Should I sell a negative cash flow rental?

Question

Hi All,

I have a 1 bedroom 1 bath condo that I bought late December 2004 for $205k in San Diego.  I took out a zero down 80/20 loan.  The 80% was a 5-1 ARM and the 20% a HELOC.

I lived in the property for 5.5 years and upgraded to larger home.  I have been renting it since middle of 2009 and have been paying $150 - $200 out of pocket to cover all expenses.  At one point during the crash, the property value dropped all the way down to $70k.   I can now sell it for $180k.

I owe about $140k and because rates have been low, my rate on the primary mortgage has been lower than 3% for years.  The question is, should I cut my losses and sell now?  I have come across some cash and is able to pay off the whole thing but I am not sure if that is a wise decision.  The property rents in the $1000 -$1100 range.  While it is close to a college, I don't see the area changing drastically to become more desirable.

Any thoughts you guys have is greatly appreciated.

Dan H. · Answer

How I analyze this is whether I would consider buying this property as an investment and it is not even close to something that I would consider purchasing. There will be cost associated in selling it but being a landlord requires effort/time. You have been exerting that effort/time and paying cash to do so. IMO this is a no-brainer. After selling costs you will end up with a little cash (maybe $20K to $25k) that can be invested in something that does not require you to work and costing you money at the same time. It will be too little cash for a decent down payment on a good investment property but it can make a nice investment into a nice index fund or other investment option.

I also believe that the appreciation in San Diego has slowed compared to the last 5 years. I think there will continue to be modest appreciation but even if it is appreciating enough to cover the negative cash flow you need to compare that against what the money could return elsewhere.

I would sell it and invest the cash in something else.

Good luck.

I also believe that the appreciation in San Diego has slowed compared to the last 5 years.  I think there will continue to be modest appreciation but even if it is appreciating enough to cover the negative cash flow you need to compare that against what the money could return elsewhere.

I would sell it and invest the cash in something else.

Good luck.

Degmo Bedada · Answer

Account Closed  The condo is located in Collge Grove.  Zip code 92115.  SDSU is 4 miles away.  All the comps in the area for a 1 bedroom is in that price range.  By the way, it is 625sq ft.

Thomas S. · Answer

I don't see any reason to keep it at all. There are plenty of suggestions as to how you could improve your situation but none make the property really worth investing in. It's sort of like the theory if you have lemons make lemonade but the question is WHY. It is an investment that is not worth investing in. Your wasting time trying to fill a money pit.

Sell, Sell, Sell.

Kevin Fox · Answer

Hey @Degmo Bedada

If you're cash flow negative, I think that $40k equity could possibly be better served elsewhere.

I'd be happy to discuss your options and review the numbers for each.

I'll shoot you a PM now!

Andrew Syrios · Answer

I don't see much reason to hold $40,000 of equity in that property if it's going to cost you each month. Unless there's som reason to think the area's about to take off I would probably recommend selling it.

Kevin Wells · Answer

You cou very slight profit of you refiancex but unlikely the monthly cash flow will be worth the effort in the next few years.  I haven't been to college grove in a few years but it was looking like it was going to be the next hot neighborhood anytime soon.  I would dump the property and find something else 40k (if I understand you will only net 40k off the sale minus expenses) won't get you far in San Diego but if you look Midwest you have a full down payment with better cash flow.

Luke Schrotberger · Answer

Hi @Degmo Bedada

When evaluating the refi be sure to take into account all factors of that option.  My estimate is that your current loan payment (just principal and interest) is in the $680-700 range each month. Based on your numbers you need that to be down around $500 to break even because tax and insurance will remain constant.  If you re-fi, you will be looking at rates based on an investment property which will likely be around 4%. To get a $500 P&I amount your loan would have to be about $105,000 for a 30 year loan.  That would reset your loan and you would be paying $75,000 in interest over the life of the loan vs. the $31k ish that you probably have left on your current loan.  The basic math is that if you stay on the current path you would pay an extra $2k out of pocket for 20 years or $40k then own it free and clear. OR Pay an additional $40k of interest over 30 years and lose the 10 years of free and clear ownership.  I personally don't like that trade off.

Another option would be to get a $75k loan for 15 years to get a payment in the $500 range. Then you have to bring $65k out of pocket. If you can't find a better investment then that might be a good idea.

Also, I have a rental condo in Dallas in a similar situation as yours. $140k loan on $200k property. Bought in 2007 and I pull about $400 out of my pocket each month to cover HOA. I've realized that even after I pay off the loan and own free and clear, I will have $500 in free cash from the property. I've decided that I can find investments with a better return so I'm planning to sell the condo in November when the next lease is up and reploy the cash.

James K. · Answer

@Paul Spradling , @Degmo Bedada, You are right. 1/1 in that zip are in that price range for both rents and sales. It seems like you are not that far off from making it cash flow. so I would see if you can lower your month mortgage and raise your rents.

Brent Coombs · Answer

@Degmo Bedada, if properties there were losing 2/3 of their value just 8 years ago, it COULD happen again! So, you lived in an overpriced condo for quite a few years because you could, and you've been able to ride out the worst of the bank-inflicted crunch days. Lived, and learned!

On the face of it, the time to sell is: NOW! (But, I have not looked any deeper).

Next time, how about waiting until AFTER the prices drop again?

And/or, I always also suggest: aim to find ones that you can get cheaper than market! Cheers...

Should I sell a negative cash flow rental?

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