Keep or Sell?

Question

Cross posting as I cannot edit the post in the other forum

I'm relatively new here and have ventured into real estate investment over the last two years with two single-family homes (SFH). Here's a brief overview of my current situation:

• SFH1Acquisition Price: $1.6MCurrent Market Value: $1.89MLoan Balance: $1.2MInterest Rate: 3.75%Annual Net Cash Flow: -$12K
• Acquisition Price: $1.6M
• Current Market Value: $1.89M
• Loan Balance: $1.2M
• Interest Rate: 3.75%
• Annual Net Cash Flow: -$12K
• SFH2Acquisition Price: $2.15MCurrent Market Value: $2.2MLoan Balance: $1.5MInterest Rate: 7.75% (I'm considering refinancing in the next few years)Annual Net Cash Flow: -$65K
• Acquisition Price: $2.15M
• Current Market Value: $2.2M
• Loan Balance: $1.5M
• Interest Rate: 7.75% (I'm considering refinancing in the next few years)
• Annual Net Cash Flow: -$65K

• Acquisition Price: $1.6M
• Current Market Value: $1.89M
• Loan Balance: $1.2M
• Interest Rate: 3.75%
• Annual Net Cash Flow: -$12K

• Acquisition Price: $2.15M
• Current Market Value: $2.2M
• Loan Balance: $1.5M
• Interest Rate: 7.75% (I'm considering refinancing in the next few years)
• Annual Net Cash Flow: -$65K

Despite being proactive in educating myself through BP forums and real estate literature, I'm beginning to question the sustainability of enduring annual losses from these investments. I'm reaching out for guidance on a few points:

• Long-term Strategy: With the current losses, I'm evaluating whether I should hold onto these properties for the next five years or consider selling them. I'm concerned about the potential costs associated with selling. What factors should I consider in making this decision?
• Upcoming Family Commitment: In two years, I'm planning to purchase a family home for around $1M. Would it be advisable to sell one of the investment properties to finance this, or should I explore using a Home Equity Line of Credit (HELOC)? Are there alternative strategies to leverage my current investments for this purchase?
• Investment Reallocation: Given the negative cash flow from these properties, would it be wise to sell both and reinvest in markets outside of my current state, where positive cash flow is more achievable?

I appreciate any insights or personal experiences you can share. Your advice will be invaluable in helping me navigate these decisions.

Thank you in advance for your support.

Eric Gerakos · Answer

What was your strategy for buying those negative cash flowing properties? Was your goal to lose money?

Christie Gahan · Answer

Be nice.

V.G Jason · Answer

I'm not against negative cash flow, but how far out was the RTP for your initial bids?

It looks like you just bought to buy. You can't sit here and take a property that's bleeding north of $5k/mo in rent.

The mark to market value on these may not exactly be where you have it plus realtor fees to get out of it, so think about that. You might be actually underwater on it.

Without knowing your full situation, if you invested in these high price point areas you can't go in this levered. I get the less leverage aspect makes you more vulnerable to the underlying house price, but the lack of debt gives you the ability to maneuver around that & its likely a high house price point will appreciate more than the average over the long haul but these are just two years in, you got to wait till really year 8 to start trading the equity.

And without knowing your full financial situation, it's hard to give you really practical advice. You're likely way ahead of the normal BPer in your W2 or source of income job to enter these markets, and I understand if you don't want to share. My best advice is the manage the debt better on property #2(as in recast this), evaluate rent appreciation on #1 and depending on income if you do buy a primary-- you better pay cash. There should be very little to no personal debt if you have such high price point leverage on investments.

David M. · Answer

@Jerry Callow

Well, investing in real estate is speculation.  You have no idea which way the value of the property goes.  Of course, the idea is for it to go up, but between now and and when you do sell, it might go down then up..

Since you say that you purchased for the sake of purchasing, probably best to at least sell that second property.  No idea of the prospects of that first property.  That's your call.

You should consider you overall investing strategy and goals.  You need to use invest in the asset class and the associated method with the opportunity.  You can't just invest in something for the sake of investing.  If some of the methods don't work for you, such as as investing out of state, then you need to continue to learn.

As mentioned, the 5% HYSA is just some sort of default answer.  Granted, this is a real estate investing forum.  But, there are plenty of other assets to invest, and many methods, and still achieve a yield better than 5%.  Keep searching and learning.

Hope this helps some.  Happy to chat.  Good luck.

Eric Gerakos · Answer

It was a reasonable question, considering the huge negative cashflow.

Kerry Baird · Answer

@Jerry Callow, I bought a number of cash flow properties in another State, so those houses provide the monthly payment on the mortgage for my FL properties.  The CF houses don’t really appreciate much, and their job is to produce cash flow.   The FL properties appreciate.  I bought them on a barrier island where there is demand and very little supply,  Their job is to appreciate.  The TX + FL  houses’ cash flow propped up a new, expensive STR house while it was growing income as an STR.

In other words, I think you can make it work by strategizing your holdings.

Also want to point out that big losses, year after year, can have the IRS saying our business is just a hobby…businesses are meant to make money every so often.  :D  Also, perhaps you have bonus depreciation or similar write-offs that can enable those to break even or product income.

V.G Jason · Answer

There's no way to answer that without knowing how your entire financial picture looks. $5k/mo to some on here is all they make, $5k/mo for some on here is just a rounding error in net income.

My advice, in general, would not be to sell to get a cash flow positive place only but also to sell & buy into a less cash flow money pit. If San Fran is all you know,  it's all you know. I just wouldn't marry myself to a steep OTM properties because the end goal with them is to make money, so even if appreciation kicks in you're working off $65k/annually to offset first. Just by that logic-- time is not necessarily on your side. Something like $500/mo OTM in San fran is solid, I don't know SF great but let's say SoCal area I would feel comfortable being $1000-$1500 OTM if the house location is excellent-- within 5 years I'm likely net positive on it. $5k/mo, it's going to take a generation to get back up to flat. That's to answer the question directly about the $5k/house, can apply same logic to the -$1.2k/ house. I am not familiar with SF and how things move there, if it's like SoCal $1.2k/mo is not the end of the world if your financial picture can support it.

Everything really points to how you sit, your risk tolerance, and your goals. That's really going to define this all.

Christie Gahan · Answer

I look at things from two perspectives, personal finance and investment.

1.  Personal Finance:  This is a holistic view looking at someone's life.  How steady is your income?  Are you single or do you have others depending on you financially?  Do you have debt?  Do you have an emergency fund?  Have you done your tax planning with a good accountant?  Do you have a spouse or partner that needs to be involved in decisions?  What kind of investment portfolio do you want to have?  Stocks? Bonds? Real Estate? What percentages of each?

2. Investment: I've answered my PF questions and I know I want X risk and X return. I know how much I can invest in each category. Now I am deciding which specific property to buy.  Which market?  What type of property?  Etc.

It is hard to give someone advice if you don't know the answers to the personal finance questions.  A lot of these answers are very personal and should never be shared on a public internet forum.  Do you need long term growth or income?  You could find a great property for income but if you aren't looking for income then it doesn't matter.  You will need a good accountant that loves tax strategy.  Find someone that thinks tax strategy is more fun then Monopoly. Vet them and make sure they share how aggressive a tax strategy is.  ( Aggressive tax strategy can be a red flag to the IRS.)

Assuming you have these pieces down .....   I'm selling at least one property.  With out the locations, I can't say which one.  Why ?  San Francisco is one of the toughest markets in the country.  Folks with 40 years experience are puzzled by the rent laws, taxes, population exodus?.... vs.  Is it now an international city? Meaning that there will always be buyers of financial means that want to live there due to weather, beauty of the city etc etc   The great news is that it is a market you know.  The bad news is that it is not beginner friendly. For that reason, I would not have multiple properties.  Buy a house to live in.  Maybe one rental.  Follow the market.  Reevaluate if/when interest rates drop, more local issues get resolved etc.  I would look at Washington County, OR.  ( Portland.  One hour flight.)  Two new chip fabs sched to be built and opened in the next four years due to CHIPS money and Nividia wants to build a third with out CHIPS money.  The Intel plant alone is projected to bring in additional 35,000 people and there is already a housing shortage.  Classic path of progress stuff in a close-ish market.

The other option ( which could be very unpopular) is to sell both and preserve the down payment funds.  Put that in a high yield savings account at 5%.  In two years you have aprox one million dollars and you pay cash for a house to live in.

Jerry Callow · Answer

all fair questions and comments thank you.

@Eric Gerakos - 2 reasons and both the properties are in San Francisco. 1. That is the only market I know 2. Leverage and hopeful potential appreciation

@V.G Jason - yes a bit of ignorance and I bought to buy. What is RTP and Mark to Market? What does recast for property 2 mean and how are you coming up with 8years for trading equity?

thanks both of you really appreciate the response and for basic questions :)

Julie Gates · Answer

I don't like to sell real estate, but if you're in a negative cashflow situation and you don't see that changing, I would sell. If one thing breaks or if a tenant moves out, you'll be in a tougher situation. It sounds like it's time to stop the bleeding. Even though there are costs involved in selling, at least the negative cashflow stops at that point.

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