Negative Cash Flow on Rental Property - Hold or Sell?
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Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
3y@Yun Han you havn't supplied enough information for anyone to give an intelligent answer, only knee-jerk feeling based opinions.
For example, what is the interest rate your locked in at? Is your current cost of $ sub 6%? Your not going to get that going forward.
Are you using depreciation? How much is it?
Have you looked at Cost Segregation and accelerated depreciation? What kind of $ impact does the use of depreciation have on your taxes?
Yeah, you could sell, 1031 into some other "cash-flowing" properties, clear as much as a few hundred per month, but depending on your situation and use or non-use of depreciation, that more cash-flow could COST you thousands per year. Yeah, sometimes -$200mnth results in highest ROI after depreciation.
And what is the area like? Is it flat, ascending, descending? Is there room for growth or is it capped out?
Your taking 1 item, 1 alone, putting on blinders of the 40+ other factors. Decisions made with such tunnel-vision are all but certain to end regrettably.
23 Replies
- Bay area, CA · Member since 2021 · 383 posts · 306 votes3y
If you did put lot of work like you are saying, did that increase the of the house significantly?
If yes, why not sell, 1031 exchange to save tax in gains, and then buy cash flowy turnkeys or airbnbs in Florida!!
That's what I do.
- Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3y
Cash flow should be calculated after estimated vacancy, repairs, and capex reserves. If you are already negative, you are actually probably doing worse than your estimates. If you got rid of PMI, I'm guessing you got an appraisal or refinanced? Did you roll those costs into the loan? Is this your only property? Can you manage yourself and remove the PMC fees? Have you searched for a cheaper insurance carrier? There are lots of ways to cut costs, but being that far in the negative is going to be difficult to make sense, in my opinion. It may also be difficult to sell in the current market. Do you have the current comps? Is the area known to appreciate?
What is the current market rent? If you are well below market, you may need to increase more than 4% (check state laws). Numbers don't lie, and if the numbers don't work, then it's not worth holding, in my opinion. If you can't get at least back to even with accurate and conservative estimates, I would consider going a different route. Cash flow is king, appreciation is a bonus. Just remember, rates are not your friend right now, so if you're looking for a killer deal, you'll have to put in some work and be very creative.Just noticed you said you can't manage yourself, being remote. If you have a great rate, it's in a great area, and you can get close to breaking even, it may be worth it to hold. Other than that, 1031 into another property may be more ideal, imo.
- Investor · DFW, TX · Member since 2022 · 197 posts · 160 votes3y
A harder but definitely more profitable path could be a rent by the room scenario assuming your PM is ok with managing it. You'd also have to wait for the current tenants' lease to expire. Other than that yeah... you may want to sell.
- Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes3y
Usually when one is considering to sell due to negative cash flow, the best advice is to 1031 exchange into a different property that does cash flow. Work with a buyer's broker that knows how to work with 1031 exchanges. Seems simple at first (and is if you have done it 100 times) but stressful. Having someone on your team makes it easier. What markets are you in?
- 3yYun HanMember since 2023 · 17 posts · 9 votesOP
Quote from @Ruchit Patel:
If you did put lot of work like you are saying, did that increase the of the house significantly?
If yes, why not sell, 1031 exchange to save tax in gains, and then buy cash flowy turnkeys or airbnbs in Florida!!
That's what I do.
Yes, value was reappraised to 830k from 650k. So the LTV went from 95% to 71%.
Thanks for the advice on 1031!
- 3yYun HanMember since 2023 · 17 posts · 9 votesOP
Quote from @Troy P.:
Cash flow should be calculated after estimated vacancy, repairs, and capex reserves. If you are already negative, you are actually probably doing worse than your estimates. If you got rid of PMI, I'm guessing you got an appraisal or refinanced? Did you roll those costs into the loan? Is this your only property? Can you manage yourself and remove the PMC fees? Have you searched for a cheaper insurance carrier? There are lots of ways to cut costs, but being that far in the negative is going to be difficult to make sense, in my opinion. It may also be difficult to sell in the current market. Do you have the current comps? Is the area known to appreciate?
What is the current market rent? If you are well below market, you may need to increase more than 4% (check state laws). Numbers don't lie, and if the numbers don't work, then it's not worth holding, in my opinion. If you can't get at least back to even with accurate and conservative estimates, I would consider going a different route. Cash flow is king, appreciation is a bonus. Just remember, rates are not your friend right now, so if you're looking for a killer deal, you'll have to put in some work and be very creative.Just noticed you said you can't manage yourself, being remote. If you have a great rate, it's in a great area, and you can get close to breaking even, it may be worth it to hold. Other than that, 1031 into another property may be more ideal, imo.
It is in a good area imo and the area definitely tends to appreciate. I agree that cashflow is king and I do want to make numbers look right and keep it.
Is there a way to decrease the monthly mortgage? What did you mean by "did you roll those costs into the loan"? I did get an appraisal after improvements and submitted it to the lender which changed LTV from 95% to 71%. The loan amount did not change.
This is one of 2 properties I own so far, and the other one is my primary residence. I will check if I can find cheaper insurance. Do you see any other ways to cut the costs?
- Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes3y
Yun - I would double check your rents to ensure that your rents are matching the market rents in the area. Use zillow, Rentometer, and other sources to make sure you rents are near to where they could be. Beyond insurance I'm not sure how much you can bring down expenses since you already refinanced and the taxes are what they are. To me, this seems to be a good time to think about selling/1031 exchange and invest in an area/property can has a higher chance of cash flow. The value of this property is very high so it's difficult to get a property of this value to cash flow in my opinion - You would likely have a better chance of buying a small multifamily property with the equity and getting the new property to cash flow. Good Luck!
- 3yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
Quote from @Yun Han:
Hey everyone!
I wanted to get some advice about my investment property. So, in 2020, I bought my first house with only 5% down. I put in a lot of work and made some improvements while I lived there for a year, which helped me get rid of the PMI. Now, I've been renting it out for the past 1.5 years, but unfortunately, my monthly cash flow is -$200 when I consider rent, mortgage, and management fees at 6%. And this doesn't even include other possible expenses like vacancies or improvements.
So, what do you think? Should I hold onto the property? If so, any tips on how to generate some positive cash flow? Or would it be better to use this as leverage to invest in something else?
Oh, and by the way, I did raise the rent by 4% last December. Also, I moved to East Coast so managing the property myself is unfortunately not an option.
I would look at the comps see what you can sell it for and 1031 it into something where you are at or somewhere you will cashflow. Your cash out right now will be hard and the refi due to the rates, which will increase your costs per month.
The McKernan Group4.954 Reviews - 3yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Yun Han, With that kind of equity a diversification 1031 exchange would be perfect for you. Sell the one property and use the proceeds (equity) to purchase two replacement properties. Because of the equity you have you will be putting a much larger % down on each. So your cash flow should improve greatly.
One other tip would be to allocate those proceeds so that one of your purchases is made in cash. And use maximum leverage on the second one. This way you have one property that is protected from debt risk and loss if the market down turns. But it also has the most equity. So if you happen to find another attractive property in the future you can access your equity easier with a refinance of that property.
There's some good options for you that will improve your cash flow position.
The 1031 Investor5137 Reviews - Realtor · Los Angeles · Member since 2022 · 56 posts · 32 votes3y
Quote from @Yun Han:
Quote from @Ruchit Patel:
If you did put lot of work like you are saying, did that increase the of the house significantly?
If yes, why not sell, 1031 exchange to save tax in gains, and then buy cash flowy turnkeys or airbnbs in Florida!!
That's what I do.
Yes, value was reappraised to 830k from 650k. So the LTV went from 95% to 71%.
Thanks for the advice on 1031!
Check the appraisal report to make sure that there was nothing missing or no errors on that report
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
Spending $40,000+ in selling costs to save $200/mo in negative cashflow (obviously still producing income and tax savings) doesn’t seem like a great first move.
Unless you’re in such desperate financial straights you can’t afford the $200 why sell unless you think it’s going to start going down in value? Would it change your world if you raised rent $300 and became cashflow positive? I doubt it.
If you don’t think you’ll ever move back you can certainly sell just because it’s not an ideal rental or you have other uses for the money. But a built in $40-$50k selling costs alone with another $30-$40k in taxes if you sell without doing a 1031 seems to make selling a bad idea. If you found a great deal closer to your new home you could do the 1031, but remember California will still want their 10+ % in the future.
- 3yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Yun Han:
Hey everyone!
I wanted to get some advice about my investment property. So, in 2020, I bought my first house with only 5% down. I put in a lot of work and made some improvements while I lived there for a year, which helped me get rid of the PMI. Now, I've been renting it out for the past 1.5 years, but unfortunately, my monthly cash flow is -$200 when I consider rent, mortgage, and management fees at 6%. And this doesn't even include other possible expenses like vacancies or improvements.
So, what do you think? Should I hold onto the property? If so, any tips on how to generate some positive cash flow? Or would it be better to use this as leverage to invest in something else?
Oh, and by the way, I did raise the rent by 4% last December. Also, I moved to East Coast so managing the property myself is unfortunately not an option.
I have been seeing a lot of LA investors face the same issue with Single Family Rental Properties. A lot of the people that are killing it in the rental market are people that bought when prices were extremely low and have a small mortgage payment. Or have no mortgage at all. Look into Multi-family, specifically ones that are vacant.
LuxePrivate Investments LLC 572 Reviews - Investor · Baton Rouge, LA · Member since 2019 · 184 posts · 167 votes3yIf a refinance was required, you would've had the option to roll those costs into the loan, driving up the LTV and therefore your cashflow, but that is not the case.
Quote from @Yun Han:
Quote from @Troy P.:
Cash flow should be calculated after estimated vacancy, repairs, and capex reserves. If you are already negative, you are actually probably doing worse than your estimates. If you got rid of PMI, I'm guessing you got an appraisal or refinanced? Did you roll those costs into the loan? Is this your only property? Can you manage yourself and remove the PMC fees? Have you searched for a cheaper insurance carrier? There are lots of ways to cut costs, but being that far in the negative is going to be difficult to make sense, in my opinion. It may also be difficult to sell in the current market. Do you have the current comps? Is the area known to appreciate?
What is the current market rent? If you are well below market, you may need to increase more than 4% (check state laws). Numbers don't lie, and if the numbers don't work, then it's not worth holding, in my opinion. If you can't get at least back to even with accurate and conservative estimates, I would consider going a different route. Cash flow is king, appreciation is a bonus. Just remember, rates are not your friend right now, so if you're looking for a killer deal, you'll have to put in some work and be very creative.Just noticed you said you can't manage yourself, being remote. If you have a great rate, it's in a great area, and you can get close to breaking even, it may be worth it to hold. Other than that, 1031 into another property may be more ideal, imo.
It is in a good area imo and the area definitely tends to appreciate. I agree that cashflow is king and I do want to make numbers look right and keep it.
Is there a way to decrease the monthly mortgage? What did you mean by "did you roll those costs into the loan"? I did get an appraisal after improvements and submitted it to the lender which changed LTV from 95% to 71%. The loan amount did not change.
This is one of 2 properties I own so far, and the other one is my primary residence. I will check if I can find cheaper insurance. Do you see any other ways to cut the costs?
After seeing the value of the property in question, I have heard it is very difficult to rent a property of this value long-term and make the numbers work. If it's a SFH with plenty of bedrooms, renting per room may be a more profitable route. Another thought is to look at the latest tax assessment. Remember, if an exemption was in place and was removed since this is now an investment, that may have been something overlooked when running the original numbers. Check your assessed value and make sure it is equal or less than the recent appraised value. - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
@Yun Han you havn't supplied enough information for anyone to give an intelligent answer, only knee-jerk feeling based opinions.
For example, what is the interest rate your locked in at? Is your current cost of $ sub 6%? Your not going to get that going forward.
Are you using depreciation? How much is it?
Have you looked at Cost Segregation and accelerated depreciation? What kind of $ impact does the use of depreciation have on your taxes?
Yeah, you could sell, 1031 into some other "cash-flowing" properties, clear as much as a few hundred per month, but depending on your situation and use or non-use of depreciation, that more cash-flow could COST you thousands per year. Yeah, sometimes -$200mnth results in highest ROI after depreciation.
And what is the area like? Is it flat, ascending, descending? Is there room for growth or is it capped out?
Your taking 1 item, 1 alone, putting on blinders of the 40+ other factors. Decisions made with such tunnel-vision are all but certain to end regrettably.
- 3yYun HanMember since 2023 · 17 posts · 9 votesOP
Quote from @Bill B.:
Spending $40,000+ in selling costs to save $200/mo in negative cashflow (obviously still producing income and tax savings) doesn’t seem like a great first move.
Unless you’re in such desperate financial straights you can’t afford the $200 why sell unless you think it’s going to start going down in value? Would it change your world if you raised rent $300 and became cashflow positive? I doubt it.
If you don’t think you’ll ever move back you can certainly sell just because it’s not an ideal rental or you have other uses for the money. But a built in $40-$50k selling costs alone with another $30-$40k in taxes if you sell without doing a 1031 seems to make selling a bad idea. If you found a great deal closer to your new home you could do the 1031, but remember California will still want their 10+ % in the future.
That is a valid point. I had never gone through a selling process and I guess selling cost would still occur even with doing 1031.
- 3yYun HanMember since 2023 · 17 posts · 9 votesOPI apologize for not providing enough information earlier. The loan has an interest rate of 3%, and the property is located on a flat area with a large lot in the R2 zone of LA County, which permits secondary residential units. In terms of tax strategies, I used standard depreciation last year, which amounted to $1500 (not sure if it matters but I received only one month of rental income that year). However, I am eager to learn more about cost segregation and accelerated depreciation, as suggested by your comment.
Quote from @James Hamling:
@Yun Han you havn't supplied enough information for anyone to give an intelligent answer, only knee-jerk feeling based opinions.
For example, what is the interest rate your locked in at? Is your current cost of $ sub 6%? Your not going to get that going forward.
Are you using depreciation? How much is it?
Have you looked at Cost Segregation and accelerated depreciation? What kind of $ impact does the use of depreciation have on your taxes?
Yeah, you could sell, 1031 into some other "cash-flowing" properties, clear as much as a few hundred per month, but depending on your situation and use or non-use of depreciation, that more cash-flow could COST you thousands per year. Yeah, sometimes -$200mnth results in highest ROI after depreciation.
And what is the area like? Is it flat, ascending, descending? Is there room for growth or is it capped out?
Your taking 1 item, 1 alone, putting on blinders of the 40+ other factors. Decisions made with such tunnel-vision are all but certain to end regrettably.
If you have any additional advice based on this information, please let me know. I appreciate your insights and guidance on this topic! - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Yun Han:
I apologize for not providing enough information earlier. The loan has an interest rate of 3%, and the property is located on a flat area with a large lot in the R2 zone of LA County, which permits secondary residential units. In terms of tax strategies, I used standard depreciation last year, which amounted to $1500 (not sure if it matters but I received only one month of rental income that year). However, I am eager to learn more about cost segregation and accelerated depreciation, as suggested by your comment.Quote from @James Hamling:
@Yun Han you havn't supplied enough information for anyone to give an intelligent answer, only knee-jerk feeling based opinions.
For example, what is the interest rate your locked in at? Is your current cost of $ sub 6%? Your not going to get that going forward.
Are you using depreciation? How much is it?
Have you looked at Cost Segregation and accelerated depreciation? What kind of $ impact does the use of depreciation have on your taxes?
Yeah, you could sell, 1031 into some other "cash-flowing" properties, clear as much as a few hundred per month, but depending on your situation and use or non-use of depreciation, that more cash-flow could COST you thousands per year. Yeah, sometimes -$200mnth results in highest ROI after depreciation.
And what is the area like? Is it flat, ascending, descending? Is there room for growth or is it capped out?
Your taking 1 item, 1 alone, putting on blinders of the 40+ other factors. Decisions made with such tunnel-vision are all but certain to end regrettably.
If you have any additional advice based on this information, please let me know. I appreciate your insights and guidance on this topic!Holy-cow Yun, ready to get your mind blown? Check out: https://www.biggerpockets.com/...
On the depreciation side, oh-yeah, you can do a TON more. Depreciation does not depend on tenants paying rent. So that alone, tax strategy is going to make a MASSIVE difference.
Now, knowing your with 3% money costs, AND have value-add with property, your NUTS to sell! I mean, it is CA so that's a giant poo-pile there in my book but again, you'd be nuts to sell, getting hit with all the transaction costs, to just buy something else, again with transaction costs, to try and make a cash-flow. That's just dumb, that's the blunt truth of it.
If you already had that ADU, if you didn't have all the massive depreciation you could be tapping, if that were the case it would be different.
Look, if you want to sell, at least do it smart. Get an ADU on the property. In CA there is so many really cool ADU's one can do, and get it leased THEN sell, because you will get a hell of a lot more ROI that way.
Wow, yeah, THAT's why I say all the info is needed, those details really change the picture big-time.
- Member since 2023 · 46 posts · 29 votes3y
Not sure how aggressive you were with paying down the mortgage while you were in it but with 3 years in you should have put a decent amount into it. Ask your lender if they offer something called a RECAST, they will take your current rate and time left on your loan and re-amortize it giving you a new payment. Just did this on my primary and saved $50 a month two years in. It's not a refinance and they can usually get it done within a month IF they offer it. Might not get you in the green but could reduce your mortgage payment, couple that with a rent increase and the tax and appreciation benefits and you should come closer to your goal. You could also shop around for diff insurance which will be probably be a small difference but all these small changes will compound.
- Realtor · Athens, GA · Member since 2023 · 201 posts · 104 votes3y
I think you have a very good opportunity here to cash out of this house soon and 1031 that cash into a 4plex somewhere near where you live now that will definitely cash flow for you.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I see a lot of replies, but few from So Cal RE Investors. There are subtle unique items and market specific knowledge that they likely are unaware of because this is not their market.
According to Rentometer, the average 3 BR SFH in Los Angeles rent rose 13% last year. If you had raised your rent the average rent amount (instead of 4%), you likely would no longer be cash flow negative (you likely would be cash positive). You are likely at least 9% under market rent. In my market the average SFH rent increased ~$800/month in 2022 (source Core Logic). Rentometer: California Home Rents
Due to Prop 13, your property taxes are already at a significant discount. If you sell you would be losing this discount.
Rates are currently much higher than 3%. You are likely looking at ~6.5%. Selling a low rate property to purchase a high rate property is something I would only do if the high rate property far out performed the low rate property.
Selling and buying has costs. Commissions and closing costs are obvious, but items like getting property ready to sell to get top dollar also has a cost.
It is not real clear to me how long you lived in the property, but if you were to sell you may want to look into whether you could meet the 2 of 5 year occupancy requirement to alleviate the taxes from the gain.
Los Angeles is historically one of the higher appreciation markets. You indicated cash flow is king, but my experience is appreciation is king. In addition, RE appreciation leads to increased cash flow. This results in the higher appreciating markets having superior cash flow for long holds.
I would keep your current property.
Good luck
- CPA · Miami, FL · Member since 2015 · 131 posts · 83 votes3y
I would make sure you are renting at market value...you may be able to raise rents and make up for the negative cash flow (you do need to consider the cost of changing tenants vs keeping current ones).
Even if you are not able to raise the rent, there are different ways to analyze whether a property is worth keeping or selling/exchanging. If I read correctly, you paid only 5% down... so of course your monthly cash flow will be lower than if you paid, say 20-25% down, in which case you would be cash flowing because your mortgage would be lower. I would analyze the deal using operating expenses.
One thing to keep in mind with a 1031 exchange is that you need to move fast and find deals rather quickly. Many investors have regretted doing this because they ended up with a bad deal. I am not against 1031, it is actually a great tax reduction strategy, but it does have it's cons and you need to be aware of them.
Hope this helps,
Ana B. Garcia, CPA, MSA, CTP
- Investor · Vermont and New York · Member since 2023 · 308 posts · 309 votes3y
Quote from @Zane Cress:
I think you have a very good opportunity here to cash out of this house soon and 1031 that cash into a 4plex somewhere near where you live now that will definitely cash flow for you.
Ignore my previous comment. This is valid advice given he lives out of CA now
- Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes3y
You could sell, but unfortunately agent commissions and other fees might cut your $200K of equity nearly in half when all said and done. An alternative option which I'm surprised nobody has mentioned here, get a HELOC on the property and use that to start BRRRR'ing properties in a lower cost market where you are now on the East Coast. Plus you're likely only 1 or 2 more rent increases away from having sustainable positive cash flow.
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