Sell or hold negative cash flow properties?

[Adam Beasley]

Hey everyone, I’m hoping to get your advice on a decision I’m trying to make with my real estate portfolio. I’m going to try to stay high level, but I will also share a lot of details so that you know the full picture.

Two years ago, I decided to shift my strategy from cash flow to appreciation. I found that $100/month did very little to move the needle compared to the gain from levered appreciation. This led me to refinance my 3 property portfolio to pull some cash out in order to buy 2 more. I expected the portfolio to be about -$1k / month in cash flow after this. I left a large cash cushion ($65k) to handle this negative flow, as well as any surprises. However, in the last year, two major issues created a cash crunch.

1. +30% vacancy for 24 months, caused by two evictions, one unit on market for 7 months, and the two new properties taking 1 year in renovations instead of 4 month estimate (~$30k of lost income above assumption of 10%)

2. $45k from several unexpected large repairs (water leaks, roof collapse, siding rot, plumbing main line, etc.)

These issues are also causing me to rethink the assumptions in my model, increasing my vacancy rate from 8% to 12%, repairs from 5% to 20%, and capex from 5% to 20%. With these changes, the portfolio is now expected to be about -$2,300 / month cash flow.

I am considering a few options and would love this communities opinions:

Option 1) Sell property 1 to pay entire mortgage of property 5 (highest interest rate) -- Pro: Improves cash flow by ~$1,600 / month. Cons: Property 1 has strong expected IRR

Option 2) Sell property 1 to pay off a construction loan on property 5 and purchase new SFR -- Pros: Improves cash flow by $1,000 / month, Adds $40k cash to bank account (after $30k loan repayment and $40k SFR purchase). Cons: I've analyzed +30 deals in the last 6 months and property 1 has much stronger expected IRR than anything I can find.

Option 3) Sell property 5 and hold the cash -- Pros: Improves cash flow by $600 / month, Adds $40k cash to bank account, lowest expected IRR in portfolio. Cons: This property is in the highest appreciating area of the portfolio, so loses some large potential upside. At 6% appreciation, which I think is reasonable in this neighborhood, IRR moves to 25%.

Option 4) Hold on to all properties by saving $3k/month of W2 income and refinancing in a few years if interest rates decline -- Pros: Maintains entire portfolio. Cons: Delays buying a house hack, Greatest risk of another repair or eviction causing a larger cash issue

Option 5) Self-manage the properties -- Pros:  Improves cash flow by ~$100 / unit / month, I self-managed this portfolio for 3 years and believe that I was more effective than the professional property manager, Can do this in addition to any of the above options. Cons: Added time and mental energy

Option 6) Sell the entire portfolio and move cash to REIT index fund -- Pros: Eliminates all time requirement, Eliminates cash crunch, ~9% expected returns. Cons: Loses all other upside (levered returns, tax benefits, appreciation)

What do y’all think I should do? Property details are below.

• Property 1:
  • Cash flow: -$730 / month
  • Prinicipal + Interest: $1,790 / month
  • Equity after sales costs: $110k
  • Expected IRR of holding: 27%
• Property 2:
  • Cash flow: -$200 / month
  • Prinicipal + Interest: $620 / month
  • Equity after sales costs: $20k
  • Expected IRR of holding: 35%
• Property 3:
  • Cash flow: -$310 / month
  • Prinicipal + Interest: $690 / month
  • Equity after sales costs: $45k
  • Expected IRR of holding: 26%
• Property 4:
  • Cash flow: -$500 / month
  • Prinicipal + Interest: $1,135 / month
  • Equity after sales costs: $45k
  • Expected IRR of holding: 16%
• Property 5:
  • Cash flow: -$600 / month
  • Prinicipal + Interest: $878 / month
  • Equity after sales costs: $40k
  • Expected IRR of holding: 16%

Total portfolio:

• Cash flow: -$2,340 / month
• Prinicipal + Interest: $5,114 / month
• Equity after sales costs: $260k
• Expected IRR of holding: 24%