Rent out for a negative cash flow vs sell house at a loss?

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Rent out for a negative cash flow vs sell house at a loss?

Sarah Vance
Member since 2019 · 7 posts · 2 votes

Hey wise people,

I found myself in a bit of a predicament, and I am hoping you all can give me some insight. I bought a house and closed on July 2018. Below are the details:

Purchase price: 205K, 3% down, 5% interest (I know). Current mortgage with PMI, Escrow, Insurance = $1390. The current amount that I owe is about 198K. The house is a 3/1 in Asheville, NC - which is still, from my knowledge, a city that people are flocking to. It is in a part of town that a lot of people find desirable, walking distance to a common street and a common park. However, I am on a pretty busy street. The housing market here is hard for people who are first time home buyers or have a single income. Nonetheless, I bought this house.

Then life changed and now I am needing to move out of state. Here are the options I have thought about:

1) Rent it out.

The problem is that I don't know if I will be able to rent out my house enough to make a positive cash flow. Rent in this town and be anywhere from 1200-1600. I am thinking I could get $1400 a month on rent, but if I hire a PM then that number will decrease due to their fee. Not to mention taking into account end of year taxes, repairs, vacancy, ect..

I know I cannot hope for appreciation because that is never a guarantee. If I rent it out, I will probably have to have a negative cash flow of anywhere from 100-200. I considered not having a PM, but that sounds terrifying being five hours away.

If I do rent it out, and when I move to my new location, I will be renting. Overall my total expenses will be less even if I still am paying $200 a month towards my house is AVL. I plan on meeting with multiple property managers to get a feel on how much I can rent my house for, ect..

Option 2..

2) Sell it for a loss.

Since I haven't been in the house for a year, it has not appreciated. Although it did appraise for $215K, so there is equity already in the house. If I sell it I am assuming I am going to take a loss due to realtor fees/closing cost. Not to mention if I did make *any* money - I would have to consider capital gains because I have been in the house less than 2 years.

So - what is the best decision here? Neither is great, but how to I minimize my hurt in a equally messy decision? The other thing would be that I don't want to have this house forever and be an accidental landlord at a distance. Would it make sense to rent it out for a year at a negative cash flow and then sell it after having it for two years to avoid capital gains fees? Or is that not possible because it wouldn't be considered my primary residence for those two years?

I am very very new to all of this, and just trying to due my research prior to making a decision. I made a mistake buying this house, and I am trying to rectify it to the best of my ability. Thank you so much for your insight and wisdom BP!

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Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
7y

205k and 1400 in rent ?

Sell it before it drags you down

You think you’ll be negative 100-200 a month

I suspect it would be much worse than this when it’s said and done . I’d list it and get on with your life .

If you said you could get 2100$ + in rent that would be different ,but as it sits I’d dump it now while the market is still hot and the economy good

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    I would sell now and take the loss as opposed to gambling and risking a greater loss in the future. The headaches of being a landlord even with a PM are not worth the stress.

    Hope is another word for delayed disappointment. Know when to fold....

    2Reply
  • Davy Singleton
    Dade City · Member since 2018 · 29 posts · 6 votes
    7y

    Ok I'll give this a try. You bought this house for 205k if you sell it for 215k I don't believe you will need to concern your self with capgain. You will get enough in standard deduction to off set any money, if in fact you make a profit. Rule number one DON'T LOSE MONEY, rule number two FOLLOW RULE NUMBER ONE. I would sell because your not in a great position to rent,  but you could make a little by selling it. Negotiate the realtor fee and the buyer pays closing cost.   I hope this helped. I'm sure there are more qualified people that can give a better answer. 

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    Sell it and move forward.  IF you continue to hold a negative cash flow property, you are continuing to lose money.  If you sell a property for less than you paid for it, but you do get cash out of it (even though it may be less than you put in), you haven't lost any money...you just took a step backwards, but you stopped the assumed loss at a defined number.

    Why do I say you haven't lost money...yet?  Because you're still in the game.

    Profit is made after you recover all the funds you put in...in cash.  If you continue to hold a negative CF property, you are moving further away from breaking even...and the start of your profits.

    REI is a lot like playing Poker. If you lose the first 5 hands, but still have chips, you haven't lost any money. What you are assuming are lost chips, aren't lost...they're just in a different pile on the table...but they are still on the table, and can be won back...as long as you are STILL in the game.

    As long as you walk away with cash from this deal, you are still in the game.  The money you think you lost is not lost.  That money is in the next property...as long as you stay in the game.

    The longer you stay with the negative cash flow, the longer it will take to break even, and the smaller the dollars you have available to move into the next deal...where you "lost funds" can be recovered.

    Don't keep it and continue to move backward.  Sell it and move forward.  You'll recover the limited loss, and turn it all into a profit.

    3Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    Tough one.  How long are you planning on living in the new town?  If you're going to be there for a while, can you buy a place there which allows you do rent part of it out?  That way you could make some money to help offset any lose you may have from selling this house.  If you won't be living in the new city long term (or don't plan to stay for more than a year or two), you should just rent.

    Are you planning on moving back to Asheville in a few years?  If so maybe you want to hold onto the place.  If your living expenses in the new town are less than your current mortgage, look at it as the tenant paying for the rent in your rental rather than paying your mortgage.

    0Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Sarah Vance It MAY be worthwhile for YOU to be the property manager.  You didn't say where you were moving to and that makes a huge difference.  Are you moving to SC or Oregon?  How nice (or not nice) is your place?  If it's reasonable, YOU should be able to rent it yourself without a PM.

    Are you going to be making significant more money with this job change?  If so, a real estate investment could be a good tax shelter for you.  Especially if you can't buy in the new town right away.  

    Now, what ppl will say is what about maintenance?  Easy:  Home warranty as first line of DEFENSE.  You will pay around $500 a year, and most will fix almost anything other than a roof.  Shop around and you can get that as well.  

    I have managed a property in California while living in AZ, for the last 9 years.  One turnover, one renovation.  

    It CAN be done.  

    1Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    7y
    Originally posted by @Sarah Vance:
    If I rent it out, I will probably have to have a negative cash flow of anywhere from 100-200. I considered not having a PM, but that sounds terrifying being five hours away.

    Based on your numbers, it appears that about $250 a month is being applied to loan principal. That $100-$200 a month that you have to kick in is just going toward your principal, so not really lost money. Think of it like a forced savings account.

    The real and only question is do you want to be a landlord?

    1Reply
  • Account Closed
    Investor · Asheville, NC · Member since 2015 · 187 posts · 112 votes
    7y

    Agree with the above in general, with the summary thought that the past matters not one itty little bit. Here you are, with this house, and whether you paid $20k or $2M, you still have to decide what serves you best now and in the future. In general, renting at mildly negative cash flow is OK, IF you're stoked on market gain potential and debt paydown, which in this case are well-leveraged by your low-equity position in the property. However the hassle factor, even with using a manager, may erase this. 

    On the selling side, you'll typically lose around 6-12% of ask price to MLS fees, closing cost help, repairs at closing, etc. So you'll likely just get the mortgage off your back. Hope that helps. If you send me the address I can give you a rough guesstimate of retail and rent values assuming a nice finish and good shape.

    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    205k and 1400 in rent ?

    Sell it before it drags you down

    You think you’ll be negative 100-200 a month

    I suspect it would be much worse than this when it’s said and done . I’d list it and get on with your life .

    If you said you could get 2100$ + in rent that would be different ,but as it sits I’d dump it now while the market is still hot and the economy good

    4Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    7y

    I am not sure where your house is but I currently own a duplex downtown. The upstairs rents for $1100 and is a very small 2/1. The downstairs rents for $1600 and is a 3/2. Depending on your location, you may be a little low on your rent at $1400. I charge $25 per month per pet and that always helps. Everyone in Asheville has a pet of some sort and there really isn't any way around that fact here. I also own a 2/1 in Candler that is next to a trailer park and that one rents for $1000 per month but I feel that is low. I know I could get $1200 but my tenant has been there for years and I don't feel like raising the rent on them at this point in time. People are in a jam trying to rent a house in city limits and they are willing to pay for it. If not, they can move to Weaverville or Waynesville. 

    As far as capitol gains goes, I just had a conversation with my accountant last week and she informed me that capitol gains is only 15% if you make over $70k per year. She may be incorrect and/or I may be misquoting her but that alleviated some of my concerns about possible selling a property because we simply don't make that much money. You may want to get talk to an accountant yourself to clarify capitol gains because I had always heard that it was %30 but never actually asked anyone. I would do all I can to keep your property in Asheville if I were in your situation because you are correct. Everyone is moving here and have been for the last 10 years.

    Also, for what it's worth, our little 2/1 in West Asheville appraised at $265k this past year and I promise you it is nothing special at 900 Sq ft.

    1Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    7y

    @Sarah Vance, I would recommend being your own property manager. Get yourself a handyman or two that you can rely on as "boots on the ground". Make sure they are reliable and good communicators. 

    It is worth some effort on your part to put in the work to manage the property yourself. Once a tenant is in place you should not need to visit the property if you have someone local like a handyman. 

    Also, consider offering a lease/option. Since you home sounds desirable in an area that is growing, there will be people who cannot currently get a loan but who want to get a home that will be theirs for a long time. 

    So, the tenant/buyer will give you a lump sum payment up front for the option to purchase the home for a set price within a specified time. That agreement would guarantee you don't lose money. If they don't follow through to buy during the time period, you collected that lump sum which offset any of your projected cash-flow losses. 

    If they do purchase you won't be paying an agent a commission, you will have leased to them paying down the mortgage a little further as well. So, you should not lose money upon the sale either. 

    4Reply
  • Sarah Vance
    OP
    Member since 2019 · 7 posts · 2 votes
    7y

    @Thomas S. - valid point in regards to delayed disappointment. Something I value significantly is my mental sanity. 

    0Reply
  • Sarah Vance
    OP
    Member since 2019 · 7 posts · 2 votes
    7y

    @Theresa Harris - tough one indeed! I am not sure how long I plan on living in the new town. I wouldn't want to buy a place right away, and I would want to really do my due diligence in my thought process with my next purchase (because I didn't do my best here!) I plan on renting in my new city, for now, unless things change significantly. 

    As far as moving back to AVL - that is also a hard question. I do know that if I moved back, it wouldn't be to this property. It is in a good area, but also near a highway underpass - not something I want to be dealing with all the time. Again, not my wisest decision! 

    0Reply
  • Sarah Vance
    OP
    Member since 2019 · 7 posts · 2 votes
    7y

    @Alan Grobmeier -  I am moving five hours away, to Savannah, GA. My place is okay. The problem is that it is on a busy street - which is one problem. It is an older home, and could use some updating for sure. 

    I will be making roughly the same amount of money in my new job, and I don't plan on buying another property for a while after this. 

    I know it CAN be done, but man-- the risk involved is super scary! Especially because I am not sure if it will appreciate the way I had hoped over the next few years. 

    0Reply
  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Sarah Vance if you have a decent loan/mortgage you could always take on a 50/50 partner.  If you keep this property, you are probably keeping it for a LONG time.  Depending on who you talk to, we are probably in stage 3 of the real estate cycle.

    @Kevin Sobilo lease option is a great idea.  

    https://www.crowdstreet.com/four-phases-real-estate-cycle/

    Alan

    0Reply
  • Jeff Bridges
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    7y

    If you are worried about losing money at the sale, Maybe also consider selling using a flat fee MLS brokerage using their full service option. you'll still have to pay 2.5% to the buyers agent but you'll be spending 1k or so to the flat fee brokerage vs. 6k for traditional seller agent fee at 3% on 200k sale. so extra 5k in your pocket at the sale.

    I've used a service in MD and had good results. no experience with below group so do your own research. expect to handle more of your own staging, photography, time etc. in exchange for some additional savings.

    https://www.flatfeegroup.com/NorthCarolina/

    You don't seem like your close enough to do your own long distance management adequately and have the experience to do it professionally enough to keep things in order from afar. I would sell now and avoid becoming a landlord for this non income producing 2nd job you would be inheriting. I only want hassle if it gets me income, not working for free in a 2nd job:)

    0Reply
  • Christopher J Lemmon
    Investor · Little Rock, IA · Member since 2015 · 136 posts · 72 votes
    7y

    Hey, I sympathize with your situation. I lost my job and had to move too recently.

    A couple of comments, I don't think capital gains applies if you are forced to move because of work. I checked in to that myself with several CPAs and I got the same answer every time, if you make money but you were forced to move because of work, you are okay, there is an exception for job loss.

    Here is another idea, not an answer. I bought a house that I was not planning to turn into a rental, then I got laid off. 

    I took my own pictures of the inside and outside of my house and ran my add 6 months before I knew I was going to move. My ad was a bit fake. I used Craigslist. I priced it really high for my area and lowered it until I started to get hits for renting it. Then I knew what price I could get for it. Clean your place up real nice, stage it best you can and take pics your self, then see what you get on your ad. You might be surprised at the rent you can get.

    I would not take Property Management Companies word for it on the rent amount. Just like realtors want to sell your house super cheap (often) so it sells quick for them, PM often low ball the rent they will lease it for you, it makes their job easier and means it is filled quickly. They just make the one month rent and a percentage. An extra $100-$200 bucks is change to them, but makes a big deal to you. Don't assume they care or have your best interests in mind.

    Last, you won't hear many people say this on hear, but if you have at least one trusted friend in your city where your house is, you can manage your property long distance. 

    Get any pesky maintenance issues fixed now, before you move. Look for one friend you can trust who could be identified as a property manager, maybe even offer them a little cash for a trip here and there, and rely on them.

    Here is why I say this, it sounds like you need a little time for the property to go up before you can sell. You can manage long distance for one year, if you have a friend who helps you, every once in a while. If this is your only property, you don't have other ones to worry about, you could do this.

    I am currently managing a property long distance, its been fine. I have a friend who is a neighbor who lives across the street, and she can make a quick trip over if I ask her. You only have one property, it could be done.

    I know this is like completely against the BP Bible, but there are landlords who self manage long distance. That is actually done, and rather than take negative cashflow, I would take that chance for a year.

    Last, don't list with a realtor if you do try to sell. With Zillow and Craigslist, you can list your house on the internet without using them and losing thousands of dollars you cannot afford to lose.

    It is possible to sell your house, without a realtor, this is where a good friend, who cares about you might come in handy. 

    You can offer to pay them a little to babysit a walk through for a potential buyer and save thousands of dollars.

    I know lot of people might disagree with me on some of these suggestions, but I have done every one of them myself already, and saved thousands of dollars. Good luck, and don't beat yourself up, its a learning game and this is on the path of your learning curse. You can bounce back. 

    2Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    7y

    Just looking at zillow rentals in that area, I think you are low on your rent. Being a landlord is not for everyone but I think you have just purchased your first rental property in a town that is difficult to purchase in. I would do everything I could to keep it. But then again most of us are in the business of being landlords and we WANT to do it. At then end of the day, you are in control, just remember that. Many investors would like to purchase that property as owner occupied and then move into another but simply cannot for various reasons. 

    0Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Quite a pickle.  @Sarah Vance seems that peace of mind is being lost because of indecision,  and of course there's the money.  

    Here's the question as I see it:  which is most important to you, money or peace of mind?

    I'd do some soul searching and make a decision, then stick to it.  In money matters, a spread sheet and cost analysis works.  However in the things that matter more than money, like your peace of mind and emotional stability, your gut will be your best guide.

    Wish you well.

    0Reply
  • Charles Long
    Real Estate Agent · San Marcos San Antonio, Austin · Member since 2015 · 28 posts · 18 votes
    7y

    @Sarah Vance Personally, I dont think renting and being a semi-long distance landlord is that big of a deal. Offer a good price and ask for a 24 month lease. Make sure to choose great tenants, screen, screen, screen.

    Secondly.... For future reference, I dont ever recommend purchasing a 1 bath home for a rental, unless you are planning to renovate and add a second bath. 1 baths are hard to rent.

    Third.... Consider selling and owner financing. You can charge a premium on asking price and interest rate and take the maintenance and upkeep responsibility off your plate. I just did a deal for one of my clients like this....$5000 down, 15% above market value on the asking price, 1.5 points above prime on the interest rate (which is generous).

    My client has supplemented his retirement income, the buyers have good income but some credit issues that prevented them from traditional financing. Everyone was happy.

    Just a thought. Use an attorney for the contracts. Good Luck!!

    0Reply
  • Micki M.
    Flipper/Rehabber · York, UK · Member since 2013 · 895 posts · 453 votes
    7y

    The theme here is take the action that fits your lifestyle now. Are you going to be stressed out with tenants while you're far away? Would you happily pay $200/mo to own property in a strong market like Asheville? There's no right answer, just the right answer for you. You have a lot of options in this market and I'd be happy to talk through them with you. PM on the way.

    0Reply
  • Jim D.
    Investor · United States · Member since 2015 · 415 posts · 487 votes
    7y

    Well thought out question... you're thinking about it in all the right ways. 

    I moved out of state a few years ago, and decided to self-manage my rentals. They are in A and B areas, are already in good shape, and had good renters, so I figured I'd just let it ride until I needed more help and then would hire a manager. It's turned out to be far easier than I expected, and I am 2,000 miles away. I pay a handyman to do a maintenance check every 3 months and take care of odd jobs. If something breaks, the renters just text me with a few photos to let me know, and it's so easy just to call a plumber or tree trimmer to head over and take care of it. It's actually way easier than when I lived there, because I'm not tempted to drive over in rush hour traffic, stare at the problem for a while, haul around used appliances in my Prius... I just make one call and it gets done. Now granted, I am in good neighborhoods... this wouldn't work so well with tougher tenants. When I eventually have turnover it will be more difficult, but so far I'm stunned by how easy it's been. 

    It looks like you'll probably be breaking even or having to spend a few hundred bucks a month if you keep the house. My advice is this: if you want to learn to be an investor, keep it. The experience and confidence you will gain from renting it out for a year or two will be far, far more valuable than a few hundred dollars a month. You'll be very well prepared to buy your next one and will know just what to look for. My first property had similar numbers to yours, but the experience of doing it and getting started was extremely valuable to me.

    If you don't plan to be into real estate investing in the future, I would sell it. 

    1Reply
  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    7y

    I agree with some others, time to sell and move on.

    0Reply
  • Garrett Pearson
    Addison, IL · Member since 2018 · 72 posts · 24 votes
    7y

    @Sarah Vance I'm no expert one way or another but I will throw my 2 cents in. I am overanalyzer so take my thoughts with a grain of salt. If owning a rental property is of any interest, can it rent for enough to cover your expenses?It don't ask, you will never know the answer. In addition to talk to property managers, start advertising it yourself for the amount that you need to cover your expenses. Your response to the ad is the best indicator. If doesn't rent, sell it. You also have to look at the thought of being an out of state landlord, my concern is making sure you have a reliable handyman especially with a one bathroom. A toilet going out in the middle of the night can be a problem. I don't know about there but we have a challenge in Chicago finding good maintenance guys. The next thought is if you keep it are you prepared to do so for the long haul? Also, if you are considering keeping it, I would have a home inspection done if you haven't already done so to see if there are any major components that needs to be replaced anytime in the near future; roof, furnace, hot water, HVAC, etc. I would also invest in a home warranty. Keeping a property that you are uncertain about is always risky because you know the value today but what about tomorrow. I don't to frighten but provide you with food for thought. If the predictions are accurate about the market correction in the next year or so, prices could drop along with the value on your house which may means that you either be forced to keep the house for a longer term or sell it a greater loss. Well, I warned you that I was an overanalyzer :). I wish you the best. I know this is a tough decision.

    0Reply
  • Jason Hendrickson
    Rental Property Investor · Park City, UT · Member since 2019 · 84 posts · 149 votes
    7y

    If you sell, and you liked the agent who sold you the house, go back to him/her and ask if they'll list it for you at a discounted commission. Some might not be able to simply because of the brokerage they work for, but I've had agents list my properties for 1% commission on their end in situations like these. 

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    7y

    I would sell now. $200/month loss is pretty bad and there is no guarantee the property will appreciate. Indeed, I think we're pretty likely to be heading toward a recession in the next year or so which would mean there's at least a decent chance you will lose additional money if you sell later and you will lose money each month before then if you hold it.

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