Investment Property Gone Bad

Rental Property Investor · Member since 2021 · 48 posts · 50 votes

@Marlia Stone

I closed on my first property on the 21st, the old owner had an illegal electric hookup. Fortunately it was caught by the inspector. Needless to say, the owner spent thousands of dollars and 3 weeks of work and back -and- forth with contractors and city inspectors to have it rectified. They had to relocate the tenant to a hotel too. Sounds like these things are too common. Sorry you're going through it, I hope it works out in the end. May I ask, what state or area is this?

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Moises B.

Investor · Bronxville, NY · Member since 2017 · 114 posts · 48 votes

4y

Take it in the chin, learn from it and keep moving. Thank you for reading my TED message.

3 Reply

Jayson Barrow

Member since 2018 · 1 post · 2 votes

4y

@Marlia Stone

Your working too hard. Work smart by fixing the units and renting them with utilities included. Just price them accordingly. The goal is to make money NOW! When you have the money to fix them then do so slowly. Screen your tenants strictly and put good people in there. You'll be fine

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Originally posted by @Dante Pirouz:

Mine will be: "I remember when I bought that deal from a wholesaler that had 2 feet of raw sewage in the crawlspace..."

Oh yeah, those are the fun times....... :-(

3 Reply

Santiago MarquezPro Member

Rental Property Investor · Bronx, NY · Member since 2017 · 152 posts · 65 votes

4y

@Marlia Stone You mentioned this is your buy & hold Duplex. When you ran the numbers originally did you buy right? As in already including equity? Surely you've consider the surrounding area to your investment. What have homes in the area sold for in the past 6 mos to 1 yr? What are home values w/similar sqft, beds, baths etc? Do YOU see value in your purchase? Is the surrounding community viable enough that in most 3-5 yrs you see rents increasing? So much that you'll see returns on what you put out $$ in major repairs. Also consider your PM if you're not on hand once all is rented so you can have your eyes & ears in place.

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Originally posted by @Marlia Stone:

Originally posted by @Dave Chapa:

@Marlia Stone What is your long term goal? Every property I have bought has ALWAYS had issues. One property was budgeted 40k renovation, however cost 55k. Another property budgeted 85K, cost me 125k, out of pocket.

In the short term it can be overwhelming, you lose sleep, you worry about other hidden issues popping up, you second guess your decision to buy the property (buyer's remorse).

So, what happen to the two property I listed above?

The first one appraised for 38k over what we estimated when the work was finished, and now is worth 77% more than what I have into it, and cash flows very well.

The second property has doubled in price and is a cash cow.

So, what is your long term goal? What is the after repair value? Do you have the staying power to hold and finish the project?
What will the numbers look like 2 years from now?

Only you can answer these questions.

I'm in a different position in life where cash flow is not as important that equity capture. For you it may be different.

Don't give up without a fight :).

Hi Dave, Thanks for writing. I love everything that you have said, the wording was perfect. My property budget was 15k in renovations, but it looks like I will be spending about 25k or more, out of pocket. My original plan was to fix the property up and keep the property for some time. I never really had intentions on selling until I started to face so many problems, when it was supposed to be considered a "Turn Key" property. I agree, it gets overwhelming, but after hearing everyone's responses I think I can stick it out if I have the funds to. With the new renovations, i am not sure what the After Repair value will be. How should i factor that in? However, I did calculate the first 2 years numbers and they seem to have great cash flow of $1.6k-$2K a month, which is not bad after expenses. I won't give up. Thanks :)

>I did calculate the first 2 years numbers and they seem to have great cash flow of $1.6k-$2K a month, which is not bad after expenses. I won't give up.

what expense ratio did you use not including principle and interest? I fear you are likely way too aggressive. Are you familiar with the 50% rule? The exact percentage of the rule is less important than to understand all of the expenses that are incurred in having a buy and hold property. I suspect over 90% of newbies underestimate maintenance/cap expense. RE calculators that use a percentage of rent for these numbers exasperates the problem. A 3 br, 2 Ba, 1000’ class c property will have similar maintenance/cap ex if it rents for $1k or $4k (San Diego market).

If your holding for cash flow, make sure your cash flow pro forma is as accurate as possible.

Good luck

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JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

4y

Originally posted by @Marlia Stone:

Originally posted by @Dave Chapa:

@Marlia Stone What is your long term goal? Every property I have bought has ALWAYS had issues. One property was budgeted 40k renovation, however cost 55k. Another property budgeted 85K, cost me 125k, out of pocket.

In the short term it can be overwhelming, you lose sleep, you worry about other hidden issues popping up, you second guess your decision to buy the property (buyer's remorse).

So, what happen to the two property I listed above?

The first one appraised for 38k over what we estimated when the work was finished, and now is worth 77% more than what I have into it, and cash flows very well.

The second property has doubled in price and is a cash cow.

So, what is your long term goal? What is the after repair value? Do you have the staying power to hold and finish the project?
What will the numbers look like 2 years from now?

Only you can answer these questions.

I'm in a different position in life where cash flow is not as important that equity capture. For you it may be different.

Don't give up without a fight :).

Hi Dave, Thanks for writing. I love everything that you have said, the wording was perfect. My property budget was 15k in renovations, but it looks like I will be spending about 25k or more, out of pocket. My original plan was to fix the property up and keep the property for some time. I never really had intentions on selling until I started to face so many problems, when it was supposed to be considered a "Turn Key" property. I agree, it gets overwhelming, but after hearing everyone's responses I think I can stick it out if I have the funds to. With the new renovations, i am not sure what the After Repair value will be. How should i factor that in? However, I did calculate the first 2 years numbers and they seem to have great cash flow of $1.6k-$2K a month, which is not bad after expenses. I won't give up. Thanks :)

If the difference in budget is $10k, it will be a rounding error in the grand scheme of things. That's virtually nothing when it comes to real estate especially if you are holding long term as a rental property. By the time you include those costs in your taxes, over 10 years that 10 grand will end up costing you about 50/60 bucks a month in cash flow.

In other words, just consider it a learning experience and carry on. If you let a $10k loss in real estate discourage you, then you should probably look at other investments. Trust me, a few years from now you won't even hardly remember you spent that money. This assumes, of course, that the house is a good investment property in the first place. One-time rehab costs have less effect on you than ongoing costs as a buy and hold investor.

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3 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

1. Proving that they knew about this may also be a hassle within itself. Thanks, if i decide to continue with the investigation on this i will consult an Attorney.

2. I agree, given everyone's encouraging responses, I think i have decided to keep it. When i purchased the property, i had no intentions on selling, and i don't think i should give up now just because I am facing some issues.

3. Yes, that is my next step.

4. Yes, i do have home warranty, i didn't think of that, but i will try reaching out. Thanks!

0 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Nathaniel Walker:

Currently as long as you are classified as a passive investor you can only reduce your expenses by your passive income which you currently don't have. Until you can generate income you need to become classified as active so at least your losses can reduce your tax liability on your earned income. Consult with your tax advisor on the requirements so you are compliant with tax laws. This is a short term consideration as you work through our issues.

Hi Nathaniel,

Thank you for your insight on this i appreciate it!

0 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Martin Taylor:

@Bruce Woodruff this may come across as a silly question but wouldn’t fines like you mentioned against the property show up in the title search?

That's what i was thinking as well. If the electric has been off for about 3 years, i thought it would come up on the title search, but i was mistaken.

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Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Robert Edwards:

Unfortunately this is going to cost you no matter if you keep it or sell it. Get it fixed and fall forward!

Thanks Robert, I agree!

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Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Justin Sullivan:

@Marlia Stone

I recently purchased a 4 unit property with 3 units livable snd one unit gutted. Through the process I learned Thea foundation was shot and needed to replace about 80 linear feet of foundation. As we got into it the roof sprung a leak snd the copper was stolen. So at that moment we decided to redo everything. So we sunk an extra $40,000 into the property. Luckily we’ll recoup most of the once we refinance but my point is if you have the funds then put the money into the place. In my opinion it’s always best to just do things the right way and be done. Now you don’t have to worry about it for years. Like some others have said finish one collect cash flow save money and finish the other unit down the toad. We are only finishing 3 snd well finish the fourth in 6 months or so after collecting some cash flow and saving money.

Welcome to investing. Adds theses items to your pre purchase check list!

Hi Justin,

Thanks for the advice. I like the way you analyzed your recent property purchase. Getting everything all done at once without any problems is ideal, but it doesn't always work out that way. I'll continue to work on one as many has advised, while collecting cash flow. Thanks!

0 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Dante Pirouz:

@MarliaStone Your most recent response is the right way to look at things...you learned something for the deals...plus it makes for a great story when you finally get your episode on the BP podcast :)...Mine will be: "I remember when I bought that deal from a wholesaler that had 2 feet of raw sewage in the crawlspace..."

Hi Dante,

Thank you, I appreciate your response. It made me feel a lot better! Leaning the things i know now, for in the future will create such a great story for me like you mentioned. I can't wait to listen to your podcast!

0 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Mark Cruse:

Iḿ pretty much mirroring what most have said in here. Its part of the game. You have to be very careful, do massive research and have some understanding of what it is. Many people sell, hiding tens of thousands of discrepancies to pass on to others. I know it sucks now but think how this lesson will prepare you for the next. If its a viable investment, 10k in is not that bad and depending on the numbers it can be recouped. Depending on where you are located, getting that one side up and running can generate enough to service the mortgage. It will get the foot off your neck and give you time to work through the other unit. Selling will make you lose more because it would be unloaded for much less than you got it for when the problems are disclosed. I have no idea how any competent inspector to miss those things.

Thanks Mark for writing in. I am learning that the inspection period is the most valuable as everyone has mentioned. hearing everyone's story about the amount of dollars that people spend on fixing a property makes my 10K look like nothing. I have decided not to sell and continue working on the one unit. I feel like I'm so close to listing, it would be a complete waist to sale after putting money and time into.

1 Reply

Marlia Stone

OP

Rental Property Investor · Member since 2018 · 61 posts · 33 votes

4y

Originally posted by @Allen W.:

@Marlia Stone

I closed on my first property on the 21st, the old owner had an illegal electric hookup. Fortunately it was caught by the inspector. Needless to say, the owner spent thousands of dollars and 3 weeks of work and back -and- forth with contractors and city inspectors to have it rectified. They had to relocate the tenant to a hotel too. Sounds like these things are too common. Sorry you're going through it, I hope it works out in the end. May I ask, what state or area is this?

Hi Allen, Thanks for your comment. Looks like you caught it just in time. The property is currently in Philadelphia, Pa.

0 Reply

Ade Akingbade

Investor · Glen Burnie, MD · Member since 2017 · 22 posts · 3 votes

2y

Quote from @Marlia Stone:

Hello Marlia,

Hey BiggerPockets, I’m here for any advice that you can give me on my current situation.

I recently purchased my fist Duplex property in July 2021. The property seemed like a great investment with minor cosmetic issue to be done. Certain things in regards to the property my realtor didn’t advise me to look further into after the home inspection, such as the gas and electric bill. As I began to work on the property with my contractor. We found more and more issues wrong with the property like the plumbing and state guidelines. A month later I tried to turn the gas on and put the service in my name. One unit was successful and the other wasn’t. The service was off for a year(which I didn’t know) and the unit required an inspector. I hired an inspector referred by PGW and it failed due to it not being up to “Code”. For the unit to be up to code I had to hire an electrician and all of them were mentioning that It would be thousands of dollars to fix.

On another note I tried to put the electric in my name as well. One unit was a success and another unit was not. The repress mentioned that one unit has been off since 2017( which I didn’t know) During the home inspection, for some reason the electric was on for both units and is currently on (Illegal Electric). Being as though this was my first investment property, who was supposed to figure this information out? Was I?

These two are keeping me from listing the property and putting tenants in there. It has been almost 4 months since I purchased the property and it has done nothing, but stress me out to the point where I am considering selling and starting over. I’ve lost more money than was expected. Please share any advice that you may have or any stories that may help.

Hello Marlia,

How are you doing? How did this play out?

0 Reply

Scott Mac

Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes

2y

Quote from @Jim K.:

Originally posted by @Marlia Stone:

@Jim K. Hi Jim, yes I’ve been learning so much about the property and backtracking how things went wrong. Selling I would have to disclose this information, putting the property at a low price, are you sure?

Knowing what I know now...yes, I would take the hit square on the chin and sell. Because your choices are to sell the property or to fix the property, and fixing the property is going to cost a lot in time and energy. It would be a long, painful, drawn-out learning experience for you, and unless you plan on specializing in assets like your duplex for the next 10-15 years to get your real estate investing career off the ground, I don't think it's worth it.

I do speak from some experience here, Marlia.

In 2017, I bought a duplex that was a converted from a big old single-family.I bought the duplex for $5000 at the county sheriff's sale. I got the taxes way down on it and held the property for two years. I finally paid a guy $2K to empty it and clean it up a bit and sold it through a wholesaler for $10000 to a young, big-talking investor from out-of-town who was positive that all he needed was some basic repairs (that he confidently told me he knew all about).

To date, that property is still under renovation. The new owner fixed the sagging porch and it seems some of the interior issues, but the back is still as terrible as it ever was and my plywood boarding up the front windows is still in place. I suspect he's holding it to sell to someone else for $20K someday.

Here are pictures of the property as it was back then, not that it looks much different now. To get the full effect of how I first saw it, I'm going to have to ask you to imagine a raccoon sitting up on top of the bed.

If it were mine I would curb appeal this place to make it desirable to a new buyer, and just leave some meat on the bone so they say, as far as the interior and the upgrades.

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Investment Property Gone Bad

Investment Property Gone Bad

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