Sell a non-cash flowing property?

Question

I purchased a 2 bed / 1.5 bath condo in Claremont, NH in June of 2021. It was my first investment property and I may have not paid enough attention to the numbers because I was anxious to get my first property. Now, a year later, with negative cash flow, an increase in HOA fees and over $1,000 in unforeseen repairs, I'm wondering if I should just sell it and redeploy the capital into a better deal.

Purchased in cash for $115,000. Appraised for $119,000, did a 75% cash out refi for $89,250 so I left about $25,000 in the deal.

PITI is $957.64 and monthly HOA is $375 = $1,332.64/month (15 year mortgage at 3%). Rent is currently at $1,275 (raised from $1,200 at time of purchase) so negative cash flow of $57.64/month, not including any maintenance or vacancy expenses. Market rent is probably $1,350-$1,400 so would still barely cash flow.

I estimate I could probably sell the property for around $135,000. This is not a quickly-appreciating market so I don't see that as a reason to hang onto this property. It is a 15-year loan so technically it would be cash flowing if I had a 30-year loan. Should I just unload this property?!

Jill Dolnicek · Answer

Thank you @Charles Carillo @Andrew Freed @Alex Talcott @Jonathan R McLaughlin @Jeremy Horton @Drew Sygit @Jonathan Bombaci @Theresa Harris @Lien Vuong @Steve Milford!! Lots of great advice to consider. Definitely sounds like I need to take a harder look at numbers before making any decisions. And also lesson learned on 30-year vs 15-year - especially when rates were so low, that was a silly move. Appreciate all the feedback!

Jonathan R McLaughlin · Answer

I dunno...lots of good reasons to own NH real estate right now, if you feel good about Claremont, the rental potential.and the majority of surprises are behind you. I would consider keeping it. You are probably at about 300 in principal a month now right, maybe more with the 15K? Not a bad return on the 25K left in the place. Depending on your tax situation the losses could also have some benefit.

Next time, would make sense to do a 30 year and just make extra payments when you are feeling flush. Helps with those "unexpected" repairs.

Sell for 135K (with a tenant in place? hmmm....) and you net 120K minus whatever staging and rent hit you take, not to mention the transaction costs.. Say 117500. Not really worth an exchange and you are taxed on the 15K gain or so, maybe at short term rates, so thats another 5K.

I think a year is too soon to pull out, time turns A LOT of seeming mistakes into wins.

Steve Milford · Answer

I would say look at the numbers if you refinanced into a 30-year versus the cost of selling including the Realtor fees versus raising the rent as needed as you go versus buying something else. So four sets of numbers. Don't look at just the wins, look at the costs too.

It might make sense to refinance and raise rent, or just raise rent. As previously stated, if you raise rent more and more, the cash flow will get better and better.

As a Realtor, I would say sell, cause I earn a transaction fee. If I was a lender, I would say refinance so I can earn a transaction fee. What is the easiest answer? Raise the rent more.

Charles Carillo · Answer

@Jill Dolnicek

Yes, I would sell it and move on. This property will most likely never cashflow (when you factor in vacancy and maintenance); even if you get the rent to $1500.

Jonathan Bombaci · Answer

To echo the points of others it’s never smart to hold onto a losing property. Every year we assess our portfolio and sell off the losers. It’s just part of real estate investing as you grow. If you can sell it for $135k then do it and roll the money, and the lessons your learned, into the next property. The good news is that it sounds like you bought it right so all in all you’ll probably have a decent ROI once you sell it and you learned a ton from your first experience. So congratulations, we’ll done!

We own a couple condos and the HOA makes them super easy to maintain (especially with heat and hot water included) however the HOA fee is a killer on the cashflow. Ours cashflow a little but as tenants turn over we’ve been selling them off. We had 8, we already sold 5, have 1 under agreement, have another one going on mls in June, and then we’ll still have 1 left in Framingham MA with a long term tenant in place. They’re a great, easy, real estate product to ride up appreciation but they leave a lot to be desired in the cashflow department. With the market the way it is we’re taking our wins and cashing in on the low cashflowing properties in the portfolio. We’ll sideline some cash so it’s available when new opportunities pop up.

Andrew Freed · Answer

@Jill Dolnicek - Yes, condos are super hard to make work for long term rentals. I own a condo myself and it only works because I bought it in 2015 in Boston for $222K. HOA increases along with special assessments always occurring really hurt condos numbers. The good news is, at least if well run, the condo association covers a majority of the capex items.

That being said, have you considered AirBnbing it? The numbers might work in that scenario. Just a thought, but if not, I would definitely consider selling it based on those numbers and used it as a lessons learned.

Drew Sygit · Answer

@Jill Dolnicek why did you select a 15-year mortgage?

Are you factoring into your ROI calculations the principal payoff amount?

Appears you may have made a mistake or two rushing into this deal => don't make those mistakes worse by rushing out of it!

Jeremy H. · Answer

Why not just refinance it into a 30 year mortgage?

Re-do your budget with all your income and expenses and see where you sit.

You should be accounting for vacancy, repairs, cap ex, property management etc. It's not unforeseen repairs, you just didn't budget it - 1275 * 10% = 130/mo so call it $1500/year. These "unforeseen" repairs pay for themselves if you budget it. It would've costed you only $1000 but you budgeted $1500 so you'd actually come out better than you expected...

What does your HOA cover? Water? Sewer? Trash? Yard care?

Just looking at the numbers it seems like this would work for a regular 30 year mortgage. Not a homerun per say but a deal I'd look into. Figure it out soon though, the market is changing fast and condos (at least in my area) are the hardest to resale and see the changes in the market first. That said I steer away from condos locally due to the HOA.

Lien Vuong · Answer

It tougher with the mortgage at 15 years at a lower rental rate market for sure. Is there another type of rental you can do such as STR or MTR to find better cash flow. Having bought just last year, I'm not sure if the cost of the sale and admin fees to facilitate a sale would be worthwhile for you to exit the asset just yet.

Theresa Harris · Answer

HOAs will kill your cash flow.  When running numbers condos look good as the prices are lower, but those HOA fees add up.

You have the property now, so think 2-3 years down the road with regular rent increases, where would you be?  I agree with Jonathan that 1 year is not a lot of time to hold it.  You may end up losing money.  I'd wait a year.

With mortgages and low interest rates, always get the longest term you can.

Sell a non-cash flowing property?

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