Rental Property Fremont CA(Tesla Area) Negative Cash Flow but Potential Appreciation?

Question

Background

I own a 2 bed, 2 bath condo in Warm Springs, Fremont, CA (near Tesla - Lennar / Toll Brothers construction) that I'm currently renting out (long term).

The property has appreciated 10-13% over the past 4 years (2-3% annually).

30 year mortgage at 2.75. Recently refinanced so 27-28 years to go.

25% equity built up at current home value

I'm cash flow negative on cash flow each month (~700-800 per month) because the rent doesn't cover the mortgage, HOA, and property taxes. This calculation includes depreciation deducted during income tax returns. I calculated the numbers assuming 1, 2, 3 and 4% annual rent increase.

At 1% increase in rent, it takes me ~15 years to be cashflow positive annually

At 2%, it takes ~8 years

At 3% 5-6 years

This assumes 0% vacancy.

If I look at cumulative cash flow i.e. net gains (loss) from (income - expenses) projected over all years of ownership, those numbers are worse. Money put into condo via ALL expenses vs income generated by long term rental

1% - cumulative cash flow positive after mortgage is paid off. 28 years

2% - 17 years

3% - 12 years

4% - 10 years

My Dilemma:

I'm concerned about the negative cash flow, but hoping for future appreciation. There's a lot of new condo construction happening in the Bay Area, so I'm worried about future appreciation. Lot of condos being built for rental as well so rental income increase may not be as rapid.

I compared condo appreciation for the last 10-20 years and best case scenario I found is annual appreciation of 6-7% according to Redfin.

Should I Hold or Sell?

Searching through past forums, some people say hold because it's the Bay Area (near Tesla and Facebook), while others recommend selling. Although my current gains are not a lot ~100K.

I may invest the amount in stock equity or Sacramento / Clovis / NC real estate.

I'm torn on what to do. Any advice from experienced investors would be greatly appreciated!

Arlen Chou · Answer

@Rohit Girme Have you lived in the condo? If you have lived in the condo for 3 out of the past 5 years you can take advantage of the primary residence sales capital gains exemption and sell the condo. If you can do this, sell the property and invest in a different asset class. Condominiums are a tough asset class to make money with over a long period of time. HOA's take a substantial amount of control away from the owner and the monthly dues will always have a negative impact on your cash-flow. Additionally, you are correct about the potential appreciation of a condo in this environment.

Scott Scoville · Answer

I use a hard money lender, where they typically require 10-15% down payment on purchase of an investment property, and they fund the rehab. I find properties that I can add square footage or add beds/baths, to force appreciate value. When I'm done with the rehab, I rent out the property and refinance into a conventional loan. There is always higher risk when operating with hard money, so you'll want to make sure that you buy a solid deal, in a good neighborhood, and have a plan for rehab and exit strategy. Happy to share examples of some of my deals over the phone if you'd like to chat.

Rohit G. · Answer

Thanks Jake for taking the time to answer my question. I am noticing a lot of new construction in Fremont. Both for rental and ownership. And most of these are condos and townhomes. I see this trend increasing given SFH in immediate Bay Area won't be built or will be high priced.

Scott Scoville · Answer

Hey Rohit, I'm an investor and agent in Sacramento. You could 1031 the $100k equity that you've built, into a property in Sacramento, but if you bought an investment property with a conventional mortgage, you'd need 20-25% down. That would limit your purchase to $400k. There's not much at that price range that would produce cash flow or change your position much. If you used that $100k to buy with hard money, you could find a value add deal and potentially move into a higher priced property or even a duplex. I've been investing in Sacramento for years, and while cashflow has been harder to get recently, I've found that value add (adding square footage, beds, baths) is where the market has rewarded me the most. Be happy to chat if you'd like and discuss over the phone.

Jake Andronico · Answer

@Rohit Girme

Rohit, welcome to BP! Great question.

You'll likely hear a lot of different answers through different lenses. A lot of it comes down to your goals and financial situation.

You've experienced the appreciation so far at a reasonable rate, so what has happened that would make you think that would dissipate?

If you do sell, what do the alternatives look like? My guess is there isn't going to be a clear answer based purely on math and analytics, so what makes the most sense for your current life and your future goals?

Rohit G. · Answer

Thanks Scott for taking the time to answer my question. Can you please elaborate on what you mean by value add deal and $100k to buy with hard money ?

Rental Property Fremont CA(Tesla Area) Negative Cash Flow but Potential Appreciation?

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