What would you do with this no cash flow property?

Question

Hello everyone,

I own a studio condo in a 14 unit building in St. Louis. A little background: I bought this property in 2008 in my 20s just before the crash, thinking you can't go wrong buying instead of renting. I paid $172,000, slightly more than the original owner paid a few years prior.

Fast-forward to now, the property is not back to pre-crash price levels. Zestimate (FWIW) is around $150,000, and taxes on studio units in the building are also based on $150,000 appraisals.

The property is located in Soulard, St. Louis, MO, a historical and entertainment district. The neighborhood has rebounded well and demand is high, but condos are lagging behind on sale price. It is extremely easy to rent. When vacant, it lasts maybe 2 weeks, and most tenants stay for multiple years.

Between the mortgage, insurance, HOA dues, taxes, etc., I break even almost to the dollar. There is a little room to raise the rent, but we'd be talking just a few hundred dollars per year. Our HOA dues are also very low, so every few years there is a major repair that requires a cash call.

The property was refinanced under HARP in 2012 at 4.5% and I have around $115,000 remaining on the loan.

The HVAC and other appliances are all from 2005. So there are likely some upcoming expenses there.

I have been intending to hold this property for the foreseeable future, but I'm no expert. What would you do?

A little asterisk on this question: I am considering investing in a vacation rental, and could possibly use the equity built up in this property (if it appraises high enough). I'm in the very early stages of researching this, though.

I'm interested to hear what those with more experience would do in this situation. Any insight is appreciated!

Thanks,

Tim

Bill B. · Answer

I was going to lead with you can’t really tap the equity as you’re probably limited to 75% LTV, or about $112.5k, and you say you owe $115.

I’d make sure you aren’t still paying PMI, if you can get out of that you be a little cash positive.

You are making a few tax free $’s (principle pay down)

That being said, because it’s a rental, if you don’t enjoy it, I would actually sell. You’ve got a bunch of accumulated depreciation you’re going to have to recapture at 25% if you turn a profit. You may be better off selling at a loss to avoid those taxes. You’d actually have to get pretty far above your purchase price just to break even after commission and taxes and then the depreciation recapture would kick in.

Elise Whittenburg · Answer

@Bryan Devitt and @David Avetisyan I think both have very good comments. I’m a CAM manager in Florida managing 3 HOAs with about 700 units combined. My experience in the CAM world lends me to say SELL while you can before the market downturns. You are more likely to get hit with a special assessment in a COA than you are an HOA (not sure that is statistical, just personal opinion). But in either Association, the dues could go up ay moment putting you in the red immediately. Bryan suggested getting an accurate evaluation from a trusted realtor using comps. If you can’t loose the PMI and bring your payments down...it might be best to get out while you can, learn a few things from your experience, and try investing again when you’re ready.

Sam Shueh · Answer

If not living there, it makes no business sense to hold on to it. What do you do if the local properties drop -20%,-30% in the next few years?   West Coast has experienced a stagnation. Homes outside of Google, Facebook, Microsoft that used to appreciate +25% year after year since 2012 just sat there unsold with local full employment. Until 2018 spring most were sold in one weekend with endless offers. These neighborhoods enjoyed ~quadrupled in value last 7 years. Sellers are now getting the realty check. Sell it at discount to unload before unemployment becomes ugly.  Some home sellers found out they can not refinance due to lack of equity. Instead of continuing paying 6.5% interest they unload and find another home start a 3.7% interest mortgage by breaking even.  If the performance does not meet your object move on.

Caleb Heimsoth · Answer

@Tim G. First thing I would do is get a proper evaluation.  Zillow and tax appraisals are not proper evaluations.  Find an agent and have them pull some comps.

Next if you still can’t sell for high enough to make some money, I’d probably keep it but maybe look into refinancing.  You could potentially beat that interest rate.

Deb S. · Answer

After getting comps from an agent, you could look into selling it and doing a 1031 exchange to avoid paying capital gains.  Consult a financial planner though to make sure you don't trigger any taxes on the depreciation also.

Allan Szlafrok · Answer

@Tim G. I would take a shot at selling it. Cash flow is king in this business and I’m fairly certain you can find a better opportunity out there.

Jason Dillard · Answer

@Tim G. You could offer to seller finance it.  Get a down payment and pass the expenses that fluctuate to your buyer.  We have some condos that this worked very well on.

Bryan Devitt · Answer

@Tim G. I would dump it, take the money and gold onto it. The market has cooled off in a lot of places and it looks like there is a downturn in the near future. Condos have too much downside to break even IMO. You could get hit with an assessment for something or have the HOA fees jacked up putting you in the red with no warning and a handful could be put on the market because of that. There are other investments that would break even with much more upside and stability or even turn a profit to hold onto something like that IMO

Tim G. · Answer

Thanks everyone for the responses.

Regarding Airbnb, it is not formally against our bylaws yet, but the HOA did recently vote to ban it. Some owners live in the building and there were some issues with a few short term tenants.

Kyle Eckert · Answer

Soulard is one of those excellent spots in STL where Airbnb can do a great job at improving your cash flow. STL laws are friendly to it for now, but check with your HOA to see if it is accepted.

What would you do with this no cash flow property?

Most Popular Reply