Should I sell my negative cash flow investment property?

Question

I currently own a house that has a negative cash flow of $3400 per year. I am trying to decide if it makes sense to keep the house or to sell it. I've done some analysis of the benefits of holding it despite the cash flow loss and figured that the house gives me a "net worth" gain of about $10k per year taking everything into consideration (future cash flow, the principal being paid down by renters, the increase in the value of the house where I've assumed only a 1% increase to be conservative). The challenge is that I've never seen this played out before. Does anyone have any experience with holding a negative cash flow house long term and the economics moving in their favor? Thanks in advance.

Jeff S. · Answer

Your answer should have something to do with the reason you own it in the first place. If that was understood your scenario would take on some meaning.It would make sense to me to own it if I bought it at a huge discount and my profit was in the property. If that is the case then holding it for a while until everything fell into place to use the equity in the best fashion would be fine.If you bought it in 2008 and are waiting out the increase in values to get you out of being under water then holding might be a good choice.If you are suffering financially because of the negative cash flow then sell it.

Joe Villeneuve · Answer

Run away...run far away.If this was a poker game, you'd be looking at a "Jack High",and still feeding the pot. You can keep putting more into the "pot", but it won't change your cards.

Josh C. · Answer

With only 1% appreciation sell it if you can. You left out what's it worth and what you owe. If appreciation was at 8% the answer would be maybe, but at 1 it's a dog.

Account Closed · Answer

Hi Elke,If the property is worth $530k, you're in an above average appreciation market. My guess is your property has an average 4%-5% of appreciation over the last 30 years. To use 1% in your calculation is short changing yourself. Just say "sell it" or runaway is ignorant IMO. The decision to sell depends on a lot of other factors. How long have you own it? How long has it been a rental? What was your initial basis/purchase price? How much depreciation recapture are you looking at? What is your tax bracket? How many years do you have left on the mortgage? What's the current interest rate? What's the current rent? What's the fair market rent? How's your rental market? What is your household income/tax bracket?If your original basis is low and you previously did cash-out refi, you might end up owing taxes instead of walking away with money. I'm in the process of refinancing 3 loans with a lender, where the interest rate is 1.75% for a 1-year ARM. Terms are 1-month LIBOR + 1.56% margin. A lot of time, a refinance will solve your negative cash-flow issue. Just remember that cash-flow pays the bills. Appreciation makes you rich. I'm a testament for owning properties in an above average appreciation market. Unfortunately, you need the immediate cash-flow to get off the rat race. If that's not your immediate need and you can wait 10-15 years to reap the rewards while watching your equity grow, I'd say keep it. this is truly depends on your personal financial situation. One size does not fit all. I wish you make the right decision, whichever it is. Best of luck.

Elke Cardella · Answer

Exactly. @Mike H gave some great advice.

Brent Coombs · Answer

Looks like @Mike H. was right on the money with his refi idea. In the end, easy decision. Certainly, $50k+ transaction costs just to to sell then buy something supposedly better might put a dampener on your day (anyone know ways to avoid such high fees?). Cheers...

Elke Cardella · Answer

Thanks everyone for your replies on this. I am going to refinance the property to become cash flow positive. An easy solution for now!

Elke Cardella · Answer

After thinking about this a bit more, I'm still not sure it makes sense. Feel free to point out any flawed logic here but the transaction costs to buy and then sell a new house would add up to about $55k (assuming 10% including broker's fees and other costs on both transactions). Let's say that I then bought a house that profited $3400 per year (instead of losing $3400 a year) for a net annual change of $6800 per year. It would then take about 8 years to "break even" on the deal ($55k/$6.8k), meaning it would take 8 years for the deal to pay off in improved cash flow to offset the transaction cost of $55k to switch investments. 8 years and $55k seems like a lot of money and a long time. For those of you who advise selling negative cash flow investments, generally speaking, how do you reconcile the huge transaction costs of doing so? Thanks in advance!

Ron Garney · Answer

It's all about positive cash flow now. If it's not making u money then it needs to go. I would sell it and buy something that makes you money now with positive cash flow. You will still get the same benefits with another property that you was talking about, appreciation etc. To me that makes economical sense. Just saying...

Elke Cardella · Answer

Thanks everyone for your responses. The opinion that it makes sense to sell so I can use the equity to invest in a cash flow positive house particularly resonates. The challenge there being finding the next property and of course, overcoming the inertia associated with owning an out of state home that for the most part takes care of itself with the exception of the $3400 annual loss.