Sell, Keep or something else for rental property??

[Michael Orlando]

Hello!

I was wondering what others might do in the following scenario as I have a rental property from the first condo I bought in 2010. It is in pretty good shape located in East Brunswick NJ.

2 bedroom 2 bathroom
Currently being rented out and they just renewed the lease until Oct of 2020.
Mortgage is $1500
HOA is $260
Rent received is $1625
So technically I lose about $150 a month and probably put $500 in repairs in to the place a year.

I owe $178,000 on the mortgage with 26 years left on the mortgage (I bought in 2010 and refinanced in 2014). A few comparables in the area just sold for $190,000 - $205,000.

I am patient and would like this to be a med-long term investment....

any thoughts would be appreciated...

Thanks 

Michael 

[Jake Stuttgen]

Hey @Michael Orlando! I would sell and move onto something else if you are in a negative cashflow situation

[Michael Orlando]

Thanks Jake! Im considering that.....anyone else have other ideas or thoughts?

[Nathan Gesner]

Sell it.

You're spending at least $2,300 a year just to keep the place. It's unlikely to appreciate much faster than that and it's very likely to lose a ton of value if the market turns.

Being patient would work for you...eventually...in 20 years or so. 

Why not sell it and buy a property that cash flows today and makes you wealthy in 20 years???

[Frank Geiger]

The appreciation play likely won't cover the lost cash every year. I would sell. There is opportunity cost with the capital your tying up in this property. You'll probably come close to break even on the mortgage when you sell. But you'll stop the bleeding.

[Greg M.]

Option 1, Sell: If you sell the place mid-range of your estimate, you're getting $197,500. Assume you pay 5% commission and 1.5% in closing costs, you're walking away with about $6,000.

Option 2, Keep: You didn't mention taxes and insurance, so I'm going to assume that is escrowed in the mortgage payment. Between the mortgage and HOA and current rent, you've got an out of pocket of $177 a month. What is your current monthly principal reduction? I suspect it is significantly higher than $177, probably around $600 is my guess.

You can walk away with $6,000 in your pocket and try to invest that elsewhere. Or you can continue to pay $177 to have $600 added to your net worth every month.

[Michael Orlando]

Thanks everyone...I hope to be able to give back in a helpful way on this website when I learn more; like you folks do. Sorry guys, Last inquiry on this topic:

I just pulled the exact numbers from my statement:
Principal $349.54
Interest $573.13
Tax and Insurance $598.38
HOA $260
TOTAL PER MONTH: $1,781.05
Rent: $1645 (agreed to a small rent raise)
Negative cash flow: $-136.05

So I don't have a problem keeping this long term in the hopes that....once paid off...I create an income stream for me in retirement but more importantly...one of my kids or even my wife....(if I go first lol)...or even my sister...benefit from this renting it out or even selling it...etc. Also, on my next contract I think I can raise the rent to $1700-$1725 as I just saw 2 of the same condo go for these rents. 

With that said....we have a two family that Is about $700 a month positive cash flow and another townhouse that is about $100 positive cash flow.....

Does taxes...write off...credits...etc... help lessen the monthly loss on my negative cash flow property? And can't I take the loss for the next year or so maybe and then refinance to get this place into a positive cash flow situation?

....with all of this new information....am I still unwise to keep it?

[Michael King]

Sell. It will be super easy to get a property that brings in $150 a month cashflow. And then technically you've doubled your cashflow.

[Greg M.]

Ah yes, insane NJ property tax. I forgot how insane it actually was.

You said the property was in East Brunswick, which I understand to have rent control. Therefore, you're looking at $1685-$1695 next year assuming a 2.5%-3% allowable rent increase. The fact that the city has rent control likely means that it is a desirable area where rents tend to increase. That is a good place to own.

There are a lot of people on these forums that scream about positive cash flow. If they don't get money in their pocket every month, they want to dump the place. I suspect that many of them are paycheck to paycheck type people and they need the positive cash flow to survive. That's fine if that is the position you are in. I prefer to take a long-term approach and have my tenants fund my retirement rather than giving me monthly pocket change. Real estate isn't my job, it's my investment. Positive cash flow is a bonus, not a requirement. You may feel differently.

Given your numbers and including the $500 annual repairs, you're still +$171 a month. That's over $2K a year being added to your net worth. This number will likely only go up over time as rents rise and your interest cost reduces as your loan is being paid off. To be clear, you're considering trading this $2K a year for a single $6K lump sum payment all to get rid of the stigma of negative cash flow.

I think you'd be crazy to sell the place, net only $6K, and give up that $171 a month. However, if you can reinvest that $6K and get more than a 34% annual return, you should sell.

[Michael Orlando]

Thank you all!!!!