Rent doesnt make mortgage in california, should i sell or hold?

Question

Hi, im in San Diego California I have 2 properties one property that rents for $280 less than my mortgage and the other that rents for $800 less than my mortgage. Both have a pmi i could wash away probably in a year. I see in california the equity each year is a good amount PROPERTY 1 gained $23k in equity and property 2 gained about $30k all in 1 year so my question is is it a smart thing to hold and pay the little differences in rent vs. mortgage and bank on the equity 15 years down the road? Or should i wipe my hands clean with them and take a loss of about $30k in closing cost from purchasing about a year ago and get $70k net cash after all is said and done . My family member has become sick and we have to relocate to help them and this is kind of the situation im stuck any experience, recommendation or opinion is greatly appreciated thank you so much.

Twana Rasoul · Answer

@John Simerson Sorry to hear about your family's situation...I wish you luck with that.  As far as the homes that is quite a negative amount but you purchased them with low money down option and since you are saying PMI it sounds like they are conventional options unless you meant MIP which is for fha loans.

Some questions/thoughts to consider

1) How much is your mortgage insurance and how much will it help you in a year once you get rid or mortgage insurance and hopefully raise rent as well.

2) What part of San Diego is it in? It makes a difference, are you $1,000/Month negative cashflow in lakeside or a few block from the beach in PB?

3) Can you sustain the negative amounts? if so, how long?

4) The market for single family homes has been insane however, so its definitely not a horrible time to sell.  A lot of buyers out there right now and not many sellers.

Best of luck with the family

Cassi Justiz · Answer

I personally don't think that you should have to pay monthly to have an investment property. If you lost your ability to float the additional expenses of your investment properties, what would your backup plan be?

I would go ahead and sell both, take the 70k net and re-invest into a lower cost of living area where positive cashflow actually exists. Plus, there can be some tax advantages to loosing money in real estate. Obviously that's not ever the goal, but it helps take away some of the sting.

I would sell both now while the market is still hot, because if the real estate market dips you'll be out even more than your monthly holding costs.

Maxwell Ventura · Answer

@John Simerson

@Joshua J Cawthorn made some great points up there.

Question: In what city/neighborhood are your properties located? San Diego buy and hold investments are about value adds and long term appreciation.

Depending on how dire your situation is, you'll have to decide whether you need to sell or not. If you're considering a 1031 exchange I have an accommodator I can refer to you.

If you decide you need to sell, here's one positive take away: This is a great market to be a seller w/ inventory as low as it is across the county + the low interest rates.

Joshua J Cawthorn · Answer

Hi John. The way I see it, you have three options:

1. Find value add. Can you rehab? Add a bedroom, bathroom, or some impressive curb appeal/yard improvements? What can you do to make your house(s) match the high end of the comps in your area? You could force market appreciation that way and then refinance.

2. You could sell the properties. Either pay the taxes on the gains or 1031 exchange into another property (in either of those cases, you'll want to consult a CPA or 1031 professional to discuss strategies). That would be a way to offload these properties entirely and then rid yourself of their burden and/or try to find a more lucrative investment. It's possible here in San Diego!

3. Do nothing, keep funding the monthly losses, and wait for the natural market appreciation that california is famous for. While I do believe that strategy will EVENTUALLY pay off, you're looking at a solid 5-10 years before those puppies appreciate enough in value to make some money on them- most notably with the inevitable real estate correction in response to our current economic client. This is my least favorite option.

Good luck and keep us all updated! The data makes us all stronger and wiser!

Matthew Perry · Answer

@John Simerson I would hold for a year and see if they could cash flow after refinancing. Especially if you haven’t held the property for at least two years because you wouldn’t want to sell without getting capital Gains.

John Simerson · Answer

Thats what me and my wife decided on this morning, keeping our small condo and selling the larger home as our value has went up a bit in the past couple days hoping to come close to breaking even. cut our loses and move on. As for san diego has anyone purchased a property in a decent neighborhood for $100k? San diego feels so tough to amke numbers work but id hope our next home i can get below retail and build it into our home to be home any help and suggestions is greatly appreciated

D Turner · Answer

@John Simerson

Possible Solution:

Refi the property with the 200 neg cash flow and get rid of that pmi.  That will clear the property of a negative cash flow.

Sell the second.  800x12=9600

Plus improvement, rent loss, etc.  Or refi to bring the cost down to break even.

Karen Schimpf · Answer

@John Cicilioni You are assuming that the values are going to continue to rise if you hold the real estate.  Prior to 2008 many investors were buying properties assuming the values would continue to go up on nonperforming properties. As you know, many people ended up in foreclosure. The banks are using 2008 as a template on how to handle the lending landscape of today. I recommend you work from the lending institutions worst-case scenario. Currently, banks are kicking the can down the road on foreclosures. Once we have a gluttony of foreclosures on the market, the value on your property has a probability of going down, unless your end game is to hold the property for another 5 or more years. As an investor sometimes you take what you can and( do not look back) move on to the next project.  In my opinion, the market is hot right now so I would take advantage of you being able to sell the property.

Kelsey T. · Answer

@John Simerson what will your cash flow look like after your PMI is gone? I don't know much about the specific area, but San Diego has the potential for some serious appreciation. I would be tempted to hold onto them if you can. It's also going to depend on your strategy. If you are looking to scale quickly or make money now on your real estate, you should probably sell. If you are doing real estate investing on the side with enough cash coming in to take the hit and enough in reserves, it could make sense for a buy and hold investor. California appreciation is pretty unique!

John S. · Answer

I'm sorry to hear about your circumstances. That definitely adds a layer of stress to the decision making process. I think the first thing you need to determine is how long you can absorb the cash flow deficit and maintain adequate reserves. You only mentioned the difference between the rent and mortgage, so keep in mind that any other expenses/vacancies will require additional cash, and potentially a lot of it. If the answer to that question is that you can hold indefinitely, I'd recommend using a metric like IRR to take the emotion out of your decision and look at what you forecast your ROI to be if you exit after 10 or 15 years. If that number is high enough to justify the investment, you hold. If not, you don't. Use conservative assumptions and see what it looks like in different scenarios, with different value adds, etc.

If you're not able to hold the property indefinitely, I'd recommend selling now. As some people have mentioned, it's not an awful time to sell. It may very well get worse before it gets better, so the worst case scenario could be that you run out of cash in a year or two and get forced to sell into a worse market than the one we're in today.

Rent doesnt make mortgage in california, should i sell or hold?

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