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
Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
8y
@Nik Moushon Good point Nik. I am overseas at the moment and doing long distance anything is going to take a lot more effort than the next guy. Unfortunately, I am unable to up there rent anymore because of the comps. I appreciate the good advice.
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
8y
If you notice, the replies from people in California are very different than people who are not from California.
San Diego market is seeing a divet as home prices have finally reached the point that it's pricing out demand. I've finally seen houses start selling for less than ask. I personally believe it is an excellent time to sell and guarantee a profit. It seems like a better play than gambling on the next two years when we have obvious headwinds to further growth. I think it especially makes sense if you are tax-advantaged with the sale.
What I think you definitely should not do is sell and go buy dead equity "cashflow" in the rust belt.
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
8y
Man this is a tough one. When I read the headline, I thought sell immediately but your situation is pretty unique.
If it was ME, and this is just ME-I would sell and when you get to come back to the US don't go back to California. With how much you paid for the place I feel it is a crime for something like that to cost that much! :-)
Rental Property Investor · Havelock, NC · Member since 2017 · 74 posts · 19 votes
8y
@Ben Payano
If there way to balance the books for your liability and convert it into an asset or break even.
Ideas:
Could you convert it into a two bed room and rent the rooms for x dollars with in the market.
Is there way to partner with another investor(s) in a larger project and convert that into postive cashflow then be able to write the loss off on taxes?
Work with your Local REIA or investor group to help find a solution that would help.
Purchase something that covers the loss there by negating the negative cash flow.
You can sell it but consider all the costs.
Mostly, find a way to come back to it longer term since you plans are such but change the equation and make it balance.
Don't rush it! Be creative and use you network.
One option no one mentioned, could you lease option the property thereby giving the money to cover your loss?
You could owner finance or Wrap the mortgage and costs?
Sell a portion or you interest of the property and not the whole?
What side of the equation do you want to be upon?
It might be easier to STR it would a short term and build the fine the HOA would charge you into the rental fees this gives you time to find a longer term solution instead of one that you cannot prepare for
Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
8y
What did you pay for it and how is negative cash flow that bad?
We had quite a few friends that "cashed out" in CA in 2004- 2006, left CA....and now want to come back and will never be able to afford it. So if you plan on coming back, where and when will play a roll if the "take your profit and run" will really work out to truly be a real profit
Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
8y
@Brett Goldsmith great point Brett, I have been hearing that a correction to the RE Market is looming. Especially from people like Peter Schiff (moving to Puerto Rico). I'm going to look back at this time and think, Wow you really F***ed up on that one Ben, or Wow you really a F***ing bad *** Ben.
Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
8y
@Gregory H. One of the best responses yet. I just did the calculations and I would be paying the RE agents around 34K, that's good for over 3 years in negative cash flow which really cuts into the profit in selling now.
Not to say that: it's currently a cold market for sellers in DT SD; I've invested 50K in renovations; bought the property for 457K now worth 566K; and I'm looking at a monthly expense of 3.8K and collecting 3K in rent.
The plan is to return to a job in the SD area in 2020. Really loved this response man, thanks.
Investor · Baltimore, MD · Member since 2016 · 36 posts · 8 votes
8y
@Arlen Chou Jesus Christ man! That was an amazing deal. I'm definitely going to make a trip to HR tomorrow and raise hell. I'm not going to hold my breath though, I work for the government.
Fort Campbell, KY · Member since 2018 · 46 posts · 12 votes
8y
@Ben Payano
Now I’m not very experienced, but my first impression is—just do the simple math.
How many months of negative cash flow does it take to absorb that appreciation. I would then look and see if I can project what it will appreciate to over the course of the negative cash flow holding period. This will give you a somewhat accurte view of what I would a “viability period” where you know how long you have until this property has not made you any money. Depending on the rates of rental increase and appreciation, it could eventually turn into a profitable investment. But there are a lot of what if’s and how longs’
I don’t know anything about that market, but generally speaking if it costs money every month, every month you hold on to it you loose equity that could be used todayfor a better investment. Couple with with the time value of money, depending on your specific situation of coarse (I don’t have all the details) I would cut my losses and move to greener pastures.
Again, there are a lot of variables. Maybe the area will turn around, is it just in a lull, is population increasing, what do the demographics look like, what are he cap rate trends (market growing or shrinking(aka supply and demand)). Just food for though, hope it helps. And of coarse if I’m wrong about anything please correct me
Rental Property Investor · Chicago, IL · Member since 2014 · 22 posts · 21 votes
8y
I can give you a mathematical interpretation for this. Running over the next 2 years, if you can expect 5% annually from your investments, $800/month has a future value of $21,009.
So *assuming you won't be able to increase rents at all* during the next 2 years, do you think the property will be worth 21K more at this time in 2020? If the answer is 'yes! Obviously, it should be worth 75k more!' you should hold it. Especially because you will be able to raise rents.
Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes
8y
That really sucks! I think you may already kow the answer to your question Sell it and sell it fast! I think we are at the height of the market. I would definitely off load and find a better CASH FLOWING property to invest in. If you are on Biggerpockets you are looking to make money not be negative in an investment! take the emotion out of the deal, and let it gooooooo
@Gregory H. One of the best responses yet. I just did the calculations and I would be paying the RE agents around 34K, that's good for over 3 years in negative cash flow which really cuts into the profit in selling now.
Not to say that: it's currently a cold market for sellers in DT SD; I've invested 50K in renovations; bought the property for 457K now worth 566K; and I'm looking at a monthly expense of 3.8K and collecting 3K in rent.
The plan is to return to a job in the SD area in 2020. Really loved this response man, thanks.
If I liked the area and intended to move back, AND my overseas gig was paying a lot relative to local living expenses, I'd keep it.
Something not yet mentioned is Prop 13. Odds are the county assessor has no idea that you spent $50k on reno, meaning your property tax bill is still tied to $457k, inflation adjusted but NOT appreciation/reno adjusted. Prop 13 tax basis currently can be passed onto children, as the BP member who inherited two free/clear half million dollar San Diego SFRs with property tax bills of $1200 per YEAR can attest.
If you move back in 2020 and a condo like that one is worth $650k and rates are up at the 6.5% range (entirely plausible), your first couple years of higher P&I payments as well as property tax payments (based on $650k, not $457k) will be more painful than losing $800/mo for a couple years.
I am heavily biased on the "never sell coastal CA real estate, only buy" side of the wider debate, FYI, so take that with a grain of salt.
Investor · New York City, NY · Member since 2016 · 4 posts · 1 vote
8y
I had the same situation for a property in France .
- how much principal is being paid every month ? if its much higher than $800 so effectively you are not losing money. Ask yourself if spending $800 now to reduce your debt amount by $XX/month make sense.
After a few years, you can refi ( no cash out ) just re extending the maturity and the monthly payment will drop hence reducing your monthly expense ( in my case I became flat).
so find out how much time you have to wait for this to happen and see if it's worth it.
Being flattish or negative carry in a big city is relatively common given low cap rate.
What did you pay for it and how is negative cash flow that bad?
Oh Cali investors. "How is negative cash flow bad". Such an odd statement.
I know too many Houston investors that have built up 1000+ unit portfolios that bring in $200k+ a MONTH of pure profit (doesn't even include appreciation, which there has been a ton of in Houston, or principle reduction). Meanwhile you can buy some 8 unit in cali and "only" lose $1000 a month while crossing your fingers that it'll go up in value and you can sell to the next guy who's willing to "only" lose $2000.
@Gregory H. One of the best responses yet. I just did the calculations and I would be paying the RE agents around 34K, that's good for over 3 years in negative cash flow which really cuts into the profit in selling now.
Not to say that: it's currently a cold market for sellers in DT SD; I've invested 50K in renovations; bought the property for 457K now worth 566K; and I'm looking at a monthly expense of 3.8K and collecting 3K in rent.
The plan is to return to a job in the SD area in 2020. Really loved this response man, thanks.
Where downtown is your place? High rises have pop'd up like weeds. I go downtown 4-5 times a week (to my gym, Fit, across from Petco Park), and live in Mission Hills about 5 min from downtown.
Investor · St. Louis, MO · Member since 2016 · 65 posts · 82 votes
8y
@Ben Payano dump it! I don’t think it’s ever a good idea to pay to have someone live in your home.
You could take that 110,000 in equity and buy 3 homes or a multi family in St. Louis. Make and extra $1000 a month and buy back into San Diego when the next crash happens.
I was a RE Broker in SD from 08 to 2017 and the market is very cyclical. It will go down again for some reason or another and you can get a better deal. Buy low, sell high.
Investor · Cincinnati, OH · Member since 2008 · 118 posts · 22 votes
8y
It sounds like you've already got advice to lead you to this place, but I'll put it in another light.
Given what you know about the property, would you buy this house now and put $110k in as a down payment in order to lose $800/month?
Yes, you could benefit from the appreciation, but it becomes a different conversation with the negative cashflow. That doesn't even account for any potential management headaches.
Personally, I can think of a lot better investments for $110k. Look for a place to buy and get Appreciation AND cashflow. I guarantee you could find it if you wanted to.
Dump it. Cash out and find a better place for your money.