Should I Cash Out?

[fmonaco]

I have a dilemma that I have analyzed and would appreciate some advice from fellow investors.
My first real estate investment property which I purchased 5 years ago, has always been tenanted however it has also never made me a positive cash flow (that`s right it is an alligator) given the monthly condo fees. My mortgage is about to be renewed and I believe I have one of the three following options to consider:
1. Keep it. I have accumulated approx $120K of equity in it and either sit on the equity or use the equity to finance additional properties. The approx $200/month ($2400/year) loss is a tax write off. The condo town is approx 40 years old but it is close to hospitals, shopping, schools etc and I did get it at a steal 5 years ago.
2. Sell it and kill off the alligator. Use the proceeds to fund an additional investment property or use some $$ to finish off renovations on my principle home.
3. Approach the existing tenant, who loves the place, and enquire whether she`d be interested in a lease to own arrangement.

There are a lot of very savvy real estate investors in this forum. I would appreciate any advice I could get from any of you guys. All opinions are very welcomed.

 

[GarthChapman]

Assuming you believe there is not a large appreciation upside to come, sell it by either method and re-invest the capital returned in a more efficient asset. A LTO offers probably a higher price and lower costs of sale.

What was your net return after the 5 years since you purchased it, and on how much capital invested? That being appreciation plus mortgage pay-down less cash-flow losses. You may have realized a reasonable return if the appreciation was good and you bought it under market value.

 

[Rickson9]

I would cash out. However, I`m only speaking for myself. You should make a decision that makes sense for you and family.

 

[NeilUttamsingh]

QUOTE (GarthChapman @ Sep 19 2010, 08:26 PM) sell it by either method and re-invest the capital returned in a more efficient asset...

fmonaco,

Garth`s advice quoted above is the best piece of advice you could get.

Invest in a more efficient asset.

Best Regards,
Neil.

 

[EdRenkema]

QUOTE (NeilUttamsingh @ Sep 19 2010, 07:44 PM) fmonaco,

Garth`s advice quoted above is the best piece of advice you could get.

Invest in a more efficient asset.

Best Regards,
Neil.

I`m with the `Bloginator` (Neil) and BTW if your tenant loves the place absolutely approach them for a LTO yes.

 

[NeilUttamsingh]

QUOTE (EdRenkema @ Sep 19 2010, 09:48 PM) I`m with the `Bloginator` (Neil) and BTW if your tenant loves the place absolutely approach them for a LTO yes.

LOL...thanks Ed.

You are my number one fan.

http://www.firstrentalproperty.com

 

[RorySutter]

I assume with a pending mortgage renewal that you did not use a LOC, or variable rate product and have a fixed rate mortgage and your payments will probably be increasing? Does that mean that your alligator will be getting hungrier?

Over 5 years your alligator has cost $12,000 of your after-tax dollars. I wouldn`t recommend rationalizing negative cash flow with a tax write off. You could have just as easily increased your ROI with $12,000 of positive cash flow with the right investment.

As you know Robert Allen popularized the term "alligator" aka "negative cash flow" and there are strategies for caging the alligator, including asking for more rent, cutting the seller`s price, giving more towards the down payment, eliminating more expenses and structuring the mortgage payment.

Out of curiosity have you been increasing the tenant`s rent and where are you compared to market rents? With a rent-to-own scenario you can increase the rent to include all of your carrying costs and even a little positive cash flow if the tenant is able to afford it. You can also ask for a non-refundable option fee of several thousand dollars and set your selling price for 12 to 24 months out. An additional bonus is that you will not have to pay a realtor commission on the sale side.

Fortunately everyone looks good when the tide is rising and this rising tide has saved you, but this could change with softening market values and/or with rising interest rates.

Experience has shown me that the best time to sell is when you don`t have to.

But I think the most important principle to share here for all the readers, is that you can not build a long-term sustainable and repeatable investment business if you are buying alligators. How many alligators can anyone afford? They will not help you to grow your business and buy more properties in order to create and enjoy streams of passive income.

 

[markl]

Following up on Garth`s note. The opportunity cost is more than the negative cash flow. You have $120k sitting in an asset what is this going to make you per year? You could probably go out and in today`s environment get 2 positive cash flow properties in fundamentally solid towns/cities. Hence actual cash flow, double the mortgage pay down and double the appreciation.

What most investors do not look at is opportunity costs involved in the real estate they are holding.

Regards,

 

[gwasser]

QUOTE (markl @ Sep 27 2010, 04:57 AM) Following up on Garth`s note. The opportunity cost is more than the negative cash flow. You have $120k sitting in an asset what is this going to make you per year? You could probably go out and in today`s environment get 2 positive cash flow properties in fundamentally solid towns/cities. Hence actual cash flow, double the mortgage pay down and double the appreciation.

What most investors do not look at is opportunity costs involved in the real estate they are holding.

Regards,

It is hard to believe that you can not cash flow with 120K in equity. I suggest check your numbers. Also, upon mortgage renewal your 5 year interest rate is likely lower than on your old mortgage. Finally, as pointed out by other posters, your rental income should also have increased, in would venture at least 3% compounded per year.

Check your real numbers and when all is true then make your decision.