First rental property not cash flowing

New to Real Estate · Long Island · Member since 2021 · 55 posts · 19 votes

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.

Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

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Ryan KellyBusiness Member

Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes

@Michael Mackney 5 months is nothing and not long enough to know if you have a solid asset. The first year is always the thinnest and should get stronger each year. You need a full year of income and expenses to evaluate your property fully AND determine what moves you will make to improve your cash flow in year two. Real estate is a long term game.

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Tim G.
Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
4y
Are you a speculator or an investor?
0 Reply
Jim Pellerin
Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
4y
Quote from @Michael Mackney:

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.
Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

@Michael Mackney I subsidized my properties for years and lost a lot of money. I had over 100 properties that on paper looked like they were cash-flowing but after maintenance and management were actually a negative return. And then the sub-prime crisis hit in 2008 - 2010 and the market fell out and any speculation I had on appreciation was done. I lost millions.

This is why I don't advocate investing in single-family homes. Too much liability, especially if you are over-leveraged. My recommendation to everyone I coach now is to focus on short-term income generating strategies such as wholesaling and fix and flips so that you can raise enough funds to either invest in larger apartment buildings or start your own syndication with other investors.
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Tyler EveridgeBusiness Member
Real Estate Broker · Dayton and Cincinnati, OH · Member since 2019 · 80 posts · 74 votes
4y
@Michael Mackney
If you think you can sell and come out on top or at least breaking even, I would do that. It sounds like you have razor thin margins for cash flow with this property. If you would like to chat about higher cash flowing areas/properties feel free to reach out. Best of Luck!
1 Reply
Greg R.
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Michael Mackney:

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.
Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

If you've owned for 5 months, you probably bought near the top of the bubble. If you are able to get out of the property and break even, or just a little bit behind, you should do that and count your blessings.
A lot of folks are going to tell you that it's always a good time to buy, which isn't true. There are good times to buy and there are bad times to buy. You might have someone on the forums try to argue that they purchased a home run in 2008, but most people who bought at the top of the bubble lost everything.
There are very strong signs that show an imminent decline (a crash) in the housing market. You'd be much better off buying in a crashing market than in a bubble.
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Jim Pellerin
Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
4y
Quote from @Greg R.:

Quote from @Michael Mackney:

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.
Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

If you've owned for 5 months, you probably bought near the top of the bubble. If you are able to get out of the property and break even, or just a little bit behind, you should do that and count your blessings.
A lot of folks are going to tell you that it's always a good time to buy, which isn't true. There are good times to buy and there are bad times to buy. You might have someone on the forums try to argue that they purchased a home run in 2008, but most people who bought at the top of the bubble lost everything.
There are very strong signs that show an imminent decline (a crash) in the housing market. You'd be much better off buying in a crashing market than in a bubble.

@Greg R. Agree 100%. Look what I wrote earlier in the thread.
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Steven Foster Wilson
Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes
4y
Quote from @Michael Mackney:

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.
Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

Can you find another property that is in a B-/B or B+ area with the money that you would get from this property? I would start looking at the market and seeing what you can find. If there is a deal or you are seeing that it is possible then sell it.
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Greg R.
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Jim Pellerin:

Quote from @Greg R.:

If you've owned for 5 months, you probably bought near the top of the bubble. If you are able to get out of the property and break even, or just a little bit behind, you should do that and count your blessings.
A lot of folks are going to tell you that it's always a good time to buy, which isn't true. There are good times to buy and there are bad times to buy. You might have someone on the forums try to argue that they purchased a home run in 2008, but most people who bought at the top of the bubble lost everything.
There are very strong signs that show an imminent decline (a crash) in the housing market. You'd be much better off buying in a crashing market than in a bubble.

@Greg R. Agree 100%. Look what I wrote earlier in the thread.

Thanks Jim. You lived through it and know from experience. A lot of other folks on this forum haven't. The last several years is all they know and they think it will be that way forever.
2 Reply
Shiela R.
Investor · Boulder, CO · Member since 2017 · 304 posts · 347 votes
4y
@Michael Mackney hello. Deciding to sell or not is a personal decision but from what it sounds like, you may be ready. Regardless of what you decide, you've (hopefully) learned a hard lesson which is: don't buy at the top of a market and/or always get a discount. And what looks "good" on paper isn't always so good re: cash flow and maintenance funds, etc.
I very much agree with the more seasoned investors here on BP like @Jim Pellerin and @Greg R.. I have also lived through a full cycle and saw people lose their shirt who were over leveraged and who approached investing as if everyone makes money if you "just raise rents to market rent and/or fix up the kitchen." Not saying you're the latter, but you get the idea. REI is not complicated in concept but if it were easy, everyone would be successful.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Appreciation doesn't offset negative CF.
1 Reply
Spenser Harvel
Member since 2022 · 16 posts · 8 votes
4y
Hi Michael,
It sounds like it may be time to sell. I agree with the comment above that appreciation does not offset negative cash flow. If you had gained some equity in the property, maybe try to sell it and 1031 into something that will cashflow better. Just a thought!
0 Reply
Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
4y
Sell it and re-invest in A/B areas. Try to get a 4 unit they tend to cashflow the best after all the operating costs.
1 Reply
Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
4y
@Michael Mackney, it sounds like you may have fallen victim to what nearly everyone on these forums preaches: "5% maintenance, 5% capex is enough". I would say anything less than $400/mo combined is not enough. This is true if everything is NEW when you buy. And you need to account for bigger checks sooner, if not accounted for as an immediate capital item.
Now, eventually, once you fix everything, you will go through a period where you have effectively no repairs for a while. But that will likely not come until you have spent close to 6 figures fixing just about everything: roof, gutters, HVAC, kitchen and bath remodels, rewire (if knob and tube or aluminum), etc. And I am assuming you are not expecting to see $100k+ appreciation in the near future.
All that being said, probably worth selling.
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Patrick DruryBusiness Member
Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
4y
@Michael Mackney
Just sell it and look into a market where you can cash flow.
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Joseph BeilkeBusiness Member
Real Estate Agent · Palm Coast, FL · Member since 2018 · 364 posts · 244 votes
4y
@Michael Mackney
Everyone is pretty much saying the same thing. But I want you to think about what maintenance items were repaired, is this long term repair or replacement that will give you peace of mind for while? Secondly, how much are you paying for PM and if you sell are you bound to a contract and if you don't sell can get out of it and shop around or self manage? What is structured in your rent, can you make changes to have then tenants pick up some of the cost? What was the purchase price, will the depreciation off set some of your yearly tax burden from other incomes? If you end up paying 12K less a year in taxes than you did last year, that's a 1K month cash flow that you get all at once when you get a return. These are some of the things you need to think about before you jump back in the market to sell. If selling is the best option I would jump fast, prices are coming down quick. I am anticipating a 10-20% price adjustment here in Palm Coast Fl. Which will pretty much knock out the last 12 months in appreciation. Go luck on which ever path you take!
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Justin Bailey
Rental Property Investor · Canton, OH · Member since 2021 · 30 posts · 18 votes
4y
@Michael Mackney who is calling for the maintenance? If it's the property management company they might be wrongfully repairing non existing things. A good property can be easily ruined by management. Not saying this is the case but it happens often unfortunately. Easily look into another property management company.
2 Reply
Greg R.
Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes
4y
Quote from @Justin Bailey:

@Michael Mackney who is calling for the maintenance? If it's the property management company they might be wrongfully repairing non existing things. A good property can be easily ruined by management. Not saying this is the case but it happens often unfortunately. Easily look into another property management company.

Good point. I'm terrified of the prospect of having to turn management of my properties over to a management co.
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
4y
What are the repairs that are being done? It is the case of a needy tenant or were there problems that needed to be fixed and deferred maintenance from the previous owner? Often homes in tougher areas look good on paper, but the reality is higher turnover and more repairs.
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Monty McLamb
New to Real Estate · Johnston County, NC · Member since 2020 · 31 posts · 24 votes
4y
Only 5 months may be a little quick to pull the trigger on a sale. Are the tenants reliable and can you reasonably expect payment each month? Are the repairs you are making long-term repairs or just bandaid repairs that will keep popping up every month? Are the same repairs needed each month ? As someone stated above, if the management company calls for service every time a tenant hears a funny sound, a faucet drips, a light burns out, a door wont close good... you get the picture, you will be hard pressed to make any money. You pay those costs so the management company has no incentive to save you anything. (My MC called for an HVAC repair and told me I needed to replace the system at $6,600. I called my guy and he added freon and a capacitor and I was back in business for $425. I no longer use that MC. Anyway, you have owned it less than a year so the taxes on the sale will be higher. After commissions, taxes, market changes, you may walk away with very little above your initial investment. The best advice I can give is talk with your CPA and do what's right for you and your situation. A lot of people, me included, can tell you what we've done but it may not be right for you.
I was once in your shoes and questioned every decision i made. My personal opinion is that the repair expenses should work to lower the taxable income and the tax benefits may end up making your property a very positive investment, even if it is not putting a few hundred in your account every month. Ask a trusted CPA.
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Brock Mogensen
Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
4y
I suggest selling it (especially if you can make a profit) and moving into a more stable A-B asset. I've had some bad experiences with the C/C+ properties as well. Income and expenses are a rollercoaster every month. I now prefer better locations/tenant base.,even if it means a lower cash on cash return.
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Ryan KellyBusiness Member
Real Estate Broker · Austin, TX · Member since 2018 · 1k+ posts · 1k+ votes
4y
@Michael Mackney 5 months is nothing and not long enough to know if you have a solid asset. The first year is always the thinnest and should get stronger each year. You need a full year of income and expenses to evaluate your property fully AND determine what moves you will make to improve your cash flow in year two. Real estate is a long term game.
[email protected]512-674-5478
Ryan Kelly Group - Keller Williams5112 Reviews
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Joe StoutPro Member
Investor · Catonsville, MD · Member since 2020 · 81 posts · 41 votes
4y
Hey man, I understand what you're saying and that feeling came up for me too! Unfortunately, that's the name of the game and it's extremely hard to cash flow every single month. I think that when we buy these investments, we have to look at what the property will be cash flowing in 5, 10, 15 years. It's a slow game but it's so worth it and it's tried and true!
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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
4y
Quote from @Michael Mackney:

Hey everyone. I've had a duplex for the last 5 months in a C/C+ area. Original numbers and inspection report made it look like on paper that I would be cash flowing after raising rents to market rents but month after month so far, something maintenence wise comes up that leaves me in the red a few hundred a month after I calculate reserves, property management, etc. The market in the area has overall appreciated but I don't know if I can simply rely on appreciation to offset negative cash flow.
Should I sell with the appreciated price and use it as a learning experience before moving into an area that might have less maintenence issues or try and hold on to it?

Have you seen the property in person? Do you have any idea if there is any deferred maintenance and the nature of that maintenance? Is this an OOS property? If so, unfortunately, I see this so often....folks are misled by how the numbers pencil out, but in reality, it never happens that way. You live in Long Island, so you probably view this rental property from the prism of your area. But there is a reason why properties in your area don't cash-flow and there is a reason why the OOS property you bought does cash-flow (on paper, at least). I bought a property OOS in a decent area whose rent adhered to the 2% rule. It was recently remodeled and passed inspection with flying colors. It provided nice cash-flow, but nowhere near what I was expecting. I honestly don't see how folks can make any kind of cash-flow with some of the heavily financed OOS stuff I see listed these days.

With that said, I think 5 months is way too early to be making any kind of real assessment on how your property is performing, unless the plan is to dump it before the market turns.
If this is a local property and not an OOS property, then please ignore everything I wrote above!
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Jeremy Horton
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
4y
@Michael Mackney
Could of things - how did you budget for maintenence/Repairs and Capex?
Personally I feel it's a really bad idea to run your numbers at "increased market rent" rate. You should run them at whatever the current rents are, because that's what's realistic. Need to make sure it cashflows currently.
You see it with gurus all the time..."ah well I just bought the property and increased rent to market rate". Yea give me a break. Don't count on this method, the least reliable one of them all.
Did you spend anything to rehab the property tk make sure it was in good condition after you bought it? I typically budget at minimum 5k on top of everything else, because stuff will invariably come up that you don't know about.
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Michael Mackney
OP
New to Real Estate · Long Island · Member since 2021 · 55 posts · 19 votes
4y
@Jim Pellerin Thank you for the insight! I agree, the last thing I want is to continue to speculate on appreciation alone. The numbers need to make sense for me and then if appreciation happens, just the cherry on top.
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Michael Mackney
OP
New to Real Estate · Long Island · Member since 2021 · 55 posts · 19 votes
4y
Thank you for the replies, everyone! I'm leaning towards selling it, walking away with a small profit or breaking even. The main thing I got out of it was the learning experience of how to get that first deal so if I can walk away with a tiny bit of cash with that, I'm very happy.
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