Exit Strategy - throwing good money after bad?

Question

Hi everyone! This is my first post so here it goes! I am new to BP, but have been investing in RE since 2003 while keeping my day job. One important lesson I have learned (albeit I wish I learned this years ago!) was to formulate not only a buy strategy but exit strategy early on. I have managed to keep my good credit and not walk away from underperforming properties since the market crash..
However, I am struggling as to whether I should continue the strategy and keep an alligator property or to just throw in the towel? Here are the facts: I bought the property in 2004 for $206k SFR, 4,2 1800 ft2. With $13k cash in game. I have lost $31k since 04 in negative cash flow and currently owe $180k. I am renting it for $1000 and lose $500 per month. I am also concerned that Vegas is a recourse state. I am really interested in what anyone has to say that could help me through this. Thanks!

Account Closed · Answer

Hi Michele,

Sorry for your pain. How much does it worth now?  How old is this house?  What's the interest rate on the mortgage now?  Is it an ARM?  What's its terms, like prime rate +/- 1%, etc?  How much has it gone back up since the bottom of this market?  It would be easier to evaluate if we have all the numbers.

Robert Steele · Answer

Ouch. If it was me I'd get rid of it. Not only is it costing you money but it is probably unsettling your focus that could be better trained on winners.

I'ts ok to take a loss. The best lost to take is the earliest. Don't let it snowball and bury you.

I had a 4bdr for a year that wasn't performing. Luckily I found the right sucker, er buyer, and I only had to bring $4K to closing when I sold it. Several years since then the price is lower than what I sold it for and the rents have gone nowhere. Cutting it loose early was a good move.

Robert Wright · Answer

I'm far from a RE expert, but looking at the current market price of $96/sf you could probably sell for $172K area, Your rental rate seems a bit low for the area you could probably rent for a hundred or two more. Refinancing could bring you closer to $1200/mo payment. So you are almost at a break even point.

There are a lot more things to consider I'm sure, these are just a few ideas. Losing $6K a year might help on your taxes along with the interest/taxes. Perhaps you should consult with a CPA to determine the best course of action for your financial well being.

Kelly N. · Answer

Hi Michele,

I agree with Minh, we need more numbers to help you evaluate.  Namely,
Interest rate and term of current loan,
How much is the house worth now.

You may be able to refinance it and get positive cash flow, however since you are loosing $500/ month I think you may need to sell this property.  As a general rule of thumb, if you are renting for $1000, half should be going towards expenses and the other half pays the principal and interest and YOU.

Kelly