Hold non cash flowing property or sell for profit now?

Question

I currently own a home in San Diego that I bought in 2015 with 0% down for about $500k.  I moved at the start of 2020 and have rented it since.  PITI is $2750.  Rent is $3000 and the tenants will leave in June (inside my 2 year tax free window, and I don't ever plan to return to this property as I have another home with ADU in San Diego).  I expect the home will sell for somewhere in the low to mid 700s, lets call it 725k.  I owe 455k.  Cost to sell will be 7ish% so I will have a large win If I sell now.

But.  I put 0% down, I have less than 15k in the house in 6 years.  It has some mx coming due in the next few years, probably a roof and some work on the garage.  I make enough to pay for this and my currently debt pay down is about 9k a year at 3.5%.

I'm sure most people would say sell this property as it isn't a cash flowing property. Take the win and invest in a better performing asset. However, I think there is a case to be made for keeping the property, continuing to pay down the debt and 1031 into a dream property in 10 years time when I expect to leave San Diego. I will have to pay CAPEX but the taxes on the property are (ALMOST) fixed and it is certainly hold-able, I am also able to depreciate it etc etc etc. I can also delay selling and purchasing fees and still believe in a long term hold strategy.

Does anyone have any feedback or thought or does everyone suggest selling?  Does this change with the possibility of higher inflation?

Long story short.

Sell for a large win in June/July or hold for another 8-10 years as a marginal property and rely on debt pay down and possibly inflation to help a decade later.

Dan H. · Answer

I suspect you could have purchased a property in San Diego in 2015 that would be significantly cash flow positive if it was purchased as an investment property and not as a home for you and your family.  I have an ex-home in my holdings.  It is our worse cash flow property by far for its value (has the worst rent to value ratio).  This is for the same reason as the cash flow is so poor on your property.  It is totally understandable.

You understand the 2 of 5 rule for taxes.  You understand the CA prop 13 property tax benefit.  BTW we are in the process of selling a home to a child.  The child wants this home in large part due to it saving around $4K/year in taxes over a home that would be purchased from a 3rd party.  So that prop tax saving can be significant; in your case ~$2K/year.  You understand the appreciation.  You understand the cost of selling.  You understand that it currently is negative cash flow when allocating for all expenses.  you understand the equity pay down.  I suspect you understand that you could have purchased a property, like your current property, that would have done better (better cash flow, likely similar appreciation).  Basically you have a good understanding of the various aspects to factor into the decision.

I will go into one area, the appreciation.  We have purchased San Diego properties semi regularly starting in 1993.  As you can imagine some had great timing and some not so great timing.  Two of the properties initially fell in value over 15%.  Everyone of these properties has appreciated over $1k/month over the hold period.  The best of them has appreciated over $4k/month over the hold period.

I will cover the two that depreciated over 15% after purchase as being likely the worse profit examples (one of which is the ex-home I mentioned above).  In 1993, I spent $167K (fell to ~$140K) for a 3/2/2 SFH in Claremont that today is worth ~$720K.  That property has appreciated ~$1700/month over the hold period.  In 2004, I spent $741K for a 4/3/3 SFH in Poway.  It fell to ~$620K.  Today it is worth ~$1.25M.  It has gone up ~$2.5k/month over the holding period.  These are my worse timed San Diego RE purchases.  They look like good investments today.  As indicated, our best RE purchases have appreciated over $4K/month over the hold period.

You have all the information to make the right decision for you. As indicated, my ex-home is my worse performing property. I could have done better with many other local properties, but as shown it has produced very good return.

BTW if you do keep it, you may want to consider a refinance to lower your equity position.  Interest rates are low.  It may slightly increase your monthly, but it likely will also increase your equity paydown.  The appreciation returns a larger return as a percentage when the property is at its highest leverage.

Good luck

Stephen Brown · Answer

I agree with @Joe Villeneuve There's really no point in holding onto this. You can do much properties with multiple properties generating cash flow. Just buy something in a good area and watch the rental demand rise. I have a place here in Maumee Ohio which is a great school district and I got rents over $200 market value simply because of the timing in the market right now and the great school district. I think that yoiu could easily buy several of these types of properties given that you're in Cali. OOS investing is the way to go.

Eric Schultz · Answer

@Lewis Chaloner

Crunch even some more numbers.

What if you could take out a HELOC on the equity and then thru arbitrage, put that previously dead equity to work into 3 - 4 out of state properties with net positive cashflow?

Then hang on to that San Diego property for another decade only to have grown your equity higher with continued market appreciation and mortgage paydown by the tenants.

Your out of state properties may have also experienced similar equity growth, so recapture that equity to expand into yet more properties or cash out refi to payoff 1 or 2 of those properties.

All of this wealth building made possible by harvesting the equity in that one original San Diego property back in 2021...

Lewis Chaloner · Answer

Gentlemen, thank you for your advice and feedback. @dan heuschele what you described is exactly what I planned to do.  But now I'm confronted with an opportunity to make a very good profit right now and remove any headaches from the property so I am second guessing that very hard.  Your investments do leave me very envious and impressed.

@ joe villenueve, I appreciate the thoughts. My only issue with what you have said is that I got the place for 0 down. I have spent less than 15k.  Let's say I have to spend 5k a year for a few years to keep it. Each of those years I would get 9k plus in debt pay down for 5 invested. That is a positive return if you look long term enough and I could do that for 7 years before I had even put 10% down on the property. A good way to look at it? No probably not but the ease with which I can hold it is a consideration for me. I would also argue that if I took the money and say, put it in stocks assuming they would appreciate that there is no difference there with assuming the house will appreciate, long term. I understand that's not what you are suggesting,  just thinking out loud.

@Dave Foster. I'm really glad you commented. I did the math wrong and was thinking I had until Feb ish of 2022 not 2023.  That means I could stay in the property for 1 more year a roll the dice on more appreciation if I wanted to.  To your point though, no the property is not special. I was interested in your inflation comment. Would you not consider a 30 year mortgage at a decent if not great rate a good inflation hedge? But, I do get the point you made and am leaning that way.

@Eric Schultz,  thanks for the idea.  If I keep it I will open a heloc for a "just in case". I'm just not interested in a massive out of state portfolio. I thought I was. Until my wife asked me why. I had no answer. I'm 9 years away from a very good pension. If I do the right things with my two current properties and invest wisely with the rest of my money I'll be just fine.  I get the point you are making but I guess when it comes down to it there are two things. 1. I'm more risk adverse. 2. I genuinely just don't want to put in the work it would take to do what you are suggesting we'll. I have an involved job that sees me gone a lot I don't feel the added work would be good.  Thanks for your advise though.

@Mathew Paul.  You made me laugh. But you also summed the entire thing up with one sentence. If I sell i take a guaranteed win.  If I'm greedy I could lose a lot short term. I'm not going to worry about earthquakes though. Appreciate the thoughts.

Really appreciate everyone's feedback. That is a lot of extra thoughts to consider and will absolutely help me.

Cheers.

Joe Villeneuve · Answer

The debt paydown happens whether or not you have positive or negative cash flow.  Why would you take money away from yourself in the process?  Negative cash flow is not a good idea.  Your cost is ONLY what comes out of your pocket.  Negative cash flow, down payments, and using your money to pay down mortgages are all forms of cost to you.  The only one that you can't avoid is the DP.  The other two should NEVER be rationalized into thinking they are OK.  They are both forms of cost that are unnecessary.  Equity isn't the same thing as cash.  Equity has no value until you access it.  Cash can be reinvested or used to offset personal expenses.  By allowing yourself to have negative CF, you are in fact doubling the cost of your personal expenses because you have to make the actual payments on those items, and pay for the CF you would have had, that is your negative CF, that would have been (and should have been) making those payments for you.

This means, what you think is a net gain of $4k, is actually a loss of $1k.

Matthew Paul · Answer

Sell , most of California will fall into the ocean on the next big earthquake .

There was some great advice stated . All I can add is a bird in the hand is worth more than 2 in the bush

Dave Foster · Answer

@Lewis Chaloner, You can get depreciation, cash flow, and those other things on any property you own.  And in an inflationary environment you want to be in durable goods with long term low interest fixed debt.  That's another thing you can do as your loan is very good but competitive with whats available to you anywhere.

What you won't have is the opportunity to take a bunch of profit tax free.  That ends at the beginning of 2023.  That would be my decider.

The only other factor that might sway me would be if that property had something incredibly special about it that would provide octane to your appreciation (some would say San Diego real estate by itself would do that).  But even that would be a tough sale.

Joe Villeneuve · Answer

Sell.  Just do the math.

1 - You're losing money every month you hold it...for no good reason.  When you say you have less than 15k in the home, does that include the negative cash flow...because it should?

2 - Using your numbers, if you sell, and after closing costs, you would have about $220k in cash...that's your real equity.

3 - If the property is worth $725k, that means you have 30% equity

4 - If you sold the property, and walked away from closing with that $220k in cash, it would represent $1.1M in property value, as opposed to the $725k you have now (see #3 above)...that's based on your cash out equity being a 20% DP.

Hold non cash flowing property or sell for profit now?

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