Should I sell my breakeven rental?

[Jim Piety]

I purchased a fixer upper through a wholesaler in March 2021. After more repairs and expenses than expected, i could not sell the house for a profit. The house would not appraise. So instead, I refinanced, pulled out ~50% of my invested capital and rented it out. Since September, it has been breaking even. If it was located in a fast appreciating neighborhood, I’d be okay with the zero cashflow. However, I am thinking it is a better play to sell, get back most of my capital, suffer a small/minimal loss, and reinvest the cash into a different, faster appreciating market. 

Are there any other options I should I be considering? Should I sell or hold? Appreciate everyone’s advice!

[JD Martin]

Depends on the long term prospects for the neighborhood, but I would say if it couldn't make money in the market we are in/coming out of it probably has low prospects and would be better disposed of to someone else. 

[Rodney Sums]

Quote from @Jim Piety:

I purchased a fixer upper through a wholesaler in March 2021. After more repairs and expenses than expected, i could not sell the house for a profit. The house would not appraise. So instead, I refinanced, pulled out ~50% of my invested capital and rented it out. Since September, it has been breaking even. If it was located in a fast appreciating neighborhood, I’d be okay with the zero cashflow. However, I am thinking it is a better play to sell, get back most of my capital, suffer a small/minimal loss, and reinvest the cash into a different, faster appreciating market. 

Are there any other options I should I be considering? Should I sell or hold? Appreciate everyone’s advice!

 Share numbers 😊

You cash flow calculations 

Purchase price and cash in

How much you pulled out and at what cost

What its worth now as to see how much a loss you will take

Wha other investment you want to make with proceeds from sale and why it's better than what you have

[Bill Brandt]

You haven’t even held it long enough for your first 20% rent increase. 

[Denny Mears]

I agree with JD , if it is stabilized but performing like crap in the hottest market in the universe right now in a hot area ..it isn’t going to get better when the recession hits . I’d sell and buy smarter next time 

[Nicholas L.]

@Jim Piety is holding it going to prevent you from continuing to invest and achieve your goals?

[Jim Piety]

Quote from @Rodney Sums:

Quote from @Jim Piety:

I purchased a fixer upper through a wholesaler in March 2021. After more repairs and expenses than expected, i could not sell the house for a profit. The house would not appraise. So instead, I refinanced, pulled out ~50% of my invested capital and rented it out. Since September, it has been breaking even. If it was located in a fast appreciating neighborhood, I’d be okay with the zero cashflow. However, I am thinking it is a better play to sell, get back most of my capital, suffer a small/minimal loss, and reinvest the cash into a different, faster appreciating market. 

Are there any other options I should I be considering? Should I sell or hold? Appreciate everyone’s advice!

 Share numbers 😊

You cash flow calculations 

Purchase price and cash in

How much you pulled out and at what cost

What its worth now as to see how much a loss you will take

Wha other investment you want to make with proceeds from sale and why it's better than what you have

 Here are the numbers: https://dealcheck.io/s/-Mj79q8...

Cashflow: 

Rent: $1095

Operating Expenses: $463

Loan Payment: $530

Cashflow: $14

Cash Invested: $61,015

Cash-out Refi (in Oct): $26,632

Remaining Cash in Deal: $34,383

Appraised for $127k when trying to sell, appraised $155 for refi.

Comps suggest can sell for $150-$155. If I sell for $155, that's a $2,500 LOSS but would provide me $30k in capital to reinvest.

I could wait for the property to appreciate but I'm not optimistic it will appreciate well. House is in a bad neighborhood.

[Jim Piety]

Quote from @Nicholas L.:

@Jim Piety is holding it going to prevent you from continuing to invest and achieve your goals?

 I wouldn't necessarily say it's preventing me, but it is underperforming capital that I'd like to put to better use

[Jim Piety]

Quote from @Bill Brandt:

You haven’t even held it long enough for your first 20% rent increase. 

No, but with expenses going up along with it, that increase is blunted it. Maybe I go from $14/mo to $50-100/mo. I still have $30k left in the deal so it's a 4% CoC return.

[Jim Piety]

@JD Martin & @Denny Mears, that's what I'm leaning toward. I am not optimistic on the performance of this neighborhood

[Alex Talcott]

I'll buy it. You can message me.

[Nicholas L.]

@Jim Piety OK - good additional info.

[Michael Gansberg]

@Jim Piety - sorry to be a downer, but it appears that repairs are not included in the calculation of cash flow. Repairs can be more than you expect(especially if you expect them to be zero.) If the vacancy rate is 8%, then you'll likely be looking for a new tenant every year or so. Which means turning the place over annually(clean, paint, maybe carpets/flooring, etc.) So I think your cashflow picture is optimistic. 

Selling the place carries more expense than you may be thinking- paying a realtor, closing costs, attorney's fees, taxes(I don't know what that stuff runs in TX, but it's non-negligible in NY.) So I don't think you'll walk with nearly as much capital as you're hoping to walk with. 

Trading stocks is much lower friction than trading real estate. Selling one stock to buy another can be OK if you're only a little right. If you want to pull your capital out of this deal with the idea of favoring another deal/location, you have to be very right. Even in the best of circumstances, it's difficult to know that area X will appreciate slowly(or not at all,) and area Y will appreciate rapidly. I know I haven't given you much advice, but hopefully I've given you some food for thought. Hope it works out,

Michael

[Wale Lawal]

@Jim Piety

If you think it will not appreciate in near future and the loss is also minimal then you can consider selling it and moving to another deal.

Also find out what other investors are doing in your market with similar properties.

All the best!

[Rodney Sums]

Quote from @Jim Piety:

Quote from @Rodney Sums:

Quote from @Jim Piety:

I purchased a fixer upper through a wholesaler in March 2021. After more repairs and expenses than expected, i could not sell the house for a profit. The house would not appraise. So instead, I refinanced, pulled out ~50% of my invested capital and rented it out. Since September, it has been breaking even. If it was located in a fast appreciating neighborhood, I’d be okay with the zero cashflow. However, I am thinking it is a better play to sell, get back most of my capital, suffer a small/minimal loss, and reinvest the cash into a different, faster appreciating market. 

Are there any other options I should I be considering? Should I sell or hold? Appreciate everyone’s advice!

 Share numbers 😊

You cash flow calculations 

Purchase price and cash in

How much you pulled out and at what cost

What its worth now as to see how much a loss you will take

Wha other investment you want to make with proceeds from sale and why it's better than what you have

 Here are the numbers: https://dealcheck.io/s/-Mj79q8...

Cashflow: 

Rent: $1095

Operating Expenses: $463

Loan Payment: $530

Cashflow: $14

Cash Invested: $61,015

Cash-out Refi (in Oct): $26,632

Remaining Cash in Deal: $34,383

Appraised for $127k when trying to sell, appraised $155 for refi.

Comps suggest can sell for $150-$155. If I sell for $155, that's a $2,500 LOSS but would provide me $30k in capital to reinvest.

I could wait for the property to appreciate but I'm not optimistic it will appreciate well. House is in a bad neighborhood.

 I concur with @Michael Gansberg regarding your cash flow calculation.  You'd technically be in a negative cash flow situation once you include those. Fortunately you rehabbed this place.  Hopefully it would be a while before you'd have to realize those expenses. 

From the looks of it you traded in the cash flow for the cash out refi proceeds.  Your cash flow wasn't going to be that high if any, had you left the refinanced money in the deal.  

What did you do with the refi money?  Any new investments?  Consider the benefits you received by getting some of your cash back.

You're going to lose more than it appears.  you paid over 4k to pull out that 26k.  Then you're going to have to pay listing and selling fees.  It would remain to be seen if you'd have to make any concessions for the buyer resulting in more loss. You're going to come out of it with fewer dollars than you started with, have to go find a better investment with interest rates much higher than what you have on this property in a market that may be shifting due to rates and inflation, values went up, sellers don't want to make concessions, while realizing a loss.  You didn't do all that work to walk away 6 to 10k short.

However if there's a better performer out there you could get with your money back even at a loss, or losses increase on this property, then it's worth considering a sell.

You have a low cost property in a fast growing area.  As you've read, there's lots of concern about a recession.  Low cost properties fair better in those situations.  You have a low interest rate.  

This deal started without not much meat on the bone, making it appear less appealing in the short run. I'd lean toward holding it, and let it do its work.

In the meantime consider cost saving measures:

Learn how to self manage, saving you 10%.  You can always let PMs do the screening and placement if you're not confident in that regard.

Prolong and reduce vacancy expenses by getting tenants on longer leases (only if rents aren't rising rapidly in your area)

[Bill Brandt]

Is your plan to wait until the lease is over, kick out the tenant, make a few months of vacant payments,make all the repairs and replace everything worn out and then give a realtor 6% place it on the market for a homeowner?  Or are you assuming an investor will come in and pay more than you did and make money?

[Jim Piety]

@Rodney Sums @Michael Gansberg

Yes,I removed the maintenance and capex because it was recently renovated and everything is new. But I’ve re-added 5% maintenance to be more realistic. 

With the cash out refi, I used it to start a successful STR that is covering the losses. My plan with selling the property would be to reinvest into another STR.

I get that San Antonio on average is appreciating. But this specific neighborhood has a long ways to go. 

Nonetheless, I am starting to lean back toward holding since it’s not really costing me (yet), it is a low interest rate, and the high interest rate environment we are in would make it more difficult to generate the returns I want from the sale proceeds.

In what scenario would you say it’s better to sell? What information should I be looking for?

[Jim Piety]

Quote from @Bill Brandt:

Is your plan to wait until the lease is over, kick out the tenant, make a few months of vacant payments,make all the repairs and replace everything worn out and then give a realtor 6% place it on the market for a homeowner?  Or are you assuming an investor will come in and pay more than you did and make money?

Hey Bill,

Since it was renovated before leasing, I don’t anticipate too much would need to be done. But the initial idea was to wait for the lease to end to put it on the market. 

I’m starting to realize it may be better to hold because even though I’m not making money, I’m not losing it either

[Bill Brandt]

If you toss an @ in front of peoples name it will tell them you mentioned them. 

My point to keeping would be saving all the sale commissions, keeping the lower interest rate loan, you’re making tax free money with the loan paydown and depreciation and you should be counting any money the cash out refi is generating as being made by the property, since that’s where the money came from. 

[Rodney Sums]

Quote from @Jim Piety:

@Rodney Sums @Michael Gansberg

Yes,I removed the maintenance and capex because it was recently renovated and everything is new. But I’ve re-added 5% maintenance to be more realistic. 

With the cash out refi, I used it to start a successful STR that is covering the losses. My plan with selling the property would be to reinvest into another STR.

I get that San Antonio on average is appreciating. But this specific neighborhood has a long ways to go. 

Nonetheless, I am starting to lean back toward holding since it’s not really costing me (yet), it is a low interest rate, and the high interest rate environment we are in would make it more difficult to generate the returns I want from the sale proceeds.

In what scenario would you say it’s better to sell? What information should I be looking for?

 It would depend on your investment goals. 

If in your shoes it would have to be a property with significant cash flow to be made that justifies selling your current property and realizing losses from the cost of the original loan, the cost of refinance, and the cost to sell. 

Some may suggest it's worth taking a loss if it gets you in a property with better growth potential however you're entering the speculation zone doing that. 

 How much research have you done about the neighborhood to see if any other plans or developments may come about that would improve value in the long run? In growing metro areas, bad neighborhoods are often the target for new development as investors get in cheap, improve, and increase value....like you did. 

Unless you intended this to be a flip, consider what your vision was for the property investing 60k to make it new again. If not a flip I suspect it was for the long play. It may need time to season before producing desirable numbers. 

[Juan V Lopez]

Sorry to hear that, Jim – many wholesalers don't do good business and if we don't do our thorough research, it leaves us in a bad spot.

It sounds like the home is not a good area and does not have good prospects of sizeable rent increases.

Personally, I'd cut my losses and sell. Get some of your capital back and move on to the next deal. Take the lessons you learned from this property and get stronger and more strict for your future investments. We learn through experience – but one of the worst things we can do is stay in a bad deal out of pride or hoping for something that has shown little evidence of happening.

Wish you the best, brother.

[JD Martin]

Quote from @Jim Piety:

Quote from @Bill Brandt:

Is your plan to wait until the lease is over, kick out the tenant, make a few months of vacant payments,make all the repairs and replace everything worn out and then give a realtor 6% place it on the market for a homeowner?  Or are you assuming an investor will come in and pay more than you did and make money?

Hey Bill,

Since it was renovated before leasing, I don’t anticipate too much would need to be done. But the initial idea was to wait for the lease to end to put it on the market. 

I’m starting to realize it may be better to hold because even though I’m not making money, I’m not losing it either

 One thing I would say is don't be blinded by the psychology of past investments. What you do with the property should always be based on its current and future prospects as an investment. You can't change the fact that you bought it and that it's in a bad neighborhood. If the prospects of higher rent are unlikely and future appreciation is dubious or doubtful, it would be best to sell, take your loss (and the tax break resulting from the loss) and redeploy the money elsewhere. The general point of most investments is to make money, which you don't appear to be doing here. 

Aside from all of that, C class or lower housing should be making you oversized, not undersized, returns based on your higher level of risk and workload. 

[Basit Siddiqi]

I personally would keep it if you can expect to raise rents by about $100 upon lease renewal.

If you sell the property, I think you would end up less than the $30,000 that you mention.

It normally takes about 6% to 10% to sell a home so a home sold for $150,000 would cost around $10,000 to $15,000 to sell.
The 6% to 10% is realtor commissions, title work costs, transfer taxes, etc.

Best of luck with whatever you decide.