Real Estate Investment Question - Time to sell or hold?

Question

I purchased an investment property for $370k and its worth $390k minimum. I'm negative $740 a month on this rental and I currently have a tenant. The first mortgage is an interest only loan with a 7.50% rate and a lovely 6 month pre-pay penalty. My rate is high because i bought this as an investment property. Should i sell this investment property and accept my losses and move on? It would literally take 5 years for the rental income to cover the mortgage payment. This was my worst investment of all time but I did so well selling my other rentals I wanted to buy something else asap. So at this point should i sell my investment property or should i just eat $740 a month? I enjoy tax deductions but this isnt the right way to get one.

Answer 1

Right now, isn't a good time to be selling. Housing is on the downside and even though the property may have a high value, you won't realize much profit, if any.
IMO, hang on to it, a while longer and take the tax deductions.

Answer 2

It depends on what type of area you are in. If it is a high growth area and it will appreciate higher than $730 x 12=8,760 per year then it's still a good investment. However, if you find a higher yielding investment right away then I would sell. As you know rentals take a little while to start yielding positive cash flow unless you have a large downpayment. In NY where I'm from many landlords break even or even take a loss for a few years but the properties gain value over the years and they use the equity to finance other properties while raising the rents.

Answer 3

Your selling costs now would be about 10% of the sales price and you probably would sell for less than 390K in most markets.

The better way would be to sell on a rent-to-own. By accepting someone with cash but spotty credit or work history you can salvage this situation because there are always people who can't qualify for a traditional loan but have cash or good inceom. Try the existing tenant first. If not then advertise with $300.00 more income per month and don't mention the amount of down payment required in your marketing. Set the price today but raise it to $410,000.00 for the excercise of the option in the next 12 months and $430,000 for 30 months.
Make the condition of payments on time for the right to receive an option credit of 25-30% when the purchase option is exercised. Try to get at least 10% option upfront. With an increase of $300.00 more in rent and another $100.00 a month in income $33,000/12 your close to break even. Next make sure the rental agreement allows for rent increases after twelve months, and increase the rent after twelve and every six months thereafter raise in about $50.00, this is not enough to make tenant/buyer move and reduces negative. Tack on another 150-200 dollars per month if purchase option is not excercised. To get more income, finance something your tenant-buyer wants. Like a computer you buy for $300.00 and finance for $600.00. A big screen TV, Xbox, deck, car, etc. You purchase for cash and finance to make an additional 30-100 a month.

Finally, after six months you can show a lender that you have a lease of more than 12 months remaining and refinance to teaser of say 1-3% adjustable. Now you have cured your cash flow problem and next time BUY BELOW Market or buy with soft terms (subject to someone else loan).

Good Luck