OK to Keep Negative Cash Flow Rental?

Question

I converted my homestead condo in Uptown Dallas to a rental property 2 years ago when I married and moved, and I am hoping some experienced - and objective - investors can advise me about whether to sell or continue to hold it. Here are the numbers:

Paid $145K in 2006 and I could sell for $180K today (I owe $90K). If I sell by year end I can still treat it as a homestead and avoid any cap gain tax because I've lived there 2 out of the last 5 years.

I am 4.5 years into a 15 year mortgage at 3.0%. Current cash flow is negative $110 a month, not including vacancies or maintenance (which are very low as the unit is in a very popular area, HVAC and hot water heater are new, and the HOA maintains the exterior). However, the mortgage is ticking down at nearly $600 a month, so holding it positively impacts my net worth.

I know negative cash flow is never ideal for a rental, but I also love how low maintenance this unit is. It was built in 1999 so building is in good condition and has a stable HOA. I can also see myself moving back into it one day if I ever get divorced or if my husband pre-deceases me - or if we run into hard times or want to save a ton of money fast we could squeeze in there together.

If I sold I would probably use the proceeds to pay off another rental mortgage I have that is at 5%. Theoretically I could reinvest into other rentals, but the market is pretty frothy - and competitive - and it seems silly to sell a predicable easy rental just to bet on another that has also run way up in value over the last decade, even if the cash flow *could* be better. Any thoughts??

Linda Weygant · Answer

Couldn't have said it better myself. If you're unable to utilize the passive losses now due to income limitations, this is actually a perfect scenario.

Those passive losses will accumulate until your income either dips below the limitation or you sell the condo. At that point, if you have huge capital gains on the actual transaction, all of those accumulated passive losses will then be deductible all in the year of the sale and may offset your tax position quite nicely.

It's all in the math, obviously, but this does not seem like a terrible situation to be in.

Oren K. · Answer

Elizabeth - All good points above but while it is usually the math that drives most decisions, in the situation you outlined, it seems to me that there are more personal considerations that color the final decision.

From what you have said, the $100 / M is not really the issue and having this particular unit gives you some peace of mind regarding various future possibilities. Think of it as an insurance policy that lets you sleep better at night.... Cheap at twice the price.

Squeeze what you can in November when the lease matures. Who knows, maybe you can get an extra $75 or even the full $100 and have the unit break even in 6 months. Then next year, with another increase, it will have a growing positive cash flow.

Good luck.

Elizabeth Grahsl · Answer

Thanks for the responses! @Patrick Smith the cash flow is low because of relatively high HOA dues (24 hour concierge and a pool bump that up) and the fact that I have it on a 15 year note. But condos here are tough to cash flow at least at optimal rental cap rates from my experience due to relatively higher HOA dues and property taxes and the fact that rents are compressed due to a boom in new apartment buildings.

It would cash flow on a 30 year but I don't want to refinance again. The costs are prohibitive on such a small mortgage, and cash flow isn't an issue for me. I have 9 other rental units that cash flow or breakeven and also could easily service the rental debt from my day job salary if I had to.

Here are the details though:

Rent - $1400 (probably can increase to $1450 when the lease matures in Nov)

HOA - $339/mo (don't expect this to go up anytime soon)

Property taxes - $3800 a year (might tick up next year with values but only slightly)

Insurance (walls in and liability) - $550 a year

Mortgage - $808 a month (nearly $600 of which goes to principal)

@Linda Weygant Yes we make too much to deduct any passive losses currently. But this loss offsets gains on a couple of other investments as well. And honestly I don't really ever want to sell. I bought it to live in but also to keep as a long term rental from day one. I may not buy this as a rental today, but I don't think that means I should automatically sell, primarily due to the transaction costs of getting out of it and into another.

@Jay Hinrichs Yes I agree, the tax savings aren't great enough to tip the scales toward selling, particularly since I don't necessarily plan to sell in the foreseeable future.

Thanks all!

Jay Hinrichs · Answer

@Elizabeth Grahsl your tax savings are not that great 180k minus selling cost ( assuming 7%) net you about 168 to 165.. your in it 145 plus any improvements so you have a 20k gain.. with no state income tax there maybe 4k savings on using your owner occ ...

I kind of see it like Russell.. quick pay down low rate locked rate etc etc.. I would keep it 100 a month is really not much to keep this and keep paying down your mortgage only way I would sell it at this stage is if you really need the 15 to 20k you would net out of it.. or if you think values would crater .. but seem pretty stable to me.. and in 10 years its paid for and you have a 180 to 200k assets that you only paid out of pocket 110 X 120 13,200.. and your down stroke when you bough it if any. and if you may move back well then again your locked into 3% money.. If it was me I would keep it... plus you it sounds like you can self manage so you save a ton not having PM

Patrick Smith · Answer

Hi Elizabeth. Your post caught my eye because I'm thinking of buying one or 2 condos in Dallas, as homestead and /or rental, so I'm interested in others' experience. My first question is why is cash flow so low? Could you break down the numbers? Any way to raise rent or lower expenses? Refi to spread the payments out some? I suppose it really depends on what you want out of it. Even if you could break even, it may be worth it due to increasing equity and depreciation. Maybe a good CPA could help you figure out a way. From what I hear, this crazy market has another year or 2 in it, so if you can wait it out before cashing out maybe you can take advantage when it corrects...

Russell Brazil · Answer

It may be negative cash flow...but thats primarily because you are on a 15 year note. You are already a third of the way to ending the mortgage. If $110 a month is not really a big deal to you, and you dont really have anything better to do with the cash...I might consider holding onto another 10 years till it is paid off. But if $110 a month is a large sum of money to you, then it might be worth it to consider selling, especially with little tax consequences now.

OK to Keep Negative Cash Flow Rental?

OK to Keep Negative Cash Flow Rental?

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