First Investment Money Pit

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

3y

@Matthew Hermenau, congrats on your first purchase!

I think you overpaid. If you paid $130k, that MIGHT be ok if it was 100% turnkey and rented for $1400, but just barely OK given the current interest rates.

I would also budget differently for some things. I would budget 5% EACH for capital expenses, maintenance, and vacancy for a total of 15% of incoming rent.

I don't know the market or what your property manager is up for. One possibility to turn this into as cash flowing rental might be to rent by the room. If its a 3 bedroom and you rent for $650 per room per month including utilities, you might be able to squeeze a little more out of it even with paying the utilities.

Otherwise, I would be thinking to sell and get into a better opportunity. You might be able to make this cash-flow down the road with refinancing to lower rates and rents increasing, but that could take quite a while for it to become worthwhile.

1 Reply

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Quote from @Matthew Hermenau:

Hello BP network,

I recently purchased my first single family, out of state property in OH with the intent of renting it out long-term but have come across some major road blocks. I overlooked a lot of details during the home inspection and assumed all of the point of sale violations on the home (~ 30 in total) at the height of the market 4-5 months back. I did most of the repairs myself but kept finding problems that didn’t come up on the inspection (water leak before the main line, gas leak). I’m about to finish all the repairs to get it rented and grand total in repair costs will be $7500. With a renter I will be breaking even after accounting for all expenses (prop mgr, small and large cap, vacant tenant, taxes etc.). This home is old (100yrs), old furnace and water heater on last leg and I’m worried anything the renter touches will break. With the current market being so unfavorable for sellers I’m at a standstill whether I should just cut my losses or whether I should buckle up, hold and ideally refinance in 2-3 years where then it may cashflow a little more or I can leverage the equity. Selling won’t financially break me by any means but it sure would burn.

Numbers

- Purchase price: $130,000

- Downpayment: $20,000

- Mortgage left: $108,000 7-1 variable ARM @ 7.5%

- Projectes monthly rent: $1300-1400

- Projected monthly profit: $0-100

- Assuming 7.5% small/large monthly cap, 10% property manager, 1 month vacancy, taxes, mortgage insurance

Any words of wisdom/guidance would be greatly appreciated 🙏🏻

How are you reserves in general? Or is it everything you posted?

If they're strong, I'd hold and weather through. If they're tight, I'd just go on tight, still weather through, but be more proactive than reactive.

4 Reply

Jon A.

Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes

3y

Another week, another person who isn't getting the cashflow they want while paying a property manager 5%-10% of GROSS rent.

$7,500 shouldn't make or break a deal. Working on such tight margins is inherently problematic.

I'd hold. You'll make money down the road. But one way to cashflow positive now is to put in a system to self manage.

7 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

3y

Thanks for sharing. The market is tough...with the return on cost at or below the interest rate in many markets. We see very few real deals discussed on the forums these days.

7 Reply

Brittany MinocchiBusiness Member

Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes

3y

Is your property in the Cleveland area? From what I've seen, many people don't seem to want to take a chance there because of the POS violations and so much red tape. If that's something you're willing to deal with, I'd hang tight since you're already in it. You also might want to consider self-managing and finding a good maintenance guy that can be your boots-on-the-ground. That'll save you a bit. If you're willing to consider Section 8, that could be a help too. People have mixed feelings but in my opinion, you have a chance of having a bad tenant whether they're section 8 or not. I personally have had decent luck renting to Section 8 tenants and am also in OH, and Section 8 pays some or all of the rent depending on the tenant. So even if the tenant doesn't pay their share, you're not at a total loss.

[email protected]330-354-6590

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Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Kevin Sobilo thanks for the feedback! Yeah I unfortunately think I bought at the peak of the market. I’ve never considered rent by room but could talk with a property manager about it and see what they say. I factored 7.5% each for the small and large cap expenses, 8% for vacancy and 10% for property manager when doing calculations.

0 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@V.G Jason my reserves are more than twice what I paid for the downpayment. So that’s not the biggest concern but I’m out of state and this has been a major headache without even renting yet

0 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Jon A. Thanks for your feedback! Unfortunately I’m thousand miles away and unable to self manage without it being virtual essentially. The tenant market in this part of OH needs to be hands on from what I’ve been told.

0 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Brittany Minocchi thank you for your tips/feedback!!

Yea it’s Cleveland. I fixed all the POS violations so that’s not the problem anymore but it was far from easy with how strict the city is. (Delayed everything 1-2 months)

I live in FL which makes this very difficult to self-manage so far away. However, I’ve found a really great handyman in the process (which is incredibly difficult to do so here).

I posted it for rent to gauge interest and it got a lot of hits right away so finding a tenant isn’t exactly the hard part. But I understand your point about section 8 tenants and will take it into consideration.

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Brittany MinocchiBusiness Member

Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes

3y

You're welcome! The benefit of Section 8 - especially in your situation where you're cutting it close - is that a large portion (if not all) of the rent would be paid by Section 8, not so much to assist in finding a tenant. Good luck and I hope everything works out for you!

[email protected]330-354-6590

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Jon A.

Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes

3y

Quote from @Matthew Hermenau:

@Jon A. Thanks for your feedback! Unfortunately I’m thousand miles away and unable to self manage without it being virtual essentially. The tenant market in this part of OH needs to be hands on from what I’ve been told.

I don't know anything about the market you're investing in. But I do know some OoS investors who self-manage from afar. They have relationships w handymen, realtors, etc. and visit over a weekend every so often. It is possible.

0 Reply

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

3y

Quote from @Matthew Hermenau:

@V.G Jason my reserves are more than twice what I paid for the downpayment. So that’s not the biggest concern but I’m out of state and this has been a major headache without even renting yet

You need to see what's costlier--selling(at a loss) or eating monthly losses, but hoping for gains in future years and dealing with possibly difficult tenants. I think you pretty much knew these options though.

1 Reply

Joseph Crunkilton

Rental Property Investor · Oregon City, OR · Member since 2020 · 324 posts · 780 votes

3y

The good news it that real estate is very forgiving. While you're not making a bunch, you're building equity. In a year or two you can raise rents and make some profit.

Did you buy this yourself with an agent?

2 Reply

Leo R.

Investor · Member since 2021 · 591 posts · 695 votes

3y

@Matthew Hermenau if this is your first property, don't beat yourself up too much--I've definitely heard much worse scenarios from beginners. You're treading water or making $100 per month which isn't great, but at least you're not negative (I'm always astounded--and a bit scared--by how many beginners say they're negative cashflow).

A few thoughts:

If you end up keeping this property, I'd be trying to get out of the ARM asap--that to me is a ticking time bomb. So, you'll want to explore your options with refi'ing that if you're keeping the property.

I know you said it's OOS, but is there any chance you could move into the property, or move to the area so you could ditch the PM and self manage? (frankly, I think the first few investment properties a person owns, they should self-manage because they need that experience anyway. Trying to manage a PM without any personal property management experience is a bit like trying to manage a law firm without any legal experience, IMO).

What grade is the property and the neighborhood? If it's A or B, I may be more inclined to figure out a way to make it work and keep it. If it's C or lower, I'd be more inclined to try to get rid of it (for a variety of reasons incl. lack of appreciation, and the difficulty of managing a C or lower property from OOS).

Real estate investing is challenging enough when the property is down the street...it's 10x+ more challenging when it's an OOS property...and it's 100x more challenging if it's an OOS D property.

Especially since you're a beginner, it may be advisable to ditch this property and start off with a much more beginner-friendly strategy (like house hacking, or at least getting a property that's in your area).

Good luck out there!

1 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Jon A. Do you happen to know of any good resources for longterm rental templates/legal documents?

0 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Joseph Crunkilton purchased with an agent

1 Reply

Matthew Hermenau

OP

Miami · Member since 2018 · 14 posts · 13 votes

3y

@Leo Ray very helpful feedback! Thank you 🙏🏻

Unfortunately, I don't plan on moving to OH anytime soon. It's a C neighborhood overall where it's relatively safe and the street is nice but not super nice. I just pulled the trigger a little too soon and at an unfortunate time with the market. But I agree with the ARM recs… that gives me anxiety in and of itself. I think I'm going to just cut my losses and do something locally.

The original intent of doing OOS in this part of OH was the low entry point price wise. I live in South Florida where the market is beastly and very difficult to enter into.

1 Reply

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

@Matthew Hermenau

Sell it and move on. Time will also be a factor as if you have to spend more time even with a pm dealing with this property it will stop you from doing other things

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Shane Kelly

Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes

3y

Sounds like an interesting spot to be put in. What I will add to this discussion, is what were your intentions in buying it? And what would be your goal in selling it? If you bought it to be a long-term hold, retirement property in 20 years, you still should be able to have it contribute to that in the long-term, so it may be worth it to hold it out. If your goal was to generate a large amount of passive income in the short-term, you're definitely falling short of that. And if you only plan to sell the property because it's doing worse than you imagined, the grass might not be greener on the other side. I've been having a tough time over the past 2 months or so finding good deals for my clients, so you might have trouble getting into another one after if that was your goal after selling. There's a lot to consider here, and there's been some great inputs, so I'll save your time, but I hope you figure it out!

1 Reply

Joseph Crunkilton

Rental Property Investor · Oregon City, OR · Member since 2020 · 324 posts · 780 votes

3y

Quote from @Matthew Hermenau:

@Joseph Crunkilton purchased with an agent

Ah, gotcha. Agents can be tricky. I've worked with a handful of them and never found the right deal. I started working with a turnkey provider and got consistently better deals. It really leveled up my out of state investing.

1 Reply

Jon A.

Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes

3y

Quote from @Matthew Hermenau:

@Jon A. Do you happen to know of any good resources for longterm rental templates/legal documents?

You'll want to find a local real estate attorney. He or she will have that stuff and should be familiar with local laws. You can find sample leases online but you'll want something specific to your state/county/city.

0 Reply

Account Closed

Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes

3y

Quote from @Leo R.:

@Matthew Hermenau if this is your first property, don't beat yourself up too much--I've definitely heard much worse scenarios from beginners. You're treading water or making $100 per month which isn't great, but at least you're not negative (I'm always astounded--and a bit scared--by how many beginners say they're negative cashflow).

A few thoughts:

If you end up keeping this property, I'd be trying to get out of the ARM asap--that to me is a ticking time bomb. So, you'll want to explore your options with refi'ing that if you're keeping the property.

I know you said it's OOS, but is there any chance you could move into the property, or move to the area so you could ditch the PM and self manage? (frankly, I think the first few investment properties a person owns, they should self-manage because they need that experience anyway. Trying to manage a PM without any personal property management experience is a bit like trying to manage a law firm without any legal experience, IMO).

What grade is the property and the neighborhood? If it's A or B, I may be more inclined to figure out a way to make it work and keep it. If it's C or lower, I'd be more inclined to try to get rid of it (for a variety of reasons incl. lack of appreciation, and the difficulty of managing a C or lower property from OOS).

Real estate investing is challenging enough when the property is down the street...it's 10x+ more challenging when it's an OOS property...and it's 100x more challenging if it's an OOS D property.

Especially since you're a beginner, it may be advisable to ditch this property and start off with a much more beginner-friendly strategy (like house hacking, or at least getting a property that's in your area).

Good luck out there!

This is very on the money:

If it's A or B, I may be more inclined to figure out a way to make it work and keep it. If it's C or lower, I'd be more inclined to try to get rid of it (for a variety of reasons incl. lack of appreciation, and the difficulty of managing a C or lower property from OOS).

2 Reply

Forest K.

Member since 2021 · 14 posts · 5 votes

3y

Quote from @Matthew Hermenau:

@Jon A. Do you happen to know of any good resources for longterm rental templates/legal documents?

Most landlord associations provide and update all the relevant documents and make sure they are legally compliant for your region.

0 Reply

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

3y

@Matthew Hermenau

I still can't tell from this thread what the numbers actually are, what your goals are, or how the repair actuals compared to your projections.

One way of looking at it is - how long will it take for the cash flow to pay back the capex? 1 year, 5 years, 20 years, never?

And haven't you and your PM agreed on a rent amount to list it at?

0 Reply

Eric Gerakos

Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes

3y

Quote from @Matthew Hermenau:

@Leo Ray very helpful feedback! Thank you 🙏🏻

Unfortunately, I don't plan on moving to OH anytime soon. It's a C neighborhood overall where it's relatively safe and the street is nice but not super nice. I just pulled the trigger a little too soon and at an unfortunate time with the market. But I agree with the ARM recs… that gives me anxiety in and of itself. I think I'm going to just cut my losses and do something locally.

The original intent of doing OOS in this part of OH was the low entry point price wise. I live in South Florida where the market is beastly and very difficult to enter into.

A low entry point entices many new investors to buy OOS and unfortunately they often learn the hard way that there is a reason that the entry point is low. High maintenance and poor tenants. Better to buy in a better areas with better tenants and less headaches. Hopefully you can sell and move on.

1 Reply

First Investment Money Pit

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