Do you keep or reinvest a property that's not quite cash flowing?

[Tori Trent]

My husband and I bought a 3 bed 2 bath house in southern Utah during 2021 with a 2.99 interested rate. We fixed it up and rented it out when we moved to northern Utah. We are charging $1700/month but the property performs within -$100-200 with all the expenses depending on the month. My property manager says that we are already getting the best rates for our area.

However, the property has appreciated over $100,000 in the short time we've owned it. I've been listening to the bigger pockets podcasts and I remember David Greene saying a few times that depending on your situation, if you can hang onto an appreciating asset even if it isn't quite cash flowing that it is sometimes a good move because appreciation builds wealth long-term and eventually rental rates will go up. (One example is episode 534)

We can afford to pay the difference to hold onto the property for appreciation but it seems like maybe there is better ways to use our money so that it both cash flows and appreciates. 

I'd love to hear what more experienced investors, like yourselves, would do in our situation. 

Here are some ideas that we've considered.

1. Keep it, benefit from appreciation and eventually use it for a HELOC for future investments

2. Turn it into a mid-term rental (our research suggested it would not be worth it for this particular property in our area and short term renting isn't allowed)

3. Sell it and reinvest it in a house hack where we currently live (we are currently renting from a relative below the market rental rates but home prices are very expensive where we live. We can save and buy a house hack without the money from the sale but it could help.)

4. Rent until tenants move out then sell it and reinvest long distance. We've read the long distance real estate book and would like to do it in our near future. 

5. Sell it and reinvest in a more medium-term-rental-friendly property in the area. We've also read the medium-term rental book and like this strategy.

What ideas have I missed or is there something I'm over looking? Thank you so much for your help!

[Bill B.]

If you lived there 24 months before making it an entail I’d sell and take the $100k tax free. It will take that property years just to make the $20k in taxes that you’ll owe if you keep it. 

If you lived in it less than 24 months go ahead and keep it. You will not retire or grow rich off cash flow, it will be the appreciation and eventually the loan payoff.  Pretend you magically raised rents $100 (like next year.). Is it suddenly a great rental instead of a bad one? No, it’s  exactly the same rental just one year from now. 

[Jesse Poll]

It could be tough is trying to get into a cashflowing property with todays interest rates. House hacking may be a great idea but you may find the same difficulty on the other side because of the cost of the money today. 

Also Bill Barndt had an exellent point. If you lived there for at leat 2 year you can sell it as a primary residnence. If not and I could carry the cost then I would also keep it. The tax benefit could far outweigh the cost. 

What part of Southern Utah is your rental located?

[Theresa Harris]

Bill's point is dead on for tax purposes.  If it was bought as a rental and you've never lived there, with a 3% interest rate and close to cash flowing with a PM, I'd hold it.  Rents go up over time and you are unlikely to get interest rates that good for a long time.

with the current interest rates, it would be a lot harder to find a place that cash flows and long distance rentals are not always good.

[Tori Trent]

We have lived there for over 2 years so we would qualify for the tax benefit. 

Current interest rates are a factor that we are taking into consideration but if a deal makes sense with the current interest rates, we don't have a problem reinvesting. 

We are looking into buying with creative options such as using a wholesaler, putting more money down, and house hacking. We have 3 kids so we would want a bigger home and privacy (not the rent by the room strategy). Our house hack would likely not cover the full monthly payment which we are fine with. However, we want it to at least break even when we move out and rent out all the units. 

[Max Bradshaw]

@Tori Trent, I think @Bill B., @Jesse Poll, and @Theresa Harris all have great points. I was in a similar situation last year. Purchased a rental in 2019 as an investment in Salt Lake City. I was barely covering expenses and many months lost $100-$200. However, I had over $200K in equity, and took the advice of David Greene and took a long hard look at my return on equity. I decided to sell in early 2023 and use the equity to buy a short-term rental in Southern Utah. Went from a mid 4% rate to a 7.8% rate, but my cashflow is significantly greater. I'm glad I did. I was also able to reduce the tax on the sale to virtually nothing because I immediately ran a cost seg on the new purchase. All without a 1031 exchange, because I wanted to hang onto some of the proceeds from the sale to purchase furniture for my new short term rental. 

If you're now in Salt Lake City (or surrounding area), a house hack may not be the worst option, because you'll get favorable terms and require less down. Possibly allowing you to live there for 1-2 years, hold onto some of that equity from the sale, then do it again.

[Adam Bartomeo]

There are some good questions and points here. As you have seemed to figure out in your intro... It Depends... 

Let me ask you, how many NEGATIVE cash flowing properties can you afford before you cannot have anymore? You are limited.

How many POSITVE cash flowing properties can you afford before you cannot have anymore? It is infinite.

It really depends on your situation, what you are trying to accomplish, how long it will take before it positive cash flows, and how much it will be worth when you sell. I don't like when people say things like "rents will go up". Although, this is normally true, but what else will go up? Taxes, insurance, maintenance costs, etc. 

In my opinion, having a negative cash flowing property isn't always the worst thing to have depending on the situation but you do not want to have many of them.

[Rick Pozos]

I guess I am the contrarian. I would hold it. If it breaks even, makes a little, costs a little, whatever, hold it. You will never have that low of an interest rate. You WILL make more money in the next year or two. Time will bring rents up.

Real Estate is not a 3 year game. It is a 20 or 30 year game. This is your retirement. It is like worrying that your stock portfolio only grew by 1% or lost 5% and now you want to cash it out. 

[Marcus Auerbach]

Exactly. Hold it. Wealth is created in decades, not in 2 years. I regret almost every property I have sold early on, except the ones in rougher areas - I am glad I traded up.

Your next move should be a house hack with 5% down. You have a good thing there, keep it going, in 2 years you will break even, eventually it will cash flow.

[Steve Vaughan]

Keep it.  $100k long-term cap gain minus selling costs isn't enough tax for most to sweat missing the 121 exclusion. 

Do keep an eye on your PM, though.  Their real costs are in the fill fees and high costs of repairs and maintenance. 

[Michael Smythe]

This happens all the time with Class A rentals and high-priced properties in general.

It often takes 3-5 years before rents increase enough to cover your PITI.

[Jacopo Iasiello]

Hi Tori, Selling the property could trigger capital gains taxes, especially considering the significant appreciation. Consult with a tax advisor to understand the tax consequences of selling versus holding onto the property.

[Alex Olson]

@Tori Trent General rule of them is that if you don't like it, sell it. If you like it and it breaks even, then you need to decide if you can make more. The interest rate is temporary. Many investors refinance every 5 years anyway to take cash out or make improvements. Hope that helps!

[Carlos Ptriawan]

Quote from @Tori Trent:

My husband and I bought a 3 bed 2 bath house in southern Utah during 2021 with a 2.99 interested rate. We fixed it up and rented it out when we moved to northern Utah. We are charging $1700/month but the property performs within -$100-200 with all the expenses depending on the month. My property manager says that we are already getting the best rates for our area.

However, the property has appreciated over $100,000 in the short time we've owned it. I've been listening to the bigger pockets podcasts and I remember David Greene saying a few times that depending on your situation, if you can hang onto an appreciating asset even if it isn't quite cash flowing that it is sometimes a good move because appreciation builds wealth long-term and eventually rental rates will go up. (One example is episode 534)

We can afford to pay the difference to hold onto the property for appreciation but it seems like maybe there is better ways to use our money so that it both cash flows and appreciates. 

I'd love to hear what more experienced investors, like yourselves, would do in our situation. 

Here are some ideas that we've considered.

1. Keep it, benefit from appreciation and eventually use it for a HELOC for future investments

2. Turn it into a mid-term rental (our research suggested it would not be worth it for this particular property in our area and short term renting isn't allowed)

3. Sell it and reinvest it in a house hack where we currently live (we are currently renting from a relative below the market rental rates but home prices are very expensive where we live. We can save and buy a house hack without the money from the sale but it could help.)

4. Rent until tenants move out then sell it and reinvest long distance. We've read the long distance real estate book and would like to do it in our near future. 

5. Sell it and reinvest in a more medium-term-rental-friendly property in the area. We've also read the medium-term rental book and like this strategy.

What ideas have I missed or is there something I'm over looking? Thank you so much for your help!

 if future appreciation is flat or less than inflation (3%) i would sell especially since you already have appreciation. 

[Tori Trent]

Quote from @Bill B.:

If you lived there 24 months before making it an entail I’d sell and take the $100k tax free. It will take that property years just to make the $20k in taxes that you’ll owe if you keep it. 

If you lived in it less than 24 months go ahead and keep it. You will not retire or grow rich off cash flow, it will be the appreciation and eventually the loan payoff.  Pretend you magically raised rents $100 (like next year.). Is it suddenly a great rental instead of a bad one? No, it’s  exactly the same rental just one year from now. 

 We have lived there for at least 24 months. If we were to sell, where would you reinvest the $100k? We are thinking of doing a house hack in SLC but we can do that without the $100K. 

[Tori Trent]

Quote from @Theresa Harris:

Bill's point is dead on for tax purposes.  If it was bought as a rental and you've never lived there, with a 3% interest rate and close to cash flowing with a PM, I'd hold it.  Rents go up over time and you are unlikely to get interest rates that good for a long time.

with the current interest rates, it would be a lot harder to find a place that cash flows and long distance rentals are not always good.

We have lived there for over 2 years before it was a rental. It's only been a rental for about 5 months.  Would you still recommend keeping it or would it be better to sell?

[Basit Siddiqi]

There are two types of returns on a real estate property - cash flow and appreciation.

What is your expected rate of return on a property(5%, 8%, 10%?)
It appears that maybe the cash-flow is 0% or 1-2% but your appreciation is 10%+

I would keep the property until you feel the area can no longer appreciate or give you cash-flow.

[Theresa Harris]

Quote from @Tori Trent:

Quote from @Theresa Harris:

Bill's point is dead on for tax purposes.  If it was bought as a rental and you've never lived there, with a 3% interest rate and close to cash flowing with a PM, I'd hold it.  Rents go up over time and you are unlikely to get interest rates that good for a long time.

with the current interest rates, it would be a lot harder to find a place that cash flows and long distance rentals are not always good.

We have lived there for over 2 years before it was a rental. It's only been a rental for about 5 months.  Would you still recommend keeping it or would it be better to sell?

If it has appreciated over $100K in the time you've owned it, I would sell it.  You will be taxed differently on the capital gains if it is your primary residence (ie you lived there recently) vs a rental.  The savings in taxes will likely be more than you'd make in rent for a long time and you can use that money to buy a new rental.

[Marcus Auerbach]

Quote from @Theresa Harris:

Quote from @Tori Trent:

Quote from @Theresa Harris:

Bill's point is dead on for tax purposes.  If it was bought as a rental and you've never lived there, with a 3% interest rate and close to cash flowing with a PM, I'd hold it.  Rents go up over time and you are unlikely to get interest rates that good for a long time.

with the current interest rates, it would be a lot harder to find a place that cash flows and long distance rentals are not always good.

We have lived there for over 2 years before it was a rental. It's only been a rental for about 5 months.  Would you still recommend keeping it or would it be better to sell?

If it has appreciated over $100K in the time you've owned it, I would sell it.  You will be taxed differently on the capital gains if it is your primary residence (ie you lived there recently) vs a rental.  The savings in taxes will likely be more than you'd make in rent for a long time and you can use that money to buy a new rental.

She would have to invest in a lower-priced market. Otherwise, if she is buying something in the same town, it is equally expensive. The market you sell in is the market you buy in, unless you have a time machine.

And while she may save 15% long term capital gains tax, it will probably still cost 7% - 8% in selling expenses - real estate commission is the majority, but most people overlook pesky little things like transfer tax, holding cost after tenant has moved out, maybe some repairs etc. Seldom sell. 

You are right it will take forever to make it up in cash flow, but it will probably make it up in equity in 1-2 years. It's basically a marsh mellow test for adults :-)

My recommendation: run it through a BP calculator and let the numbers decide.

[Theresa Harris]

Quote from @Marcus Auerbach:

Quote from @Theresa Harris:

Quote from @Tori Trent:

Quote from @Theresa Harris:

Bill's point is dead on for tax purposes.  If it was bought as a rental and you've never lived there, with a 3% interest rate and close to cash flowing with a PM, I'd hold it.  Rents go up over time and you are unlikely to get interest rates that good for a long time.

with the current interest rates, it would be a lot harder to find a place that cash flows and long distance rentals are not always good.

We have lived there for over 2 years before it was a rental. It's only been a rental for about 5 months.  Would you still recommend keeping it or would it be better to sell?

If it has appreciated over $100K in the time you've owned it, I would sell it.  You will be taxed differently on the capital gains if it is your primary residence (ie you lived there recently) vs a rental.  The savings in taxes will likely be more than you'd make in rent for a long time and you can use that money to buy a new rental.

She would have to invest in a lower-priced market. Otherwise, if she is buying something in the same town, it is equally expensive. The market you sell in is the market you buy in, unless you have a time machine.

And while she may save 15% long term capital gains tax, it will probably still cost 7% - 8% in selling expenses - real estate commission is the majority, but most people overlook pesky little things like transfer tax, holding cost after tenant has moved out, maybe some repairs etc. Seldom sell. 

You are right it will take forever to make it up in cash flow, but it will probably make it up in equity in 1-2 years. It's basically a marsh mellow test for adults :-)

My recommendation: run it through a BP calculator and let the numbers decide.

 She mentioned buying a place closer to where she lives now and using the money as a 40% down payment-so it would be more expensive and she would have a mortgage.

[Leonardo Chandler]

You have several options, and the choice depends on your goals and financial capabilities. Consider holding onto the property for long-term investment and using it as an asset for future investments. Also consider selling and reinvesting in other assets based on market conditions and your goals. Choose a strategy that best suits your needs and financial capabilities.