Need advice on 2 negative cash flowing properties

Seattle, Washington
General Real Estate Investing
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Need advice on 2 negative cash flowing properties

Raghavendra Kulkarni
Member since 2023 · 5 posts · 3 votes

Hi All,

My first post here. I started investing in real estate in July of last year and now have 3 rental properties. 1 in Alabama purchased through REI Nation and 2 in Port Charlotte Florida purchased through Rent to Retirement.


Unfortunately, the Florida properties turned out to be bad investments. When I bought those the projected rent for both the properties was $2650 each. But we were able to rent it to only for $2150 and after all the deductions, these are negative cash flowing by about $450 each. 


I am wondering what my options are to turn these properties around. When the interest rates do go down, I should be able to reduce the deficit or may be even break even. The mortgages on  these are at 8% with 25% down.

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Joseph Bui
Lender · Nationwide · Member since 2023 · 362 posts · 237 votes
2y

Hi Raghavendra I'm also based in the Seattle area. Unfortunately many turnkey companies will inflate the estimated rental rate to help drive sales. I usually use rentometer or rentcast.io or Zillow to check estimated rental rates. As for your negative cash flow situation, being in the red 900/month is not a good place to be in, especially considering an emergency can happen at any time. How much equity do you have in these properties?

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  • Joseph Bui
    Lender · Nationwide · Member since 2023 · 362 posts · 237 votes
    2y

    Hi Raghavendra I'm also based in the Seattle area. Unfortunately many turnkey companies will inflate the estimated rental rate to help drive sales. I usually use rentometer or rentcast.io or Zillow to check estimated rental rates. As for your negative cash flow situation, being in the red 900/month is not a good place to be in, especially considering an emergency can happen at any time. How much equity do you have in these properties?

    6Reply
  • Peter StewartBusiness Member
    Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes
    2y

    Ouch. I have heard so many stories just like this from people who have purchased from turnkey companies.

    The refi is one way, but you'd have to have a big rate cut to free up $450 (unless this is a high-priced property). And that could be a few years away, so you'll be losing $$ until then.

    Could you convert them to medium or short term rentals to boost cash flow?

    Last option is to sell them - do a 1031 and roll your proceeds into a better performing property. 

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  • Raghavendra Kulkarni
    OP
    Member since 2023 · 5 posts · 3 votes
    2y
    Quote from @Joseph Bui:

    Hi Raghavendra I'm also based in the Seattle area. Unfortunately many turnkey companies will inflate the estimated rental rate to help drive sales. I usually use rentometer or rentcast.io or Zillow to check estimated rental rates. As for your negative cash flow situation, being in the red 900/month is not a good place to be in, especially considering an emergency can happen at any time. How much equity do you have in these properties?


     I have about $90K each in equity.

    0Reply
  • Raghavendra Kulkarni
    OP
    Member since 2023 · 5 posts · 3 votes
    2y
    Quote from @Peter Stewart:

    Ouch. I have heard so many stories just like this from people who have purchased from turnkey companies.

    The refi is one way, but you'd have to have a big rate cut to free up $450 (unless this is a high-priced property). And that could be a few years away, so you'll be losing $$ until then.

    Could you convert them to medium or short term rentals to boost cash flow?

    Last option is to sell them - do a 1031 and roll your proceeds into a better performing property. 


     They have been rented out for a year long lease. So can't do any short or medium term until the lease is up which is April next year.

    I have been thinking about about 1031 exchange as well but I will have to be ok taking a considerable loss on both properties.

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    2y

    Ok, I'm admittedly old school, but why would someone use a middleman to buy a property? Are there advantages?

    0Reply
  • Joseph Bui
    Lender · Nationwide · Member since 2023 · 362 posts · 237 votes
    2y
    Quote from @Raghavendra Kulkarni:
    Quote from @Joseph Bui:

    Hi Raghavendra I'm also based in the Seattle area. Unfortunately many turnkey companies will inflate the estimated rental rate to help drive sales. I usually use rentometer or rentcast.io or Zillow to check estimated rental rates. As for your negative cash flow situation, being in the red 900/month is not a good place to be in, especially considering an emergency can happen at any time. How much equity do you have in these properties?


     I have about $90K each in equity.


    90k in equity in each is pretty good. Would you be about break even overall if you sold both of them? If so, I would consider that route and redeploying the funds into a truly cash flowing property or a REIT or something.

    0Reply
  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    2y

    I spoke with Rent to Retirment 3 years ago about their business model. I own a property management company in Cape Coral which is just south of Port Charlotte. The rental prices that they said they could rent these homes for was WAY beyond what the actual rental prices were. In the last 4 months I have had numerous investors like you that have the same problems and are asking us for help. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Raghavendra Kulkarni:

    Hi All,

    My first post here. I started investing in real estate in July of last year and now have 3 rental properties. 1 in Alabama purchased through REI Nation and 2 in Port Charlotte Florida purchased through Rent to Retirement.


    Unfortunately, the Florida properties turned out to be bad investments. When I bought those the projected rent for both the properties was $2650 each. But we were able to rent it to only for $2150 and after all the deductions, these are negative cash flowing by about $450 each. 


    I am wondering what my options are to turn these properties around. When the interest rates do go down, I should be able to reduce the deficit or may be even break even. The mortgages on  these are at 8% with 25% down.


     Personally I would sell and take your losses and look to invest elsewhere. Why? Interest rates are not going down anytime soon, and your expenses are going to continue to increase as well as your taxes and insurance. These you are either going to be in them for 5+ years or get out now.If you are ok being in them very long term and continuing to drop cash in them, then thats ok, but realize its gonna get worse before it gets better. 

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  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    2y
    Quote from @Raghavendra Kulkarni:

    Hi All,

    My first post here. I started investing in real estate in July of last year and now have 3 rental properties. 1 in Alabama purchased through REI Nation and 2 in Port Charlotte Florida purchased through Rent to Retirement.


    Unfortunately, the Florida properties turned out to be bad investments. When I bought those the projected rent for both the properties was $2650 each. But we were able to rent it to only for $2150 and after all the deductions, these are negative cash flowing by about $450 each. 


    I am wondering what my options are to turn these properties around. When the interest rates do go down, I should be able to reduce the deficit or may be even break even. The mortgages on  these are at 8% with 25% down.


     Floriday props. sorry to say but it's only going to get worse. Ins and taxes are only going higher, and IMO FL is heading for a correction, its already started. Dump them and move on or keep losing 900 a month for the foreseeable future. 

    All the best 

    0Reply
  • Bob S.
    Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
    2y
    Quote from @Adam Bartomeo:

    I spoke with Rent to Retirment 3 years ago about their business model. I own a property management company in Cape Coral which is just south of Port Charlotte. The rental prices that they said they could rent these homes for was WAY beyond what the actual rental prices were. In the last 4 months I have had numerous investors like you that have the same problems and are asking us for help. 


     Hey Adam, I did a lot of biz there back in the day, 2002- 2007. My good buddy, Ilan owns well let's just say a lot . Do you know him? How many Ilan's are there LOL . Also Brad C ? 

    1Reply
  • Adam BartomeoBusiness Member
    Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
    2y

    @Bob S. Hey Bob! I am plugged in to the local investor community. I do have Ilan in my contacts but we haven't done business together yet. I am unfamiliar with Brad C.

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  • JASON V.
    Rental Property Investor · Lee County FL · Member since 2021 · 19 posts · 12 votes
    2y

    Just wanted to point out, if you're taking a loss or even close to break even on the sales no need to worry about bothering with a 1031 as there wouldn't be any taxes to defer anyway. (then you also don't need to worry about the time crunch of a 1031

    I would suggest just selling and sitting on the money until a truly attractive offer comes your way. As others have mentioned, things are a little rough in FL right now, and you need to do very careful underwriting. Rents are trending down, and prices are starting to as well(inventory is way up, time to sell has doubled, and a lot are seeing as least one price drop before they sell).


    Sorry to hear they aren't working out for you. 

    1Reply
  • Caitlin Logue
    Denver, CO · Member since 2024 · 31 posts · 24 votes
    2y

    I would agree with Jason. A 1031 exchange is a great option, but only under certain conditions if you end up making money.

    If the property is performing poorly, it makes sense to sell and put your funds elsewhere, unless you have a buy and hold strategy and you are okay with riding things out for a bit.

    Single family home rentals aren't what they used to be in terms of profitability. I am seeing many investors dump their poor performing properties and look into other avenues of investing.

    0Reply
  • Tatiana Viviano
    Member since 2019 · 20 posts · 4 votes
    2y

    My advice is 1041 exchange out. It will take you a long time to recover this negative of a cash flow. (They say REPS would be one way on some forums. this is reaching 750 hours qualifying you for real estate professional status. And you are offsetting a W-2 income in the household. Or 500 hrs as STR)

    Took a 40k hit when I sold my permitted Cape Coral lot last year unbuilt. Lots of issues from taking too long with builder and permits and loosing funding to bad info from property manager about my STR. My fault for not speaking to more managers before purchasing lot. Home Insurance was very expensive due to hurricane.

    Builder wouldn't let me transfer permit and build to another investor. So the investor had to start all over again. And so did I. I'm back at the starting point again with my real estate investing trying to build equity to purchase again. But I am probably steering away from Turnkey companies and working specifically with STR companies.

    I know RTR is a great company but you REALLY have to vet out the builders and the rental projections. Covid run up on prices made this area volatile in the short term.

    0Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    2y

    @Raghavendra Kulkarni research the Port Charlotte market for economic forecasting: how many jobs are expected to be created/lost in next 3-5 years? Is the population expected to grow or shrink?

    Both of these will affect the real estate market.

    Should give you an idea of IF AND HOW LONG rents will increase to cover your negative cashflow.

    Then you can make a logical decision on whether to hold or sell.

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  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    2y

    @Raghavendra Kulkarni I would 1031 exchange out of these into a cashflowing market. Right now competition is lower because buyers are scared off due to what they perceive as higher rates. KC has been good and is even better now that there is less competition from buyers. Hope that helps. 

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    2y

    Why is everyone mentioning 1031? OP would be selling at a "considerable loss"= no cap gains= no cap gains taxes= no reason to 1031. The loss would be a tax write-off not a tax liability wouldn't it? Assuming OP has income to offset of course, and depending on other individual factors related to their personal tax situation obviously... am I missing something? What would be the point of doing a 1031 with no cap gains?

    OP I would probably just sell, depending on your situation and what your goals are. If you like the location long term appreciation-wise, and think you may be able to raise rents and create cash flow in the near future, and aren't concerned with cash on cash return/ the opportunity cost of having money tied up in these properties as opposed to putting it to work elsewhere... maybe your main goal is just a safe place to park your money... then you might consider keeping them or even putting more money into them so that they cash flow (refinance with more down). But it sounds like cash flow was the main goal, in which case I would just sell and use the loss as a tax write off if you can. You can make better returns in a different investment. 

    5Reply
  • Account Closed
    Investor · College Station, TX · Member since 2023 · 16 posts · 98 votes
    2y

    We wanted to jump in on behalf of RTR to add some clarity and see how we can participate in assistance in this situation where rents came in less than expected, as we are always happy to do.

    Here are some clarification points to be aware of:

    -We do understand that rents in SWFL have fluctuated over the past year, which does happen with dynamic markets like we are seeing nationwide currently.

    -When this does happen, we always try to be involved with investors to come up with viable solutions, including rent gap coverage when needed. This is assuming we are made aware of the situation.

    -RTR does not determine rent in any market, or for any property. Rents always come from the property management teams handling the properties. We require actual rent comps from them. We did verify many comps for these properties from multiple PM teams prior to allowing the builder to put them on our website. We are aware that rents have fluctuated in this area over the past year.

    -Additionally, when one PM team fails to meet expectations, other PM teams are recommended. When Douglas PM seemed to struggle with renting homes at what they said they could, we specifically recommended another property mngt team that is consistently renting these same exact homes anywhere from $2,350 to $2,550. This mngt team is Logistical Choice mngt. These rents are still below what was anticipated, but much better than Douglas was doing. We recommended this change to Raghav in January.

    -We did already offer some compensation to Raghav, but we have also booked a call with him and our CEO this afternoon to further discuss this. We hope he keeps this thread updated as we progress to further assist him on these properties to understand what the best options are and how we can be of assistance.

    This is certainly good feedback for our team as we are always looking for ways to improve and we appreciate all the input. We continue to stay committed to offering excellent investment opportunities across the nation, and when things do not go as planned (which does happen from time to time in REI), we always want to be made aware of the situation and see how we can step in to assist.

    Thank you,

    Grant COO RTR

    4Reply
  • Raghavendra Kulkarni
    OP
    Member since 2023 · 5 posts · 3 votes
    2y

    Thanks everyone for all the advice. I truly appreciate it. I agree that if I do sell these properties,  1031 exchange might not make sense as I will for sure lose money.

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    2y
    Quote from @Raghavendra Kulkarni:

    Thanks everyone for all the advice. I truly appreciate it. I agree that if I do sell these properties,  1031 exchange might not make sense as I will for sure lose money.

    I'm going to qualify my earlier comment a bit because while it's a much less common strategy, you actually can do a 1031 to defer a loss. Most people would take advantage of the loss by recognizing it on their returns immediately, as that is typically the best course of action (writing it off). But there are some circumstances where it might make sense to defer that loss such as if you expect to be in a higher tax bracket in the future and it would help to carry it forward. Not that common of a strategy, and requires some guesswork on what your taxes are going to look like in the next few years. Just wanted to correct myself, 1031 isn't ALWAYS for a gain, just usually. 

    3Reply
  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    Have you tried looking into a short term rental model ? 

    0Reply
  • Marcus R.
    Real Estate Agent · Denver CO · Member since 2019 · 209 posts · 332 votes
    2y

    @Steve K. - Good info!  Never knew you could use a 1031 for a loss. 

    Another option may be selling the lowest performing property and rolling the proceeds into the other?  

    2Reply
  • Michael SloanBusiness Member
    Property Manager · Richardson, TX · Member since 2023 · 31 posts · 15 votes
    2y

    @Raghavendra Kulkarni a negative cash flowing property is not all bad. I’ve had properties that were negative cash flow and the rents grew over time to balance it out.

    Rates would have to drop a lot to reduce your payment hundreds of dollars after only a year. You would probably have to bring money to the table to get the balance down.

    If your going to do that you should consider paying the loan down now and asking your lender to recast or reamortize your loan

    Don’t forget about the tax benefits.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    Most properties these days are not going to cash-flow at 20% or 25% down

    If apepars that as of right now you are negative on cash-flow.
    If you are positive on appreciation and happy with the appreciation, keep it.

    If the appreciation and cash flow returns are less than your required rate of return, sell the property.

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  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    I'm always curious. Have you tried to ask the Turnkey providers to show a bid to buy it back? If so how did that go?

    It'll tell you the real market when you see the two-way. Working just on offer side you are blind to it. 

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