Should I sell my neutral cash flow property?

Question

I have this rental single detached home that is 100 years old. It has been lifted and a foundation has been poured about 20 years ago. I just put in a new A/C unit and furnace. My tenant will be leaving in 1 year. The market is good for finding renters and the house is a good location in decent shape. I owe $170,000 on the mortgage and it has been appraised at $220,000.  The costs are about $1080 in taxes,insurance and mortgage and I get $1300 for the mortgage leaving a net $220. It is practically cash flow neutral but i'm confused. If the market keeps going up and the tenant is paying down the mortgage should I keep it or not? I claim all the utilities and property tax come tax season however I still have to pay taxes on the extra 15,600 I make off the monthly income. I have used this rental house as an equity leverage move to buy another property that I live in raising it's mortgage from 136,000 to now 170,000 in a refinance. The house I now live in is worth 280,000 and the mortgage owing on it is 260,000. I will be leaving my job to go back to school for 5 years and may not have a good income for awhile. Do I sell this rental and invest in stocks or some other real estate? what are my options?

Johann Jells · Answer

This makes no sense, you should have no taxes at all from this property after depreciation if it's only $200/m positive. Check your form E again.

Nathan Gesner · Answer

I wouldn't consider this a cash-flowing property. After paying PITI, you should still set funds aside for vacancy, repairs, capex, and other potential expenses until you have a healthy reserve.

If you hold onto this property, the market will eventually grow and you'll make really good money with hit based on appreciation, equity, and rent increases. However, you could sell this property and buy one that cash flows today that will do even better in the future.

I recommend selling it now while the market is hot and investing the funds in something that produces a better return.

Johann Jells · Answer

Not to beat this to death, but if you have little or no net income from this property, how can you have a tax liability? That makes no sense.

As for the bigger picture since you are new here, the majority of BP's are in favor of low priced, low appreciation, high cashflow properties where the name of the game is constantly leveraging for more acquisitions. This is something of a long running battle for those of us in expensive, high appreciation markets who say there's more than one way to get rich in RE. Negative cashflow condos sell like hotcakes in my city, and not everyone buying them can be an idiot. It's a different, less active, "buy and hold" investing model that's that can pay off hugely if you've done it right.  But you need to study the numbers and decide where YOU think your rent and value are going, and what works for YOU.

I bought a $385k neutral cashflow triplex in 2004 for $77k down.  It's now cashflowing >$20k annually (+$10k in mortgage paydown), and has more than doubled in value with the area gentrifying rapidly and the rents continuing to go up. BP gospel says that was a bad buy.

Johann Jells · Answer

@Kenny Keating, it was nothing fancy. we pulled $80k of appreciation from our previous purchase for the downpayment. Our next one in 2012 that has done even better was indeed fancier, it was a short sale. But deals like that are long gone. What was relevant from that was the seller had tried to build an ambitious leveraged empire like many BPs recommend, but had ended up completely underwater and unable to service his debt, thus the short sale. We, relatively unambitious, weathered the 2008 storm just fine. Since we were not leveraged to the max, theoretical loss of equity meant nothing to us.

Kenny Keating · Answer

@johann, I wasn't aware of the inner gang war on the site lol. I'm a newb and appreciate all the insights from both angles. Hey, weed stocks do pretty Damn good up here also. The books I read on finance all preach increasing net worth as the primary focus and it seems like you did that well Johann. I'd love to hear the details of how you acquired the triplex.

Kenny Keating · Answer

The unit has increased in value from 150,000 originally to now 220,000 in 6 years.  It was refinanced back up to 170,000 to leverage another house that im living in now that has appreciated 20,000 in one year. This is the outlook for the region. https://globalnews.ca/news/4749870/winnipeg-housing-market/. There isn't much speculation with these numbers, it will appreciate in this market quite well. I don't know of another investment with that kind of ROI in 6 years using a banks money.

Anna Buffkin · Answer

If the tenants want to buy, I'd go ahead and sell it.  If this is your only rental or one of only a few, I would sell.

If you have enough cash flowing properties which can carry the weight of this property should an event cause it to go from cash neutral to cash negative and you want to speculate on future appreciation or rising rents, I think the answer lies in your risk tolerance and end goals (don't you love the it depends BP answers).

Also: Schedule E mentioned above is the tax form used for rentals in the US.  The poster assumed that you were  filing in the US.

Kenny Keating · Answer

The rent is competitive for the area and the tenants are interested in a rent to buy.

Kris L. · Answer

Is the rent below market, or is there no room for increase?

Should I sell my neutral cash flow property?

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