Japan and I received rental income!  My point is to think outside of the box. If I had just looked at my situation as a traditional buy or sell equation, I would not have had that bonanza.  

    Just ask your HR, I am sure you will be amazed at what they will be willing to do for you. On that same trip, I asked them for a bicycle and they ended up giving me a new car... in Japan of all places!

    Good luck and have fun as an ex-pat!

    11Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    8y

    gosh that is a beautiful place...I'm really digging the interior design. Personally I'd move back in and just eat the cashflow until then.

    0Reply
  • Chris Purcell
    Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
    8y
    Originally posted by @Dennis M.:

    I would dump that in a second .take the profit and 1031 that into another property .. a property that actually cash flows , preferably a multifamily 

     This

    0Reply
  • Ben Payano
    OP
    Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
    8y

    @Joe Hines My plan is to come back and live in the Loft. That's a great example about your property situation in Florida. Eventually, I also get into that market because of the sunny weather (for the most part) and the Latin culture. Great advise man, thanks.

    1Reply
  • Ned J.Pro Member
    Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
    8y

    Its CA and San Diego...all conventional wisdom goes out the window....

    I would STR this place in a heartbeat until they laws take effect and someone actually starts to enforce them....

    Biggest question I would be asking?....how do I change the cash flow in order to keep this very desirable location...... I wouldn't sell in this location unless I had no choice...

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    @Ben Payano Nope don’t hold this. Sell within 6 months of now. Either take the tax free capital gains (if possible under 121 exclusion) or 1031 exchange and go buy some rentals likely out of state
    0Reply
  • Ben Payano
    OP
    Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
    8y

    @Nate Burgher That's an awesome question. No, I'm planning to embrace the grind and work like no one else to one day  be worth as much as no one else. $800 will hopeful be like buying a bottle of water one day.

    I know man, STRs are a great solution to this problem but California in general is starting to be a hard place to live with taxes and limited options. I appreciate you response man, thanks.

    0Reply
  • Ben Payano
    OP
    Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
    8y

    @Dan H. 100% right. I actually had it as a STR for a year (I moved to Europe last year) and everything was going great until my HOA found my ad online and sent me a notice to remove. They also threaten to give me a hefty fine if they ever see it back on Airbnb and VRBO.

    Thanks for your perspective on home value appreciation. I have a voice in the back of my head telling me SELL YOU IDIOT, but like I said in my original post, I'm naturally an optimistic guy. Great point on the 8 years of negative cash flow and lost opportunities. You got me thinking on what can I do with potentially 77K.

    0Reply
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