Negative cashflow duplex....Not sure what to do

Sacramento, California

Buying & Selling Real Estate

Negative cashflow duplex....Not sure what to do

Bryce Joseph Deniz

Member since 2021 · 1 post · 3 votes

Not really sure what to do.....

Bought this duplex in 2023 FHA, I thought after looking rents up on rentometer at the time that I would be able to get more. I underestimated how the units being on a very busy street in tahoe park and next to commercial would impact getting renters as well as the price.

Currently negative cashlfow ~800 a month, (assuming fully rented) not accounting for repairs or vacancy

I have talked to several agents, they are saying the place is worth ~470k, due to a comparable place down the road that has been on the market for 60 days. I paid 495k in 9/23 and it appraised for that as well..... seems like I overpaid, after reviewing the appraisal forms and discussing with a third party appraiser, he seems to think that the appraisal was overvalued and recommended I speak to an attorney.

I start medical school in july and really don't want the headache of trying to be a landlord and floating the negative cashflow, but do not want to have to pay out of pocket 30-40k to sell on the market. I am considering a short sale, does anyone have any other advice?

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Jake AndronicoBusiness Member

Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes

1y

@Bryce Joseph Deniz

I'm sorry to hear that. How much do you owe?

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Jules Aton
MD/DC · Member since 2024 · 1k+ posts · 1k+ votes
1y
You agreed to purchase the property for that price and it appraised. It is unfortunate that it wasn’t a solid investment. Sell the property and check out White Coat Investor’s message board.

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Jake AndronicoBusiness Member
Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
1y
@Bryce Joseph Deniz
I'm sorry to hear that. How much do you owe?
415-233-1796
1 Reply
Noah Laker
Real Estate Broker · Sacramento, CA · Member since 2021 · 517 posts · 408 votes
1y
Hey Bryce, I'm a local broker / investor / PM. Few thoughts I'd like to share...
1) Every investor makes costly mistakes. Don't beat yourself up about it.
2) You might be able to increase your revenue by switching to an STR, sober living, or other creative rental model. That's what we do with most of our properties (LTR cashflow in California is pretty rare these days).
3) If you ultimately need to sell and you're gonna take a haircut, it might be worth exploring Subto or creative finance. Buyers will pay a premium if your interest rate is lower than current market. That, or at least negotiate with a great broker for a reduction in fees. Every bit of savings counts in a situation like this.
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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
1y
You're thinking of destroying your credit for 7 years to save $30K-$40K? It'll probably cost you more than that over those 7 years. Plan on financing anything (car?) over the next 7 years? Looking to qualify for a rental while in med school? Expect to be declined a lot and pay a much higher interest rate for any financing you can actually get. Be prepared to have your credit card accounts closed or their limits slashed to ridiculously low amounts.
That's also assuming that the bank would agree to a short sale. If you're willing to go for broke, might as well rent it out and stop paying the mortgage. This is CA, if you game the system you can probably collect rent for over a year before the bank secures the foreclosure.
As for an attorney over the appraisal, forget about it. You're wasting your money.
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Rick Albert
Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
1y
A couple of things:

1. Is there any option to refinance? You can still refinance and have PMI, but by getting out of the FHA loan, you can remove the PMI later on.

2. Don't pursue legal action on the appraiser, it is just an opinion of value and you will probably go nowhere. The market can go in either direction at the time of the appraisal.

3. You are talking to agents who are comparing yours to a unit that hasn't sold yet? That's horrible and shame on the agents for doing a bad job. What if that one sells for less? Then your place is worth at a lower price and even vice versa if it sells for higher. They need to focus on ones that already closed.

4. Is there an opportunity for mid term or short term rental? Get higher rents to hold you over.

5. Is there any signs of appreciation on rents? For example something big is being developed nearby that could suggest changes to the neighborhood?
6. Here is a wild idea, go use the $30K-$40K to go buy a cheap property out of state and use that cash flow to help offset this loss. You probably won't be able to cover the full $800/month, but now you would have another income producing asset.

@Greg M. is likely correct, your best bet is to suck it up for a little bit because it will hurt you more in the long run. Keep in mind you lose $800 cash flow, but look at your loan buy down and appreciation. You are likely netting positive in the long run. It just doesn't feel good right now. I wouldn't short sale right now.
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Jeremy Horton
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
1y
Damn - make this a lesson learned. It's going to be a painful one though.
Best thing to do honestly, is sell, take the L, then go from there.
That's a big L on rents - we're not talking 100-200/month, we're talking $800 + everything else is probably closer to 1000-1200/month realistically.
The RE market seems to have slowed down a lot the last year or so too, I'd expect the same for the next couple of years unless interest rates drop big time. Which I kind of doubt will happen.
Plus selling costs - 3% is 12k - buyers agent is going to ask for you to pay their fees too - so you're talking 24k in selling fees, plus whatever they come up with on the inspection, plus whatever loss you take on the price. I believe these are considered "active losses" though, so you may be able to take a large deduction on your taxes at this point or going forward (don't quote me on the taxes, I'd have to take a second look). Your LTR is considered passive losses, so you can take that deduction too. So it's not all bad news. Did you take depreciation on the property? If so, you'll have that to recapture as well.
Sell, figure out how this happened, learn from it, then move forward
I would not short sale - you seem to have plenty of money even being in med school. I had about $200 to my name back in college LOL. Don't ruin your credit this early over an avoidable mistake
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Minna Reid
Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes
1y
FHA is currently running a streamline Covid 19 short sale program. Almost everyone qualifies for it via verbal statement alone, and there are no financial documents involved. There has literally never been an easier time to short an FHA loan. FHA fully forgives the remaining debt, and even gives you a $7500 relocation check (for owner occupants - not sure if you live in this or not). You will generally qualify for a new loan about 2-3 years after a short sale and credit recovery is very swift if the house is the only thing in default and you resolve it quickly.
Whether you overpaid it or not is your issue, not the appraisers so that is a dead end. I recommend dumping this loser via short sale ASAP before you throw more money down the drain.
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