Advice - Keep or Sell LA Condo?

Question

Hello BP community, I am in need of advice on whether to keep or sell a condo (2 bed, 2 bath) in LA (Frogtown/Elysian Valley) that I purchased in 2017.  Complex was built in 2017 so no rent control.

Purchased $480,000, down payment ($127,000) at 4.5% fixed 30 years.

P&I: $1,789, Property tax: $500, Insurance: $30, HOA: $331 = $2,650 per month. I realize vacancy, repairs, cap ex also need to be figured into expenses.

Currently charging $2,600 for rent but could go up to $2,750.

So when considering all expenses, potential rent, tax benefits this is break-even at best.

The reason that I am considering selling is because my down payment cash ($127,000) is tied up and I may want to purchase something within the next couple years. If there is a downturn in the market, I would want to have cash ready to invest. Also, if there is a downturn, my condo might be impacted by it. Current market value is $550,000. I understand I will be paying about 6% in closing costs, etc as well as capital gains.

Advice from you all would be very appreciated!

Brett Goldsmith · Answer

If you didn't want the money and could weather a down turn, I'd say keep. Since you want the money for something else ( a potential better importunity and peace of mind?), and that this property may impact you negatively if we start going into a real downturn ( doesn't cash flow so it is tough to weather storms unless if you have substantial reserves ), I'd likely highly consider selling.

This is my general opinion on these type of matters, but depending on how much additional money you have saved, income earning potential, and investment goals, I may think keeping makes more sense for long term appreciation plays.

Matthew McNeil · Answer

You're getting 0% return on your $127k.  You're at "break-even" as you wrote.

You "will be paying capital gains" as you wrote - if you sell.

So, no cash flow and you're willing to pay capital gains taxes.

My initial question centers on your last statement.  Why would you be willing to pay capital gains rather than do an Exchange?

Greg M. · Answer

Keep in mind that the advice from most people on this site will be from  the perspective of outside of California. For them negative cash flow is  a business killer. For investors in Los Angeles and many parts of  California, positive cash flow is a dream and if it happens it may be  many years down the line. It is not the norm unless you are in the  ghettos. Did you actually buy this property expecting it to positive  cash flow early on or did buy it betting on appreciation?   If you are looking for a positive cash flow or are scared the market  will turn, then sell. However, you may be missing out on a lot of  capital appreciation. The area is nice and close to other higher priced  areas and will likely benefit from the spillover of people who are  priced out of those areas. It's a low crime area. Slightly above average  income with it likely to continue to rise as there are a better than  average percentage of college educated people there. There  is very little inventory and this is not an area where you're going to  be seeing high density complexes. It's a family area and the schools are  decent. Those with children in the good schools will likely be staying  there. Lots of renters in the area. And while you P&I will remain  the same, rents seem to always go up here, especially in the nicer  areas.   Wanting to have cash available to invest in case of a downturn is a  prudent decision. However, the number of people who have sat on the  sidelines while waiting for the market to have a downturn is staggering.  Many have been completely crushed and priced out of the market while  waiting for this downturn. I have had multiple tenants that have been  sitting on the sidelines and waiting, only to end up paying  significantly more for their home or being priced out of their desired  home, all the while paying me rent. I even have a tenant that sold his  home in order to rent as he felt the market was going to drop. Between  the appreciation he lost on his sold house and the rent he has paid me,  he's down well over $200K. Timing the market is a losing proposition.

Frank Wong · Answer

Hi Megan,

I think your reasoning to sell is very valid.  Not only is your down payment tied up your debt ratio will be affected by your current loan.  What you have now as Thomas said is a pure buy and hold speculation play.   Nothing wrong with those as long as your reserves and cash flow are high.

Dennis M. · Answer

No point in losing money every month . In a rental market You’ll never turn that into a good investment unless you just sell it . I’d sell now before we hit another recession

Thomas S. · Answer

It is not a income investment property based on what I see as long term negative cash flow. However it is my impression that most on your coast are actually speculators. You are right that a downturn in the markets will hurt. Not only will you lose your equity but also your ability to sell.

I personally would not have purchased it unless I did so with the intent to flip after completed but it really comes down to what your original intent was. It will definatly not produce positive cash flow, after expenses you will be negative, so all you really have is speculation.  Some believe that as long as the sun comes up in the morning appreciation will continue unabated.

You need to weigh the risk against your goals.