Property no longer cash flows...to sell or not to sell?

Question

So I’m just starting out ... however, I've been managing two small rentals for several years now. One is the previous home i lived in, a small luxury condo in a Philadelphia suburb and the other is a house hack in Philadelphia.

The condo currently rents for $1350 a month which just covers the fixed expenses, it no longer cash flows as the condo fees have steadily increased. The rental income on the house hack we live in now covers the mortgage, taxes and insurance.

A freind who is also in real estate investing advised me to sell the condo since its not giving us any measurable rate of return and then reinvest that capital in properties that will cash flow.

The rental market where the condo is located is strong, we have 19 years left on the mortgage. We have never had any problem finding renters and the maintenance and upkeep have been minimal as it was new when we purchased it in 2007. We have roughly 60k in equity in it and still owe 107k on it. I’m also considering taking out a line of credit on it to pull out the equity rather than selling the property since it has at least been building equity for us.

What are the pros and cons to selling it vs. holding it and pulling out equity to reinvest in hopes that it will begin to cash flow as the rents continue to rise in that area?

Bryan Devitt · Answer

So your current options are

#1. Keep it as is and next time the HOA fee goes up, have to come out of pocket every month to pay to keep it. If something happens with the economy and it is tough getting a good tenant, pay for the whole thing out of pocket and as stated above, hope the HOA has been run right and you're not hit with major repair bills

#2. Sell the condo. I also believe we're at the peak now and teetering on the edge of another housing bubble that is tied to a general economy bubble but that is another discussion for a different time. So if it isn't sold soon, you could be stuck with a condo worth what you owe on it at best that has no cash flow. Use the money for a better investment or to pay down your current hack. I like paying down the current hack best because finding the next investment could take a while and if it does, you'd be spending money on interest while cash sits in the bank unused.

#3. Refi the condo. This will make sure you have negative cash flow every month when your expenses go up and/or you extend the mortgage another 11 years.

I personally see no good reason to hold onto it. I would fix it up as necessary to sell it and dump it ASAP

Gregory H. · Answer

@Michael Manney Sell the condo, use the proceeds to pay off the mortgage on your current hack. You will LOVE not having a mortgage payment. Once paid off (it might take a year or two to make up the difference between the equity of the sale & the current mortgage), slap a HELOC on your current property to use for acquisitions going forward. Phoenixville is a decently hot market, you might be able to sell it for a bit more than you paid in 2007.

Frank Chin · Answer

I invested in and rented out condos. I bought them at the bottom of a market crash. The way I see things:

1. The market is at the top now, where I am, real estate prices doubled in the last 10 years, the usual length of a market cycle.

2. Condo fees will continue to increase, and if they haven't any major capital expenses, sometimes special assessments on major repairs in the future can kill you. Around the time I sold the rental condos, they're talking about $10,000 per unit for a new roof and repairs to public areas. Being landmarked made it expensive.

3. I don't know how tenant friendly the HOA is, but they can impose new rules. At my condo, they said they'll have to review my new tenants and leases under proposed new rules. I landlord here in NYC and know generally that adds another month to the vacancy affecting my cash flow.

4. Also, for Coops, and sometimes for condos, the HOA can impose a flip tax on purchase or sales to generate income.

I since sold my condos when it doubled in value from the market bottom after holding it 10 years. I cash flowed $100/month wile I had it, so I did OK, so I'm not knocking condos as investments. In your case, these are the issues you'll have to think about.

Michael Manney · Answer

I see, thanks for the advice. It makes a lot of sense.

Gregory H. · Answer

I mean, you can do that too, but it's always nice to have where you live paid off cash, if for no other reason than it allows you to sleep incredibly well at night! Also, you can slap a HELOC on it that could allow you to make cash offers on new investment properties, get better deals, then just lock permanent financing in place anyway, pay off the HELOC with the proceeds, and repeat the process.

Michael Manney · Answer

That's a strategy no one has mentioned yet. I like the idea and I'll crunch the numbers to see how that works for us.

In your opinion, why not just invest the proceeds from the sale in a new property?

Property no longer cash flows...to sell or not to sell?

Property no longer cash flows...to sell or not to sell?

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