How to Optimize Current Portfolio
Hi,
i have a duplex property in south LA.
purchased it for 275k now worth about 750k and I owe 525k in loan due to cashout refi that I used it for a downpayment for my other investment property.
Due to this cashout I'm negative cashflow. My rent is 3k a month and my payment is 4k a month. Before cash refi, my payment was only $1990
should I sell this property or increase value by adding Adu?
problems.
1. Two units are occupied, will need to pay them to move out. If I sell as is, value will be a lot less than 750k.
2. ADU takes too long and expensive. May cost me 150k-180k to build 450 sqft 1bed and can only charge about 1400 a month on rent
3. I can only get funds from my Heloc with 9.72% rate. No other cash saved for me to spend.
4. I'm trying to sell my condo in Virginia put on the market around June, can get equity about 50-70k after selling.
5. Two rental properties in LA each about 1.2 mil value with no equity and negative cashflow. Both of these properties are purchased with 100% loan.
Quote from @Justin Yun:Hi Justin, I will do my best to accurately respond to your post. The five bullet points that you have posted contribute to confusion about the question you are asking: Should I sell my negative cash flowing property that I over leveraged? Answer: Yes
Hi,
i have a duplex property in south LA.
purchased it for 275k now worth about 750k and I owe 525k in loan due to cashout refi that I used it for a downpayment for my other investment property.
Due to this cashout I'm negative cashflow. My rent is 3k a month and my payment is 4k a month. Before cash refi, my payment was only $1990
should I sell this property or increase value by adding Adu?
problems.
1. Two units are occupied, will need to pay them to move out. If I sell as is, value will be a lot less than 750k.
2. ADU takes too long and expensive. May cost me 150k-180k to build 450 sqft 1bed and can only charge about 1400 a month on rent
3. I can only get funds from my Heloc with 9.72% rate. No other cash saved for me to spend.
4. I'm trying to sell my condo in Virginia put on the market around June, can get equity about 50-70k after selling.
5. Two rental properties in LA each about 1.2 mil value with no equity and negative cashflow. Both of these properties are purchased with 100% loan.
I do not think your position on your other properties would influence my advice in this situation. Even if you were positively cash flowing on multiple other properties, it makes no sense to invest more money into the negatively cash flowing property unless the ADU would improve the cash flow to such a degree that the property would be stable and capable of sustaining itself. I would only add the ADU if you can reasonably forecast that the property will substantially appreciate as to make it worth holding. Good luck.
Some thoughts
- you have made $475k from appreciation. On high LTV purchase the ROU on this whoops cheap markers.
- the issue is not the poor return on this RE (the return has been great), but that if you had purchased something in same appreciation market, you would have done better.
- the rent control will require paying tenants to rehab but that is fairly low cost in the scheme of the rehab value add and sell.
- Hands off ADU additions are often one of the worse RE investments. This is for various reasons but one of the largest is they often add value far below the hands off cost to add the ADU.
- My belief is variable rates such as most heloc are best for shorter term loans. This is not what you are suggesting. In my opinion a heloc used for the down on an investment property only makes sense if you have a path to pay it off in a short duration. Otherwise, it is higher husk than I would be comfortable with.
My opinion is you have done great but from 2012 to the end of 2021 was an incredible time to invest in RE and especially true in So Cal. Making $0.5m to $1m per property was common. I have one RE that has appreciated over $2m since acquisition. I do not expect the future RE investing to be as simple or successful. I think dumb purchases will lose money. I think ok purchases will not produce great returns. I think you need to focus on good/great purchases to obtain good/great returns.
I have not purchased RE since Dec 2021 (shortly before the rate increases). I purchased $4m that month (2 properties) and have obtained about $1m of non-purchased equity between these 2 properties. since then, I have made offers in a different market (~6 offers) that would be only ok purchases (apparently not following my own advice, but it is a new market so I do not have the opportunities that I have in my market) but none have been accepted. My point is we are in a challenging RE market. Rate increases have killed cash flow on high LTV purchases. we are in our longest purchasing drought since 2010 (almost 2.25 years without a purchase).
The goal is not to own RE. The goal is to make money
Good luck
#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- San Diego, CA
Building an ADU would take a long time. Is there any way you can increase the rent? I would not keep this at negative cash flow unless I truly believed in the appreciation of the area.
I tend to look at my portfolio as a whole:
What percentage of leverage do I have?
What is my Return on Equity?
What is my reserves amount that I need in case of unexpected capital expenditures?
