Hold or sell and change market and strategy?

Question

I live in California, last year I bought 2 properties as brrrr’s in Saint Louis MO, currently one is rented for $1150 with monthly expenses at about $900, the other has become a bit larger project than anticipated and I ended up spending more than what the ARP is .

Both are in C maybe border  line D class neighborhoods. I under estimated rental comps in both areas when I purchased and cash flow is less than I planned.

I am over leveraged on the second property with 2 15% personal loans totaling $55k but owe nothing on the home. I have been faced with the options of refinancing at 10% without a tenant, or waiting to refinance after I have a tenant for a better rate.

I have struggled a bit to pass the occupancy inspection, but with a few paint touch ups from today’s inspection, I should pass the follow up inspection this Tuesday.

On top of all this, as I do my taxes this year, I am learning that none of these losses or home depreciation can be written off towards my W2 income. So I am looking to way some options, and for some overall advice.

At this point we are considering selling both properties and moving the equity/capital to a turnkey short term rental with more cash flow and tax benefit potential. Currently looking at a market a couple hours away from our home just outside of a national park.

Comps on airdna look like the rate of return would be 3 to 4 times that of the Saint Louis properties, but with more active involvement, which me and my wife are enthusiastic to take on.

I won’t get back all that I have invested in these properties, but I think the short term rental market near me has more potential and is a better long term investment not just for the reasons listed above, but for appreciation as well.

Any help, advice, or just some words of encouragement at this point would be more than appreciated! I know I took on a lot for a beginner, I feel a little embarrassed, vulnerable, and like a bit of a failure. But “a smooth sea never made a skilled sailor “

.                                 Franklin D. Roosevelt

Thanks and God bless!

Drew Sygit · Answer

@Devin Daly

What your experiencing is VERY common for newbie investors that jump into OOS investing w/o doing proper research and creating proper networks.

Would sell the 2nd property because it will never look this nice again after you rent it out.

Hopefully, you can sell for top dollar to a local family that plans to live in it!- Otherwise, maybe another newbie investor:(

The rented property you may want to hold onto - just to learn more!
It's already a known challenge with sunk costs.
So, pay close attention to your monthly statements and, assuming you have a PMC, chat with them at least monthly for 30-45 minutes to learn more about how they are managing your property.

BTW - w/o you doing more research than you did before buying these two properties, STR will just be the next "shiny object" you gamble your money on!
You could get lucky a win, but with tightening STR markets you are more likely to lose.

Dave Foster · Answer

@Devin Daly, if you think these properties won't produce what you expected and decide you want to sell both, it might be worth looking at doing a 1031 exchange if these properties have appreciated since you purchased them. But given your capital losses to put into service, you may not need a 1031 unless you've taken bonus depreciation.  So check with your accountant.

In a funky market, many times it's good to consolidate a bit and move up in class to sit through a storm.  You could do what we call a consolidation exchange, where you sell multiple smaller investment properties and reinvest all of the tax and depreciation into a larger investment property. Investors will use this strategy when they are looking to scale up their cash flow and appreciation potential, or minimize managing multiple properties, while using the tax to their benefit.

Alecia Loveless · Answer

@Devin Daly I would recommend spending some additional time to become more of an expert on your chosen market. Whether that’s the St. Louis market or a future STR market only you can decide.

By becoming an expert in my personal market I feel confident in correctly evaluating deals based on both their numbers and their location.

You’ve learned a lot in a relatively short period of time. So that’s a huge step in the right direction.

If you do decide to sell the St Louis property if at all possible I’d recommend finishing up the renovation prior to selling. I think a finished home would command a better price.

For what it’s worth I’m probably only averaging about $220/door/month across my portfolio of long term rentals.

So for you to start out where you’re at with your first two isn’t bad. Chin up!!!

Allan C. · Answer

It's ok to make mistakes as we all do. You're doing the right thing in reassessing your strategy. I think the first issue you'll need to overcome is determining if you are fit to manage C-D clas OOS properties. Your issues are just starting now and unlikely to subside over time, even with PMs.

The next thing you should assess is if you have clear understanding of investment fundamentals. When you quote having 3-4x returns in a different market, it makes me think you're only looking at surface level factors and not understanding the whole picture. Returns are proportional to risk, effort and barriers to entry.  Higher returns means you're taking higher risk and/or putting in more effort. Are you willing to do that for higher returns? Do you have an secret sauce that enables you to capture higher returns than your competitors? If you don't fully understand the answers to those questions, then you have unrealistic return expectations.

I know you likely feel like you're priced out of local markets, but why not look locally first? If you're willing to buy C-D Midwest markets, why not look in San Bernardino county? Or find rougher areas of Long Beach, Gardena or Inglewood?

Bob Avery · Answer

Be sure to check out the Smoky Mountains STR threads going on now... the STR route may be tougher than you think.

Kerlous Tadres · Answer

Hey Devin, If you're considering refinancing, it's best to wait until you’ve passed occupancy and secured a tenant for a better rate. A cash-out refinance could also help pay off your high-interest loans. If the Saint Louis properties aren’t cash-flowing as expected, selling and reinvesting in a turnkey STR near a national park could offer better cash flow and tax benefits, especially if you’re ready for the active management involved. Just make sure to double-check the STR market’s potential, including local demand and regulations. And remember, setbacks are part of the process every investor faces challenges, and you’ll learn from this to keep moving forward.

Hold or sell and change market and strategy?

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