What are you guys think about that property?

Question

Hey Everyone I bought my first property two years ago. It's located in Linden New Jersey. Nice single-family house. Three bedroom One bath

All of my other properties are nicely cash flowing but this one.

Total monthly payment, including P&I ,Taxes and insurance. Is $4000
Rent- $3500 , First Tenant that I put in 11 days after listing on the market is still there and just extended for another 10 months, Basically zero vacancies .almost no maintenance ( Built the late 19th).

Here's the catch. I bought it for $500,000. It's valued today around $580,000.

Do you guys think I should sell because of the negative cash flow? or should I be happy with appreciation and it’s also expected to continue the appreciation

Dan H. · Answer

I am often the contrarian.   I would also venture my RE investing success is in rarefied air even on this site where a fairly large percentage of posters are millionaires.

I have 2 questions:

1) do you expect the appreciation to continue at a rate significantly greater than inflation?

2) can you absorb the negative cash flow?

Assuming the answer is yes to both then this is a no brainer to keep.

Your monthly appreciation is $80000/24=$3,333/month

Now let’s assume negative $1k/month which is much more accurate than $500/month.   Maintenance/cap ex, pm, vacancy (I recognize you have not had much, but vacancy is a reality), asset protection, bookkeeping, etc.

Here is rough monthly numbers $3.3k (appreciation) - $1k (cash flow) + ~$400 (equity paydown assuming 80% LTV) equals $2.7k/month or $32,400/year.

At 80% LTV you purchased at $100k not including closing costs.   This provides a 32.4%/year return (still excluding closing costs).

I am about total return.  Of the sources of total return, the one I value least is cash flow because it is the only source of RE return taxed annually.   In addition, I do not require the cash flow.

A few years ago I purchased a non commercial residential property for $2.35m that had fully occuppied rent of $6k/month.   It was the largest negative cash flow non commercial property I have ever heard of.  Today it has value over $1m above purchase and rehab costs.  I expect the rents this year to exceed $25k/month that would provide modest cash flow.   My return so far is over 50%/year.

Positive cash flow is not required for a property to be an outstanding investment.  Total return dictates the quality of the return.

Good luck

Adam S. · Answer

In Linden, you should be able to increase the rent by up to 5% at each renewal. That would translate to approximately $175 more per month, which could help narrow the cash-flow gap.

Given the relatively modest benefit, refinancing may not be the most cost-effective option once closing costs and fees are considered.

Another possibility is completing a 1031 exchange into a property with stronger cash flow. That said, competition for investment properties in New Jersey can be quite strong. You may also want to consider exchanging into a larger multifamily property in the Capital Region. While the City of Albany can present some challenges due to the Good Cause Eviction law, New Jersey's 1974 Anti-Eviction Act creates a somewhat similar operating environment for landlords.

If you believe the property will continue to appreciate significantly, holding it may still make sense. Otherwise, a 1031 exchange into a better-performing asset could be worth exploring, ideally within a reasonable distance of where you live and can easily manage it. Keep in mind that Linden is more than three hours from Albany, which may be a factor if you prefer to stay close to your investments.

Stephen Delahoussaye · Answer

Mendy a few things stand out here that are actually working in your favor even though the cash flow number looks rough on paper.

First, you placed a tenant in 11 days and they just renewed for 10 more months with almost zero maintenance. That is a landlord's dream from an operations standpoint. A lot of investors would trade a few hundred bucks a month for that kind of stability.

Now the $500 a month negative is real and I wouldn't ignore it. But before you sell I would look at two things. One, can you push rent at the next renewal? If the market supports $3800 or $3900 you just cut that gap in half. Two, have you shopped your insurance and challenged your tax assessment? We manage about 20 doors in Nashville and I've seen owners shave $200 a month just by getting those two line items right.

The appreciation side is strong. $80K in two years on a $500K buy is solid and if the area is still trending up that is real wealth building. Selling captures the gain but you also eat closing costs, capital gains taxes, and lose the asset entirely.

My general rule is if you can get the bleed under $200 a month and the area is appreciating, hold it. That $200 is basically paying for forced appreciation. If the bleed stays at $500 and rent has no room to move, then yeah a 1031 into something that cash flows might make more sense.

Good problem to have either way. You bought right on the entry and the tenant quality tells me you are running it well.

Mendy J. · Answer

Thanks for your input! It’s class B tenants and single family so that’s why it’s less turnover. I’m paying dirt cheap insurance, taxes in Union County is very expensive and if you know a way to challenge it….I’ll appreciate it. Meanwhile, I’m keeping it because of the good Neighbourhood and proximity to NYC +appreciation

Mendy J. · Answer

It's not like I didn't know that I'll be negative cash flow I was OK with that, but I didn't think it will take that long till the rates go down which now I know is a reality. Just curious what you guys would do?

Drew Sygit · Answer

I did this on a few Class A rentals and thought of the negative cashflow as money I would have put into a 401k.

Now, they are some of my best performers:)

Do what works for you though!

Mendy J. · Answer

1. my rental is in line with current market

2. in NJ you can only protest the assessed value not the actual bill which i cant do.

3  i have nice income plus all my other rental properties that are NICELY cash flowing so i can absorb it. and it will most likely take another few years.

so my final question was if other investors will also be comfortable with holding on taken in consideration all the above facts?

Drew Sygit · Answer

How does your current rent compare to market rent?

How much time would it take to protest your property taxes?

When do you project that the rent will increase enough to at least cover your PITI?

How long can you afford to absorb the negative cashflow?

What are you guys think about that property?

Most Popular Reply