Creative Solutions for Negative Cash Flow Situation

General Landlording & Rental Properties
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Creative Solutions for Negative Cash Flow Situation

Steve Borgman
Des Plaines, IL · Member since 2010 · 4 posts · 0 votes

I'm a first time owner of an investment property. Challenge is that I did not figure in a senior tax exemption as well as homeowner exemption, which made the taxes look deceptively lower.

As it is, with the downturn in real estate in the Chicago area (we've had the property for about two years), in order to get tenants, we've had to go lower on the price, in order to fill the vacancy. We've been fortunate to have good tenants. However, it's becoming cost-prohibitive to hold the property. I've dipped way into savings, and even gone into some debt to cover the cost of taxes on the property.

Am wondering if there are creative options besides selling the place at a loss.

What I've already considered: rent to own (making for a higher rental price)

Using a self directed IRA to somehow tap into extra funds. (legally)

Is hard money a worthwile option?

Would it be realistic to approach a seasoned investor who has a lot of extra funds and ask him to invest some money (which would cover holding costs until the future sale of the property), and count him/her in as a part-owner?

Right now, we are considering the following: rent w/ option to own, rent (letting the renter we will need to be showing the house, and that this will be a month by month rental situation, until the house is sold), sell immediately (but the average wait time till sale seems to be 3-6 months)

If there's anything I have not thought of, please let me know! I am in problem solving mode....I don't want to amputate my arm (sell the home at a huge loss) if I can put on a few tourniquets to make it only a small bleed :(

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Hi Steve, welcome to BiggerPockets.

    The landlording business isn't as simple and profitable as its made out to be, eh?

    Some actual numbers would be helpful.

    Selling at a loss and ponying up the cash (or taking a loan) to cover the shortage may be your best bet. Some folks say here say they've had success getting investor short sales to happen, but that would slam your credit. And, if you have other assets, the lenders won't let you just walk away.

    Rent-to-own doesn't usually make for much of a higher rent. Plus, you'll be giving that higher rent back when they exercise the option. The property will have to appraise. If you're in a position to have to sell at a loss, that may still be true when they exercise their option.

    I assume you own the house, and its your IRA you've considering. No, your IRA cannot have any dealings with you.

    I don't know what kind of financing you have in place now, but I'm 100% sure its better than hard money. Hard money's going to be 2-6 points, 12-18% (and NOT 2 point and 12%) and 60-70% LTV max.

    You've already said you're at a loss on this deal. Do you actually have any equity? If you're selling at a loss where's the profit to split with an investor?

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  • Steve Borgman
    OP
    Des Plaines, IL · Member since 2010 · 4 posts · 0 votes
    16y

    John, thank you for the untarnished facts. Yes, there is some equity, but I was thinking that perhaps we could assume future equity? But, given the amount of great deals that are out there, it would take a very benevolent investor to go in on that type of partnerships.

    Another thought: looking for commercial loans to cover holding expenses? Or converting the current home equity loan into a commercial loan?

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  • Mark N.A
    Real Estate Investor · North Carolina · Member since 2008 · 1k+ posts · 483 votes
    16y

    Steve, if you bought 200 shares of General Electric for $70 a share, and then the share price sank to $20 a share, what would you do?

    Keep your position in GE hoping for a rebound? Or cash out your position and look around to invest in the next MicroSoft?

    Personally, I can sell a dog of a stock at half what I paid, take my lumps and never look back. But with real estate I CAN'T STAND THE THOUGHT of taking less than I paid. Hubris, I suppose.

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  • Joshua D.Pro Member
    BiggerPockets Founder · HI · Member since 2008 · 16k+ posts · 5k+ votes
    16y

    Steve -
    A few years back I found myself in a situation where the neighborhood where some properties were located began to quickly dilapidate, and I was no longer able to reliably keep them rented. No matter what I did, I wasn't going to be able change what was happening around me. As a result of all factors, I had to sell at a considerable loss. Had I not, I'd still be bleeding cash.

    We don't fully have all the details here, but I like to personally unload investments that are dragging me down.

    Podcast Guest on Show #100
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  • Stephen McKee
    Specialist · Riverside, CA · Member since 2008 · 382 posts · 72 votes
    16y

    Josh is right about the bleeding out issue. A 1 time 100k loss is better then bleeding 200k over 10 years hoping for a change. Get out, remember the mistakes, try again.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    16y

    Hi, well I don't know if you'll bleed for ten years or not. My first question would be how long do you expect to suffer. Borrowing long term fo short term expenses is the kiss of death in business(or your personal life). When do you have a repricing opportunity with rents and when is the current lease up?

    Does the city exempt non-profit housing organizations from the taxes that are sinking you?

    Most here know I'm just a wild and crazzzzy guy so hold on to your hats!

    Look into a 1031 exchange for yourself with a non-profit housing organization. Trade your way out. If the organization would not have the tax liabilities that are putting your property under, it may work for them. They may have a property that they would trade for yours, I know it might not be the best deal, but your ship is sinking!

    I would imagine Acorn is closed (LOL) but I'm sure there are others. I had a non-profit which I was the Executive Director of, with a salary and bennies, and the properties were for low/moderate income housing. I could trade for dogs and make them work.
    It sounds as if you have dropped rents to get it rented that this might be available to you, don't know the property.

    The only other suggestion as one you are considering, seller fina nce/wrp the deal, hopefully to the tenant. Tell them they need to pay more and you'll carry what ever equity you have. Amortize it so that you conserve your equity, but it has to cover the liabilities too. Hopefully you'll ahve something at the end.

    If you lose the property your tenant will have 90 days to stay there after the sale. In light of that and the costs of moving, maybe they would now consider helping with the taxes in their rents.

    Good luck, Bill

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Our advice would be more accurate with the details of the deal. What did you pay? What do you owe? What are the rents? What's your P&I payment?

    If you're pushing break even (i.e., rents are close to double the P&I payment) and not too far underwater, maybe you can hold out and get your money back. If you're really in the red (rent doesn't even cover PITI) and you're deep underwater, its probably a choice of taking the hit now or later. But without an understanding of the real situation, its hard to give specific advice.

    My feeling is we're not going to see more big drops in prices, baring some big new crisis. We may be flat for a few years more and at some point we'll start seeing slow appreciation. I'd use 3% annual appreciation as a guess.

    Realize the costs of selling real estate are at least 8% of the sales price. Probably more like 10-11% right now. If you put in a decent down payment or otherwise bought right, maybe you can get away without bring cash to the table. If you have to bring cash, you have to weight that against the monthly loss. With the real numbers, I'd evaluate the current net from a sale vs. your loan. Both right now, and projecting into the future. I'd look at the current monthly loss. I'd figure out where the monthly loss adds up to the loss to sell and see if it makes sense to try to hold on.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    16y

    I would sell the property ASAP! Things are going to get worse - A LOT WORSE! There are literally millions of foreclosed homes that the banks are holding off the market. Foreclosures are going to explode in 2011. The housing bailout is just about to end. There is a HUGE inventory of houses that will have to hit the market at some time and will drive prices much lower.

    None of these things even considers the macro economic picture. THE USA IS BROKE! The debt is 91% of GDP and RAPIDLY rising. The government's solution to this debt crisis is to borrow (print) more money by the boat load. Medicare is broke (even before the Socialist in Chief takes $500 Billion out of it to pay for socialized healthcare). Social security is broke. Freddie and Fannie are broke. Many states are broke. Many cities are broke. The government has essentially nationalized the big banks, the auto industry, big insurance, healthcare, student loans, etc, etc, etc. The country is literally insolvent and failing. If you've got a loser - NOW is the time to sell it.

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  • Stephen McKee
    Specialist · Riverside, CA · Member since 2008 · 382 posts · 72 votes
    16y

    Hey MikeOH,

    If the country is that bad why would anyone invest here?

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    16y

    I have my rental property business here in the USA because I live here and I need money to live on. It's hard to manage rentals in a different country. Furthermore, most of the "developed" world is in terrible financial shape just like the USA. Would you invest in socialist Greece? Portugal? France? Spain? Italy? Ireland? England? I wouldn't (unless I lived there).

    Are you disputing that the USA is in terrible financial shape? If so, what part of my original post are you disputing? Do you actually believe that the USA is in recovery? If so, I've got a bridge to sell you!

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    Lets focus on dealing with Steve's issue. If you want to debate the stability of the US, please use the Political talk forum.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    16y
    Originally posted by Steve Borgman:
    ... Or converting the current home equity loan into a commercial loan?


    More details will be needed to give any sort of better answers.

    Is this a loan or line of credit (HELOC)? Is this interest only, or principle plus interest? Is this financing taken against the rental property or against a property you reside in?

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  • Aaron Pfeffer
    Real Estate Broker · Los Angeles, CA · Member since 2008 · 73 posts · 11 votes
    16y

    Sell. Specific numbers or not, a feeling of concern has crept its way in, and you're considering borrowing more in hopes that will allay the fear.

    No. Sell. Most private lenders/investors you may approach will smell the blood and unfavorable terms will only lengthen the pain.

    The 1031 idea sounds very intriguing, and if plausible, should be explored immediately. Otherwise, sell and bring some cash to table to make it happen if need be and if you have the means.

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  • Tom C
    Real Estate Investor · OH · Member since 2008 · 1k+ posts · 86 votes
    16y

    Here is how I look at this. You have to look your business's whole picture. Sure, every time I pull cash out of one house that is free and clear to purchase another, that first house becomes less profitable, but now I just purchased another which gives me an extra $550 a month in cash, actually only $200, because now I have a note on the first property. As long as you are only holding one property, you will always be at risk. I say hold the property, pull some cash out if you can and go and buy another to off set your risk and the money you are loosing on this property.

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  • Steve Borgman
    OP
    Des Plaines, IL · Member since 2010 · 4 posts · 0 votes
    16y

    I want to thank every single one of you for your well thought out and caring advice. The nice thing is that the rent does cover a couple hundred above the cost of of the mortgage payment. However, the difficulty lies in the ever increasing tax costs, which are what is causing the bleeding. We are going to appeal the taxes, possibly.

    I also like the idea of comparing the loss of holding the property for 2-5 more years, versus selling now.

    The challenge is finding a way to cover the costs of holding. The loan, unfortunately, is held against my own residence.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    16y

    The ever increasing tax costs are just one small problem. Read in the Rental Property forum about the 50% rule and the TRUE expenses of rental properties. If your rent is just $200 over the PITI payment, you're almost certainly losing money every month. Well, not every month, because hopefully in most months you collect the rent and pay only taxes and insurance as expenses (debt service is not an expense)

    The 50% rule says expenses will eat 50% of the rent. That includes taxes, insurance, maintenance, vacancy, legal fees, CPA fees, capital items like roofs and furnaces, tenant damage over security deposits, eviction expenses, utilities (at least when empty), etc. Again, read in the Rental Property forum.

    If you're just above water in the good months, you're really going to be hurting when one of those bad events inevitably hits. Now, if you mean your PITI payment is $300 and the rent is $500, you're not too far off. OTOH, I'd guess (have to guess, since you still haven't given us a look at the real picture), your PITI is more like $800 and your rent is $1000. If $600 of that is P&I, then you're actually in the hole only about $100 a month, and ahead $200 a month in the good months. Save the $200 and add in another $100 out of your pocket each month until you have reserves of about $3000 and hang on.

    OTOH, if you really mean the rent is $2000 and PITI is $1800, you're really hurting. If that's $1400 P&I and $400 in taxes and insurance, you're in the hole $400 a month. If you can sell now at a $10,000 loss or hold on with a $4800 annual loss, selling now is equivalent to a little over two years of holding on. If you hold on for two years and then take the $10K loss (highly likely, IMHO, knowing nothing more about your market than its in the US.), then you've doubled your pain.

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  • Steve Borgman
    OP
    Des Plaines, IL · Member since 2010 · 4 posts · 0 votes
    16y
    Originally posted by Jon Holdman:
    The ever increasing tax costs are just one small problem. Read in the Rental Property forum about the 50% rule and the TRUE expenses of rental properties. If your rent is just $200 over the PITI payment, you're almost certainly losing money every month. Well, not every month, because hopefully in most months you collect the rent and pay only taxes and insurance as expenses (debt service is not an expense)

    The 50% rule says expenses will eat 50% of the rent. That includes taxes, insurance, maintenance, vacancy, legal fees, CPA fees, capital items like roofs and furnaces, tenant damage over security deposits, eviction expenses, utilities (at least when empty), etc. Again, read in the Rental Property forum.

    If you're just above water in the good months, you're really going to be hurting when one of those bad events inevitably hits. Now, if you mean your PITI payment is $300 and the rent is $500, you're not too far off. OTOH, I'd guess (have to guess, since you still haven't given us a look at the real picture), your PITI is more like $800 and your rent is $1000. If $600 of that is P&I, then you're actually in the hole only about $100 a month, and ahead $200 a month in the good months. Save the $200 and add in another $100 out of your pocket each month until you have reserves of about $3000 and hang on.

    OTOH, if you really mean the rent is $2000 and PITI is $1800, you're really hurting. If that's $1400 P&I and $400 in taxes and insurance, you're in the hole $400 a month. If you can sell now at a $10,000 loss or hold on with a $4800 annual loss, selling now is equivalent to a little over two years of holding on. If you hold on for two years and then take the $10K loss (highly likely, IMHO, knowing nothing more about your market than its in the US.), then you've doubled your pain.

    Josh, I think your confirming that selling right now may be the best scenario. In the future, I'll definitely keep the 50/50 rule in mind :(

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