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
Hey @Ben Payano I'd would tell you to hold on to it, like @Joe Hines pointed out if you coming back to make it your own home it would make sense to keep it. If you'd like to run the numbers with me face to face and how I may be able to help you save more contact me.
If you could afford to lose $10,000 per year that you're gone AND you plan on moving back into the unit, I'd say yes to holding it.
If it were me personally, I'd sell and roll the profits into something else that could generate revenue. Then, I'd get a badass Ram Promaster van; convert it into a camper; and travel around the country for a while collecting life experiences that will pay happiness dividends for the rest of my life :)
@Ben Payano what would you rent it for? I know some people down there and would love to help you get it rented at a fair rate. Also, no this isn’t a scam, just trying to help a BP brother out.
Sell it while you still can and take the $110k in tax-free gains. The housing market is slowing down. You should take advantage of this situation while you can.
I live in San Diego used to live downtown very close to your loft , I was off 10th and island. I am a real estate agent /investor 15 plus years. I would without a doubt sell and take your profits negative cash flow is never a good idea. You will likely be able to purchase a similar property at a similar price in 2 years. With all the market repricing its self and all the recent condo/ apartment development in East Village/ downtown I see little appreciation in the downtown San Diego condo market over the next 24 month.
I agree with @Jay Hinrichs. I would definitely sell and take advantage of the tax exemption if you've lived in it 2 of the last 5 years. (up to 500k tax free profit if married, 250k if single) If not, I would 1031 exchange into some cash flowing properties out of state.
I used to have a condo on Market st near the convention center. I did VRBO and it was the easiest money ever, once you get a system going.
You should consider doing that until the law goes into affect.
@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.
You have hardly any gain here to talk of. If you are planning on returning in two years you are better of eating the negative flow. But I don't see why it should be that negative with your numbers unless your HOA fees are really high or something?
@Ben Payano, people on here are right in asking you the question: Do you plan to move back into this property when you return in 2 years? That will be a heavy part of the decision. IF you do not plan on moving back into this place, sell it...IMMEDIATELY! And I don't think you can 1031 exchange it, since this is your primary residence. You can only 1031 exchange investment property. Now, I suppose you could show this place as an investment property but I am not sure what all the requirements of that are so you would have to talk to a 1031 exchange professional.
Now, if you plan on moving back into this place, there have already been good suggestions here for you. I break things down into numbers so here is my thought:
800*12 = 9,600 per year in loss from HOA and PITI. Now add the additional potential for maintenance expenses from a leaky toilet or a broken garbage disposal so lets round up to 10,000 per year. Finally, you may be looking at a 10% of monthly rent as a management fee if you're going to use a property manager to keep an eye on the place while you are out of country. I guess you could manage it yourself but being over seas, you're probably 8-12 hours time difference so that will be an extra coordination challenge if a tenant needs something from you, or vice versa. Maybe you can have a good friend who lives in SD manage it for you for a warm hug and genuine gratitude?
So, average case scenario you have: 9,600 + 960 management + 400 maintenance = 10,960 annual loss
Sounds bad, I agree. And this isn't even worst case scenario. But you can write off many losses associated with real estate on your taxes. While it won't recover your entire loss, it will save you a decent chunk. How much? Talk to your accountant to get good estimates on that.
Plus, someone is still paying down most of your mortgage and you have equity building in the property. Remember, cash flow is only 1 of the 4 advantages RE offers. So, does it still make sense to you to hold it for 2 years and then move back into it? Only you can answer that question.
One more point to consider: you can soften the blow of the math above if you can find an actual investment property to buy with your equity. If you can do a cash out on this loft and use the money as down payment into a 4-plex that cash flows $200 per door, per month, that's $800 per month that can offset the negative cash flow from your loft almost entirely. That will keep you comfortable for the 2 years away, then you get back to SD, move into the loft and have an extra $800 a month of cash flow from your other rental.
Of course, it will take some time to identify a property, do the cash out, close on the new property, get tenants in there. Maybe you still have the time to get it all worked out, maybe you can at least start and finish up after you move, or maybe you are out of time and can't pull off such an elaborate scheme until after you move.
Again, only you know all the variables of your current situation and so it's on you to make the final call. I hope what I wrote helped to put some clarity in your decision making process.
@Ben Payano It seems like you want to keep the place. Emotions and investing don't go hand in hand, but facing an expat situation is different from what most people ever experience. If possible, try to get compensation as part of your expat package. Ypur $800/mo loss is a direct result of your employer's decision to relocate you. Assuming you are not military, you're in a good position to negotiate.
Second, try to have them include it in your foreign housing reimbursement instead of your salary. There is an additional tax exempt portion of your foreign earned income for housing so the money may help you break even or get ahead and be partially tax free.
Third, if you decide to sell and you've been there less than two years, you do have the foreign earned income exclusion and most of the taxable gain would be cancelled out.
Check with an accountant familiar with expat taxes. S/he can provide suggestions and advice on how to proceed and key points to negotiate that we typically overlook (unless you've done multiple assignments overseas).
We just returned from 2 years overseas so I am happy to discuss. Feel free to drop me a line.
(If it's not obvious, I am not an accountant nor an attorney and am sharing based on my own personal experience.)
@Ben Payano My first question would be what is the long term ROI if you include the cash flow and appreciation. If your projected appreciation far outweighs the negative cash flow then keep it. But you better be right on the appreciation! Otherwise get rid of it if the long term ROI is bad. Or figure out a way to improve the cash flow... reduce payment? Get more rent via improvements?
@Ben Payano learn to follow trends. The bubble in Cali never really burst. From what I've been reading for the past 4yrs is that most areas like Cali, Seattle and Ny are going to have a huge bubble burst. Like a ticking time bomb. My advise to anyone that owns in Cali especially. SELL SELL SELL LIKE YESTERDAY. Not to mention the politicians don't understand simple math and think solving problems is increasing taxes. That's not to even mention the water crisis. There will be stories told about California one day.
So, 800 per month are $ 9600 in a year. Appreciation about 100K per year - It's sort of like a savings account into which you deposit $ 800 per month.......just saying
I would sell it. Investment should be making you money. Property looks good though so I can see why would you want to keep it. Unless you are planning on living there in the future, you should sell and use the money somewhere else where it would produce a cash flow.
@Ben Payano
Have you take the equity build up / principle pay down into account yet? (the potion of month mortgage that pay down the mortgage balance).
I checked the price history on this property, and I'm wondering why you posted this. If this is your property, it has been listed and unlisted for rent at prices ranging from 2000 to 2995. I seriously wondered if you were punking us all. If your profile is right, and you put $100K into it after buying it for $406K, and you've already had a bunch of renters, I think the answer is obvious.