Significant repairs to rental property vs selling for equity

Charleston, South Carolina
Buying & Selling Real Estate
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Significant repairs to rental property vs selling for equity

Jason Ellis
Rental Property Investor · Atlanta, GA · Member since 2014 · 17 posts · 6 votes

Hi BP! 

I'm looking for some advice on a dilemma I'm having with one of my rental properties. I own a short-term rental in the Charleston area that is a really nice townhome. It cash flows well as a short term rental, but I of course took some losses during Covid like everyone else. My problem is that the townhome sits over a lake, and even though I got the insulation updated when I got new floors, apparently it wasn't good enough as the moisture underneath the home has damaged the subfloor. Contractors are telling me that the subfloor needs to be replaced. This will be a significant expense on an otherwise great property, or at least that's what the estimates I've received so far would indicate. My dilemma is that I have a good deal of equity in this property, over 100k in fact, because the value of the property increased significantly after I bought it. Considering how long it would take to recoup the losses from this repair through cash flow, I'm wondering if a better option is to sell the property and use the profits to buy 1 or 2 more, or maybe a multifamily. I recently moved to the Atlanta, GA area, and I've been wanting to get into this market, but I haven't been in position to do so. I do believe that the property could still cash flow if I decided to keep it, but I'm just wondering what other investors might do in a similar situation. 

Thanks in advance for your replies!

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Dan Maciejewski
Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
3y
Quote from @Tyrek Brown:


Will you recoup the losses for the repair faster with the current property or with other properties?

If you do decide to move into the Atlanta market, are the neighborhoods/appreciation equal or better than the current?

If those two are true, I would say that it's fair to consider moving on. Especially because something like this will most likely be a recurring issue considering the property is near water and you can find a property that's closer to you in Atlanta. 

This is pretty much the answer.  You'll most likely be paying for the repair either way.  Either by fixing it before sale, or reducing the price, or giving a credit.  You can't hide the issue -- you'll have to disclose it.  I absolutely find that it's cheaper to fix prior to sale.  Buyers will add 2-3x the actual cost in their heads, and assume all sorts of other issues, too.

But, if it's better for you to move investments to closer, then that may balance out.  Remember, you'll be re-setting your equity position because of the appreciation over the past few years.  I would at least make sure that anything new will cash flow the same.
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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    3y

    @Jason Ellis STR, LTR, it does it really matter? If you list this property for sale and the buyer wants an inspection (most home owners do) they would find the damaged subfloors. You'll either reduce price or be on market for days on end generating zero return.

    Without detailed pictures nobody can offer concrete advice. I'm in the camp of fixing issues, paying for it, and playing the long game. Other investors may tell you otherwise but we basically remodel and repair all of our properties. It's so much less stress overall. 

    1Reply
  • Tyrek Brown
    Lender · Freehold, NJ · Member since 2022 · 33 posts · 32 votes
    3y

    Hey Jason!

    To add on to Jaron's post-

    I think the main questions you just need to ask yourself here are:

    Will you recoup the losses for the repair faster with the current property or with other properties?

    If you do decide to move into the Atlanta market, are the neighborhoods/appreciation equal or better than the current?

    If those two are true, I would say that it's fair to consider moving on. Especially because something like this will most likely be a recurring issue considering the property is near water and you can find a property that's closer to you in Atlanta. 

    0Reply
  • John Clark
    Member since 2018 · 1k+ posts · 1k+ votes
    3y

    Fix it and then sell. Any buyer is going to want a premium on his repair discount price (e.g., repairs and lost income as a rental cost $10k, so discount offer by $15k) to compensate for the inconvenience and delay and his loss of income from the property as a short term rental during that inconvenience and delay period. There is also the fear of the unknown -- what else is wrong with the house.

    Pay to repair and upgrade, then sell.

    0Reply
  • Dan Maciejewski
    Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
    3y
    Quote from @Tyrek Brown:


    Will you recoup the losses for the repair faster with the current property or with other properties?

    If you do decide to move into the Atlanta market, are the neighborhoods/appreciation equal or better than the current?

    If those two are true, I would say that it's fair to consider moving on. Especially because something like this will most likely be a recurring issue considering the property is near water and you can find a property that's closer to you in Atlanta. 

    This is pretty much the answer.  You'll most likely be paying for the repair either way.  Either by fixing it before sale, or reducing the price, or giving a credit.  You can't hide the issue -- you'll have to disclose it.  I absolutely find that it's cheaper to fix prior to sale.  Buyers will add 2-3x the actual cost in their heads, and assume all sorts of other issues, too.

    But, if it's better for you to move investments to closer, then that may balance out.  Remember, you'll be re-setting your equity position because of the appreciation over the past few years.  I would at least make sure that anything new will cash flow the same.
    1Reply
  • Jason Ellis
    OP
    Rental Property Investor · Atlanta, GA · Member since 2014 · 17 posts · 6 votes
    3y

    @Jaron Walling Thanks for the reply! I'm not suggesting selling the property as is. I plan to fix it either way. I'm just debating whether to fix it and keep it or fix it and sell it. I probably should have made that more clear in the original post.

    @Tyrek Brown Yes those are the questions I'm debating right now. On one hand I could potentially do a lot with that equity. This property has cash flowed pretty well, but a good multifamily could potentially produce even better. But I could also screw it up lol...so maybe like Jaron said, sticking this thing out for the long haul is the better way to go. I'm not sure if this property will continue to appreciate at the rate that it has, but I don't yet know a great deal about the Atlanta market either. I just wanted to hear the thoughts of other investors and see if anyone else has had to make similar decisions. Thanks for your reply!

    2Reply
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