Rental properties - Sell at a loss or hold on?

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KWheel
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Rental properties - Sell at a loss or hold on?

Post by KWheel » Sat Sep 01, 2018 4:27 pm

About ten years ago I bought two rental properties without really knowing what I was getting into. I haven't really been comfortable owning them for years now. They are run by a management company and I have never had any major issues with the management company or the properties. I'd really like to get rid of them, but their value has kept dropping. They haven't been appraised recently but based on prices in the area my equity is basically zero. Cash flow is also roughly zero after accounting for the occasional vacancy.

Property A is on a 15 year 3.1% mortgage since 2012, Property B is on a 30 year 5.5% mortgage since 2007 (I have made additional payments on B which is why it is not underwater). They were both bought for 80-85k and are now worth maybe 50-60k. Wife and I are about 30 with an income of about 180k a year and about 125k in retirement accounts if that is relevant.

If I sell now, the additional payments plus selling costs and depreciation recapture will put me at a significant net loss. I can cover the loss without issue but I hate the idea of doing this for ten years only to lose money at then end. My alternative is just to hold onto these unwanted properties until I have enough equity to sell them without losing money. I feel like holding is the correct move here but I don't like either option and would like to hear other opinions if you care to offer any. Thank you for any responses.

niceguy7376
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Re: Rental properties - Sell at a loss or hold on?

Post by niceguy7376 » Sat Sep 01, 2018 5:08 pm

Welcome to the forum KWheel.
In general, I would personally recommend that you go to biggerpockets.com forum as they are more involved in real estate related topics.

From my perspective:
Looks like your properties did NOT appreciate and thus that is a serious reason for selling. Property values across most of the nation have increased in the last 8 years and you still are in red?

From a pure cash flow perspective (not considering depreciation), is the rent income (rent - management fee) able to handle the mortgage loans (including property taxes and hoa and such fees)?

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4nursebee
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Re: Rental properties - Sell at a loss or hold on?

Post by 4nursebee » Sat Sep 01, 2018 5:45 pm

What do they rent for?
What is the management fee?
What is insurance and taxes?
Are there other fees?

If something is not part of my overall investment plan I stop doing it.
4nursebee

michaeljc70
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Re: Rental properties - Sell at a loss or hold on?

Post by michaeljc70 » Sat Sep 01, 2018 5:52 pm

What you are saying is very common. I don't want to sell for a "loss". The money is lost. Gone. It just isn't realized. It is like being down 5k at the casino and saying you haven't lost yet because you haven't stopped gambling. Keeping it in these properties for x years may get you to not have a "loss", but will keep the money from being invested in something that may return much more (opportunity cost) and not have you uneasy. If you keep just about anything long enough, unless it becomes worthless, it will eventually break even. However, that is often due to inflation, not an actual increase in real value.

I guess what I am saying is you will really probably lose money when accounting for inflation and opportunity costs no matter how long you keep them. Unless there is a compelling reason to think they will increase in value soon, I'd sell.

47Percent
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Re: Rental properties - Sell at a loss or hold on?

Post by 47Percent » Sat Sep 01, 2018 6:01 pm

KWheel wrote:
Sat Sep 01, 2018 4:27 pm
About ten years ago I bought two rental properties without really knowing what I was getting into. I haven't really been comfortable owning them for years now. They are run by a management company and I have never had any major issues with the management company or the properties. I'd really like to get rid of them, but their value has kept dropping. They haven't been appraised recently but based on prices in the area my equity is basically zero. Cash flow is also roughly zero after accounting for the occasional vacancy.

Property A is on a 15 year 3.1% mortgage since 2012, Property B is on a 30 year 5.5% mortgage since 2007 (I have made additional payments on B which is why it is not underwater). They were both bought for 80-85k and are now worth maybe 50-60k. Wife and I are about 30 with an income of about 180k a year and about 125k in retirement accounts if that is relevant.

If I sell now, the additional payments plus selling costs and depreciation recapture will put me at a significant net loss. I can cover the loss without issue but I hate the idea of doing this for ten years only to lose money at then end. My alternative is just to hold onto these unwanted properties until I have enough equity to sell them without losing money. I feel like holding is the correct move here but I don't like either option and would like to hear other opinions if you care to offer any. Thank you for any responses.

I know this is difficult to implement in practice.

But in any of the investments, the history doesn't matter one bit -- except may be for CG timing for at most a few months. Only thing that matters is what you expect to happen in the future compared to now; not compared to when you bought it.

If you have money coming in, you can see if that is the best place to leave the money in.
Since you will have a loss, you can consider the difference between selling now and selling 4-5 months from now.
If things will not improve significantly or about the same, get rid of it. There are only so many 10 years one has in their life!

The most you should do is try to time it such that you can offset the loss against some capital gains and call it good riddance.

euroswiss
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Re: Rental properties - Sell at a loss or hold on?

Post by euroswiss » Sun Sep 02, 2018 5:53 am

It’s rather uncommon to see a 25% drop in value over the past 10 years, so you are probably in a area that is losing population at a rapid clip. If that has been going on for 10+ years, it’ll likely continue. I would cut the losses and sell now.

I strongly second the recommendation that you visit biggerpockets.com and post you question there (preferably with some additional detail on location, etc). You will get an abundance of ideas and recommendations. And it’s a free forum, so you don’t have much to lose.

Nissanzx1
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Re: Rental properties - Sell at a loss or hold on?

Post by Nissanzx1 » Sun Sep 02, 2018 6:06 am

Welcome.

Rental property is fun when it's paid for and even more profitable when it's self-managed.

My advice would be to sell. Sounds like they aren't fun for you to own. Sounds like everyone (banks, management co) is making cash but you. Maybe start again some day when you have cash.

Valuethinker
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Re: Rental properties - Sell at a loss or hold on?

Post by Valuethinker » Sun Sep 02, 2018 7:42 am

KWheel wrote:
Sat Sep 01, 2018 4:27 pm
About ten years ago I bought two rental properties without really knowing what I was getting into. I haven't really been comfortable owning them for years now. They are run by a management company and I have never had any major issues with the management company or the properties. I'd really like to get rid of them, but their value has kept dropping. They haven't been appraised recently but based on prices in the area my equity is basically zero. Cash flow is also roughly zero after accounting for the occasional vacancy.

Property A is on a 15 year 3.1% mortgage since 2012, Property B is on a 30 year 5.5% mortgage since 2007 (I have made additional payments on B which is why it is not underwater). They were both bought for 80-85k and are now worth maybe 50-60k. Wife and I are about 30 with an income of about 180k a year and about 125k in retirement accounts if that is relevant.

If I sell now, the additional payments plus selling costs and depreciation recapture will put me at a significant net loss. I can cover the loss without issue but I hate the idea of doing this for ten years only to lose money at then end. My alternative is just to hold onto these unwanted properties until I have enough equity to sell them without losing money. I feel like holding is the correct move here but I don't like either option and would like to hear other opinions if you care to offer any. Thank you for any responses.
Sunk cost fallacy. What is past is past. What matters is future returns.

Do you have any reason to believe these will recover? Given the very low prices of these properties are they in depressed areas?

The main problem with selling now is you will crystallize losses you can't use to offset gains? On the other hand, can you carry those losses forward and use them later? Because that's a significant asset.

These things sound like a real drain on you, if not your time then on your mental resources and maybe your financial ones. I would sell and be done with it, before something else goes wrong.

As others point out, it's a very odd situation in US real estate if you have lost money in the last 10 years (if you bought before the Crash, then you might well have, still).

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Sandtrap
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Re: Rental properties - Sell at a loss or hold on?

Post by Sandtrap » Sun Sep 02, 2018 8:39 am

Options:
1. Sell. Be done with it. Walk away.

2. Cut expenses and raise the rent to full market value if possible by doing the following.
a. Self manage - cut the costs of the management company.
b. Learn the rental business. Do it well.
c. If possible, do the minor repairs yourself.
d. Streamline everything.
e. Maximize rental income, i.e.: raise rent, convert to VRBO, vacation, or short term, if in a desirable area.
f. Etc.

If you are not willing to commit to do #2, (or if not a viable strategy in your area) then do #1.
Wiki Bogleheads Wiki: Everything You Need to Know

Boats day
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Re: Rental properties - Sell at a loss or hold on?

Post by Boats day » Sun Sep 02, 2018 9:34 am

It always tough to loose money after holding for ten years.
Based on the fact you have no cash flow I would SELL.

I held a duplex in a high growth area for 20 years. I noticed single family homes appreciated about 4 to 6 % over that period and duplexes
were flat to 1 % growth at best.

It was a happy day when I sold . My experience of being a landlord on a small scale operation is a high risk low paying part-time job.

Best regards
Boat

Scrapr
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Re: Rental properties - Sell at a loss or hold on?

Post by Scrapr » Sun Sep 02, 2018 10:15 am

remember if you sell you have to recapture your depreciation. That can be hard as you won't have cash from the sale but have to pay taxes on the depreciation recapture. If i sold i might stagger the sales into 2 different tax years

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billthecat
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Re: Rental properties - Sell at a loss or hold on?

Post by billthecat » Sun Sep 02, 2018 11:04 am

Scrapr wrote:
Sun Sep 02, 2018 10:15 am
remember if you sell you have to recapture your depreciation. That can be hard as you won't have cash from the sale but have to pay taxes on the depreciation recapture. If i sold i might stagger the sales into 2 different tax years
But he’s been operating at a loss so probably has significant PALCOs.

If the OP’s marginal tax bracket is at least 22% federal, my advice for the OP would be to sell them both, as you say, one this year and the other next year, and use the losses to reduce earned income. By spreading them out, it reduces earned income at his marginal rate. If he’s so deep into his tax bracket that he could sell both this year and not drop tax brackets, do that. Note, I’m separating the losses from the capital gains. Reduce earned income fully by the losses and pay capital gains tax on the gains (I realize that’s not optional, just the way it works.)

I lost over $500k net in residential rentals. The only silver lining is that unlike personal property losses, the rental losses are fully deductible. Of course, the 6-7% total selling costs really adds insult to injury.
We cannot direct the winds but we can adjust our sails.

TravelforFun
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Re: Rental properties - Sell at a loss or hold on?

Post by TravelforFun » Sun Sep 02, 2018 11:22 am

Apply the Dave Ramsey test on situation like this. If you didn't have the properties, would you buy them? If you wouldn't then you don't believe these properties make a sound investment so why hang on to them?

TravelforFun

Jefferson
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Re: Rental properties - Sell at a loss or hold on?

Post by Jefferson » Sun Sep 02, 2018 1:57 pm

I know nothing about owning real estate investment properties.

But if I were looking at this as a stock, I would sell. Your loss doesn't matter. The question is whether you would put new money into that same investment today. If not, then the answer is to sell. The only potential reason then not to sell would be if you had significant capital gains that you don't want to pay taxes on right now. Since you don't, I would sell.

CurlyDave
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Re: Rental properties - Sell at a loss or hold on?

Post by CurlyDave » Mon Sep 03, 2018 1:21 am

Sandtrap is right.

The real problem here is the management company.

If you can not/will not/don't want to manage it yourself, a small-scale rental business is a miserable thing to own.

DW and I own 12 rental units and have managed them ourselves from the very first one. It has been a fantastic side business for us. But, for the short period of time when we were changing locations and had to use a management company, they gobbled up every dime of profit and kept asking for more money from us.

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