Negative Cash Flow Property - Hold or Sell?

Question

So, a couple years ago I bought a condo in downtown San Diego that we planned to live in as out primary home for at least 5 years. Fast forward a couple years, and I've bought a SFR in San Diego and am renting out the condo. Unfortunately, I've got a pretty hefty negative cash flow on that property. However, San Diego tends to be a great market for appreciation so I wonder if I should just keep holding it for the long term. I own one other property in San Diego that has had great appreciation and does cash flow. I am torn between being patient and dumping this place. If I sold at this point, I would likely (hopefully) break even and be able to pull out my original down payment after fees. I have been looking to do some OOS investing, and while I do have cash for this, the extra cash could be helpful.

But my ultimate goal in real estate is to own great properties that both cash flow decently and have some appreciation.

For someone looking to get started in OOS investing in a more affordable area, what would you recommend? Keep in mind I don't need the money from this condo to fund my OOS investing. I also have a well paying job that enables me to easily cover the negative cash flow and still sock away more money for future investments.

Thanks for any insight!

But my ultimate goal in real estate is to own great properties that both cash flow decently and have some appreciation.

For someone looking to get started in OOS investing in a more affordable area, what would you recommend? Keep in mind I don't need the money from this condo to fund my OOS investing. I also have a well paying job that enables me to easily cover the negative cash flow and still sock away more money for future investments.

Thanks for any insight!

Cody L. · Answer

What exactly is 'hefty'?  What type of interst payment do you have?

To be honest, if I liked the property, and I wasn't negative by much (and the amount was mostly due to principle reduction which isn't really a 'cost' in the way interest is) I might just keep it.  At least until / unless you find something that requires you to access that equity you have (I assume you have equity -- if even from your down payment)

So I say hold, as long as the negative isn't too great and doesn't impact your lifestyle.  But if/when the time comes that you need $ to buy something that cash flows, dump it.

Alexander Zurn · Answer

Hi @Danielle Wolter - I am listening to @Brandon Turner's book again and thought it would be good to got down the 4 benefits of REI that he mentions:

1. Cash Flow

2. Debt Paydown

3. Appreciation

4. Tax Incentives

I believe he says having 2 OR 3 of the 4 is a good investment. So while you're losing the cash flow on this property, are you still achieving these other benefits? Appreciation may be slowing down in San Diego (?) - you'd know better than me but I still see tax incentives and debt paydown.

Looks like your on the path towards keeping it but just wanted to offer some additional food for thought.

Wei Hu · Answer

@Danielle Wolter I would hold it TBH. Real estate is not purely a numbers’ game and there are a lot of trouble owning OOS properties which will eat up all your time(you make good money at work so you know how much your time is worth). Also you mentioned you already have money for your next OOS property so I won’t considering selling this property until you have good success in OOS investing and then need money to scale. Also as someone mentioned earlier there are equity pay down so you are not REALLY losing money.

Matt R. · Answer

SD is the crown jewel of US cities and negative 12k cash is a bummer. I see investors buy these but they put a sh#$ ton down so it's positive. What might happen is looking back, is many ask themselves why did I sell that as now it doubled in rent and value ( years later). Whatever fits best for you fiscally speaking is understandable. Good luck!

Brian Sparr · Answer

Hi @Danielle Wolter -

I see this same situation in the SF Bay Area all the time ... here's the process that I would use to help think through this:

Since I don't know your exact situation, I'll make up some numbers that may or may not be close to what you're dealing with ... my guess, though, is that they'll be in the ballpark:

- let's say you bought for $500k ... the PI on your loan might be around $2100/mo- condo in downtown SD ... you might have a $450/mo HOA fee- prop tax ... in the range of $525/mo- insurance ... maybe another $75/mo- sub total: $3150/mo (and I'm excluding repairs, prop mgmt, etc)- potential rent: $2400/mo- cash flow: -$750/mo ... -$9k/yr

You're looking for appreciation, so let's say you hold the property for the next 10 years ... you could be $90k in the hole from negative cash flow at that point (I know that's unrealistic, but this is just an example :).  If that were to happen, you'd need your property to appreciate 18% just to break even. While SD might experience massive appreciation, your wallet won't see it.

Now, compare that to another growth market like the Raleigh metro ... that same original $500k can be split into 2 townhouses that will kick off $400-500/mo in positive cash flow ... use a portion of the $90k that you were going to sink into the negative SD condo and pick up a third unit.  Your total property value goes from $500k in SD to $750k in Raleigh - plus, you're looking at $600-750/mo in positive cashflow.  Even if Raleigh appreciates at half the rate as SD, your total return is going to still be superior.

The kicker to this example ... you're making good money in CA - you're paying a minimum of 9.3% in state income tax, maybe more ... in NC, you'll have a flat income tax at 5.25%.  So, even if the the SD property was generating the exact same positive cash flow as the Raleigh one, you'd be seeing 4.05% less of it.

Hope this helps...

Danielle Wolter · Answer

@Theresa Harris Thanks for the input!

@Cody L. I'm paying almost $1K into it each month...$12K/year. I do really like the property, and with the growth and improvements being made to the downtown area I see a lot of opportunity for appreciation. Thanks for the input!

@Brian Sparr Your numbers are pretty close. I'm negative almost $1K/month. I totally see what you're saying. There is also the chance that I won't get the appreciation I'm hoping for, and then I'd really be stuck. While it's great to own property in San Diego, I may just have to cut my losses and look elsewhere. Thanks so much for your help!

Cody L. · Answer

Sometimes a good thought experiment is this:  If you didn't own it, and this property came up for sale at the same price you could sell it for now, would you buy it?  I find most people that will hold onto a property worth $x, wouldn't be willing to buy that property for $x

So I say "okay, pretend you drank to much, and in a drunken stooper, you sold the property to someone at it's fair market price.  The next morning, when you realized what you did, would you go to them and try to convince them to sell it back to you?"

If both are "no", then sell it.   Being a holder of a property worth $x == being a buyer of that property at $x

Robert Comstock · Answer

I dont suppose a refi would help with your monthly exp?

Danielle Wolter · Answer

All great points @Wei Hu Thanks!

Danielle Wolter · Answer

@Alexander Zurn Thanks so much! I do have 3 out of the 4. Appreciation has slowed down a little in San Diego, but I'm also in the game for the long term. Plus, I expect appreciation to speed up in this part of the city in the next few years. Good food for thought!

Negative Cash Flow Property - Hold or Sell?

Most Popular Reply