When to cut losses and pass on bad neighborhood?

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When to cut losses and pass on bad neighborhood?

McKenzie Bagan
Rental Property Investor · Charlotte, NC · Member since 2021 · 6 posts · 6 votes

This is a not happy post and we feel like we are in a difficult spot. I did my first Brrr property and things have been tough from the start. I was able to get the property renovated, refinanced and listed with a property manager. It has been a difficult process for the beginning. The repairs were more than estimated and the refinance came in a a not good rate. I can admit I made mistakes in buying this property and investing but it has been a very valuable learning experienced. I am in the process of getting it rented with a property management company. Unfortunately, when the PM was showing they found the property had been broke in to trashed. Looks like some teenagers came in and messed the house up. The management company was good an contacted the police for a report. We are going through insurance for repairs. We feel upset and saddened by the news of course. We feel like our hard work has been torn down. It just plain sucks, but we know that these risks are involved in reral estate investing and we were just unfortunate. 

The property is in a bad neighborhood and it has been difficult to rent. We have had no applications in 3 months despite lowering the rent rate. The latest rent reduction would have us not cash flowing at all. We would be ok with just having the mortgage and expenses covered but now that the broken in to and trashed we are thinking about cutting our losses and selling. We will go through insurance to have the property repaired but we are worried that it will just get broken in to again. Vacant properties in this area just get terrorized by teens and we are not sure how we could secure the property more even if we put bars on the windows. We would like to keep the property and make it work but we are worried that there is just no saving this neighborhood and wonder if its better just to accept the loss and move on with the lessons we learned. 

Does anyone have experience with cutting your losses on a property and getting out? Should we keep trying to fix it and get it rented evening though the area is not improving (or at least won't turn around for what we can see)? Can you carry forward real estate losses on your taxes? Do you have to right off all the losses at once or can you do it over time? Figure if we have to cut out we can look for a silver lining somewhere and save a little on the gains from our other ventures. Any thoughts, comments, or just support messages is greatly appreciated.  Thanks

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
3y

The situation will never improve.  Sell, yesterday.  The only things that will add up from this point forward, are losses and ulcers.

On the bright side, the faster you sell, the less you lose and,...here's the most important part, ...the less (and faster) you have to recover from the profits or your next deal...that WILL make you money.

REI is a lot like poker. The most important things to know are:

1 - You can't win if you don't stay in the game,

2 - You can't stay in the game by sticking with a bad hand, or in this case, a bad property, and

3 - The longer you stick with a bad hand/property, the more you have to lose, then recover, and the less chips/money you have available to accomplish that recovery.

Sell,...yesterday.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @McKenzie Bagan:

    This is a not happy post and we feel like we are in a difficult spot. I did my first Brrr property and things have been tough from the start. I was able to get the property renovated, refinanced and listed with a property manager. It has been a difficult process for the beginning. The repairs were more than estimated and the refinance came in a a not good rate. I can admit I made mistakes in buying this property and investing but it has been a very valuable learning experienced. I am in the process of getting it rented with a property management company. Unfortunately, when the PM was showing they found the property had been broke in to trashed. Looks like some teenagers came in and messed the house up. The management company was good an contacted the police for a report. We are going through insurance for repairs. We feel upset and saddened by the news of course. We feel like our hard work has been torn down. It just plain sucks, but we know that these risks are involved in reral estate investing and we were just unfortunate. 

    The property is in a bad neighborhood and it has been difficult to rent. We have had no applications in 3 months despite lowering the rent rate. The latest rent reduction would have us not cash flowing at all. We would be ok with just having the mortgage and expenses covered but now that the broken in to and trashed we are thinking about cutting our losses and selling. We will go through insurance to have the property repaired but we are worried that it will just get broken in to again. Vacant properties in this area just get terrorized by teens and we are not sure how we could secure the property more even if we put bars on the windows. We would like to keep the property and make it work but we are worried that there is just no saving this neighborhood and wonder if its better just to accept the loss and move on with the lessons we learned. 

    Does anyone have experience with cutting your losses on a property and getting out? Should we keep trying to fix it and get it rented evening though the area is not improving (or at least won't turn around for what we can see)? Can you carry forward real estate losses on your taxes? Do you have to right off all the losses at once or can you do it over time? Figure if we have to cut out we can look for a silver lining somewhere and save a little on the gains from our other ventures. Any thoughts, comments, or just support messages is greatly appreciated.  Thanks


    tough lesson to learn on buying properties in the hood.  the only folks that make those work are hyper local and totally hands on and self manage.
    U can try security systems ?  But if it was me this is a cut and run..  I have been opining since I got on BP that rentals for folks that need PM should be at or above the median price point of a given MSA.. if your buying the cheapest this is what you can expect in virtually all markets.. and its just gotten worse over the last decade even in nice areas houses are getting hit by theives..  
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  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    Property should never be vacant in what you call a "bad area." First define the area- are there drug dealers running up to cars (been there with a multifamily that I loaned money to a friend)? 

    Sell. Sell fast. Get a friend or trusted person to stay there today. Do they need to be armed?

    Fake cameras that are used on exterior go up today. Lights in interior with timers. A mannequin behind curtains and move him around. A dog.

    Any business has to make a profit in five years or it is a hobby and you owe the IRS and state for the losses. I don't know how long you have been in this... and I'm not a CPA.

    Learn from this. What made you think it would be easy and that the location was worth investing? Did you have a written plan? How effective were you with critical tasks? #1 close, next day demo, third day move in supplies and in this neighborhood you should have had an in person house babysitter day and night... and so forth for every day.

    6Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    3y
    Quote from @McKenzie Bagan:

    We have had no applications in 3 months despite lowering the rent rate. 

    This is the one thing you wrote that concerns me. If the rent is close to market, you should have had applications - even from totally unqualified people. I'm wondering if you set the rent to "what you need" instead of what the market is? 

    If you don't mind, post the listing/address here so we can see it and provide feedback.
    8Reply
  • Account Closed
    Investor · Denver, CO · Member since 2022 · 184 posts · 78 votes
    3y

    It depends how much you're willing to come out of pocket each month to pay the bank but I personally would do my best to not get forced to sell the property, likely at a discount I'm guessing. 

    You saw something in that neighborhood - That's why you chose to invest there. Is the x amount of dollars coming out of your pocket each month enough to outweigh your desire to hold the property and hope for appreciation? 

    I've always heard and lived by the adage that the last thing you want to do with real estate is get forced to sell. People often buy high and sell low because they can't handle the lows. Not saying you can't. 

    I hope the situation improves. 

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    3y

    The situation will never improve.  Sell, yesterday.  The only things that will add up from this point forward, are losses and ulcers.

    On the bright side, the faster you sell, the less you lose and,...here's the most important part, ...the less (and faster) you have to recover from the profits or your next deal...that WILL make you money.

    REI is a lot like poker. The most important things to know are:

    1 - You can't win if you don't stay in the game,

    2 - You can't stay in the game by sticking with a bad hand, or in this case, a bad property, and

    3 - The longer you stick with a bad hand/property, the more you have to lose, then recover, and the less chips/money you have available to accomplish that recovery.

    Sell,...yesterday.

    11Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    Sorry to hear about your difficulties. There is nothing to be gained by prolonging this process. I would install a security system and get the property listed as soon as possible. 

    When you are ready to get back in the market don't bottom feed. Buy a great property in a decent neighborhood. I wish you all the best!

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

    Hate to hear it, but stay out of bad  neighborhoods. I'd sell, and invest in a new place. Learn this as a lesson. And be conservative with estimates and if you're speculating on rates--know that-- don't remain beholden to it. If you think rates are going to go up or down, you have a view then great but keep more cash aside incase you're wrong. If you're doing reno, it always costs 10-20% more and takes 10-20% more time.

    When you buy in D/F neighborhoods, and defer the management you'll get this. I don't see a reason to really ever operate in a D/F neighborhood, even if you're doing it hands on. You're asking for trouble.

    Chances are if you do find a tenant, by lowering the rate even more, they won't be a great one. You'll just be rotating headaches and financial burden.

    2Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @McKenzie Bagan

    Never let emotions get involved. Understand it didn’t go well, learn from it and move on. I would sell it asap. Once you sell it you will feel relieved.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    I would sell it and buy in a better area.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    3y

    Sell for sure. Never let the psychology of past investment cloud your view of what you should do going forward. 3 months without an application is the tell right there. 

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  • Account Closed
    Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
    3y

    Investing in bad area is losing strategy for you, sell cut your losses, regroup, if I was you I would look into something like buying a 4plex in the neighborhood you would feel good living in yourself and house hacking it.

    2Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
    3y

    Why don't you post the ad that your PMC has published, which will allow us to critique their efforts and also give you more insight into the location.

    Is your rental being advertised on Zillow? WIth 3-D Tour?

    What does your PMC say about all this? What ideas do they have to secure the property?

    In Detroit we offer our clients:
    - Plywood boardup
    - DAWGS metal screens over doors & windows
    - Removal of mechanicals
    - Anti door kickin protection: https://www.homedepot.com/p/Ho...
    - Some local PMC's also offer house-sitters

    If your PMC can't help you with these issues, then they are also a problem and need to be replaced.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    Sell. Regroup, lick your wounds. Go get a real solid B/C+property and learn how to be successful....

    1Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    3y

    Sell. It is hard to manage properties in "D" neighborhoods and it would be difficult to make money in that type of neighborhood if you can't self manage.

    1Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    Is the name of the game, hopefully you bought a good deal. I would explore section 8 

    3Reply
  • Joseph R. Smith
    Rental Property Investor · Carthage, NY · Member since 2019 · 72 posts · 47 votes
    3y

    Class D neighborhood experience here. 1) The #1 thing is that the property is very secured as early as possible. Bars on windows, top security system to every entry point, high fences all around, and most importantly working relations with a neighbor or someone so that it is watched, and is never completely vacant. 2) I find it a bit difficult to understand how the property is not cash flowing very well if rented. The whole reason why some investors choose Class C or D neighborhoods is because the ROI is generally much higher in return for all the expected headaches and more constant management issues. Im a little confused on how or why the rental price is being adjusted. I would just set it at market rent or 5% below market rent in the area. 3) I think many of us would need to know the exact area to better advise. I prefer Class C areas, but am not at all afraid to get into class D IF the particular area is reasonably speculated to drastically improve and drastically appreciate over the next 2-5 years. This happens a lot in some such areas, and in others they are an entirely different animal. The largest factor is population growth or decline. I wouldn't let the unfortunate mistakes force me to sell the property and give up very easy. It sounds like some lessons learned that we all make along the way, especially in first years.

    0Reply
  • Thripura Vemireddy
    Flipper/Rehabber · Alpharetta, GA · Member since 2014 · 65 posts · 22 votes
    3y

    Sorry to hear that.

    1. As it is on the market share the address, people will give better advice by looking at area stastics and pictures.

    2. With this kind of experience any other real estate investment you do should be better.

    3. Don’t let this fear stop you from investing, lessons learned and don’t make the same mistakes.

    Thanks 

    Reddy

    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    3y

    @McKenzie Bagan thank you for posting your story! This is very valuable for the BP community and a reminder that cheap does not mean it's a good deal. I don't know where the property is located, but this sounds like a very typical Milwaukee story, we have some cheap areas and they attract OOS investors.

    What is concerning to me is that you have not gotten any application in 3 months. We have posted a SF for rent on Saturday and have seen 83 inquires in 3 days, did 2 open house style showings and have 11 applications filled out after showings. This is actually less than what we have seen this summer, we'd typically take a listing off Zillow after 48 hours.

    So, what can you do? The first question is, how does you add perform online. If you have it on Zillow you can see how it is tracking. If it is not performing online, either your pictures are bad, your rent way too high. If your rent is just a little high, you typically get low quality applicants who are desperate. The next question is do you get showings? And what is their feedback? I have seen rental properties of OOS owners that could not explain why nobody would rent it, and when I went there to take a look it was very clear why nobody wanted to live there. If in doubt, do some mystery shopping and tour your property and your competition, after that you will know what to do..

    It is actually not easy to sell a property like this, even for a low price. The problem is if someone qualifies for a mortgage it's usually more and they buy in a better neighborhood. The best way to liquidate a property like this is to offer it as a rent to own. They are hard to come by, high in demand. Make sure you coach the tenants to get their credit score where it needs to be and safe up a down payment. But the property needs to be in a condition, where someone actually wants to be there..

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

    Sorry you’ve had a rough start! Marginal neighborhoods can be unforgiving. I’d sell and start over again with more emphasis on the 3 golden rules: Location, location, and location! 

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y

    I'll jump on board with Jay and recommend you clean it up and sell it.

    These neighborhoods look good on paper, but they are difficult to manage and will result in losses if you're not very experienced and hands-on.

    It would be better to cut your losses now. Holding on to it may cost you more money and it will definitely eat up your time and cause you a lot of stress.

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  • Leo R.
    Investor · Member since 2021 · 591 posts · 695 votes
    3y

    @McKenzie Bagan sorry to hear about your troubles. As others have mentioned, this is why location is the #1 rule of real estate...you can do a million things to improve a property, but you can't do much to improve a neighborhood.

    Misery loves company, and it might make you feel a bit better to know that this type of scenario is somewhat common--so here's a recent thread of another investor experiencing similar problems (I'd suggest reading, since there are some solid recommendations):  https://www.biggerpockets.com/...

    Investors (esp. inexperienced investors) are often lured into buying properties in  D & F neighborhoods because on paper, these properties have the best cashflow (and new investors are often most focused on cashflow)...but, of course, the hassle of owning in a D or F neighborhood is often not worth any amount of cashflow. This rule is 10x true for OOS investors, because if you're OOS, you're relying on a PM, and there is almost zero incentive for a PM to put in the massive amount of work needed to correctly manage a property in a D or F area.

    On the bright side, there are lots of lessons to learn from this type of scenario.  

    At the end of most BP podcasts, they ask the guest "what separates successful investors from those who give up, fail, or never get started?" ...one of the most common answers is "perseverance" --the ability to repeatedly bounce back time, and time again from failures (especially really big failures)...so, try not to get too discouraged; every successful investor experiences setbacks and failures--it's not possible to succeed in RE investing without some major bumps & bruises along the way...

    Good luck out there!

    1Reply
  • Easton G.
    Investor · Colorado Springs, CO · Member since 2014 · 46 posts · 18 votes
    3y

    I am so sorry you guys are in a tough spot.  I probably have more questions than I do answers or recommendations. I am really curious about your manager and three months of no applications.  There seems to be some root issues to explore.  I also have more questions around the numbers and long-term viability. 

    One of my properties is in a rough part of town.  Many of the things that have been said in this thread are true.  It has been hard, there have been painful moments, I can't change the neighborhood but one of the reasons we invest in property is that we really love providing places for people to live. The mission behind the business is really important to us.  This has not always been a straight line or been easy decisions.  The truth is, I have a ton to learn to do it better and to maximize the upside. It is also true that we have really served and been served by our tenants in this hard property.  Just recently, we partnered with a local anti-human trafficing organization and are really grateful to serve our community in a really unique way.  I wonder if there are any local organizations (Catholic Charities, Barret House, etc...) that would be interested in securing the property?  
     

    0Reply
  • Sami Gren
    Rental Property Investor · NJ · Member since 2019 · 442 posts · 40 votes
    3y

    HI, I am sorry to hear this happen to you,

    I won't tell you whether you should sell or not, because there are 2 factors that I don't know, 1) how bad the neighborhood is 2) how much headache you are willing to take.

    The house Being vacant and broken in to is a scenario that could happen and in fact happens in each and every area, anyone that is in real estate for a while can affirm that. there are ways to protect the properties better, and that's totally fine that you weren't aware of that, we all were once new to the business and didn't know stuff, we grow and learn.  But there is a big difference between a decent area where you can walk the streets, or an area that you need to look over your shoulders as soon as you drive into the block, it is a thing you need to judge on your own knowing the area.

    Now hearing all these true professionals giving ideas, you can start thinking that you are doing something wrong. Let me tell you something EVERYONE MADE MISTAKES, AND BIG ONES, it is proven by talking to a lot of people, people just naturally like to talk about their successes rather than their failures. and the best courses that we all have in real estate are our failures and mistake, it is a course worth thousands of dollars, however after a failure you need to sit down and make a logical decision and see what the issue was and how to fix it.

    the fact that after 3 months you have no application is a huge question mark and i would recommend you talk it over with someone that actually has experience in real estate in that specific area'

    in whatever you do you should see only success from now on, Good luck

    0Reply
  • Brock Mogensen
    Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes
    3y

    I can relate to this story and the learning lessons on not wanting to do deals in rough areas.  My vote is to take the L and move on to something in a more desirable location.  I've learned that buying properties in A areas with a solid tenant base provides much more predictable cashflow and less headaches.  Especially since the spread between C-class and A-class properties/locations right now is pretty minimal..

    0Reply
  • Mohammed Rahman
    Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes
    3y

    Hey @McKenzie Bagan - it happens. Bad things happen to good people, it's part of the process of learning the ropes in RE. Additionally, I don't think there's anything wrong with cutting your losses (maybe even taking a hit to the numbers) and selling to move on. Think about it this way, would you rather lose $10k or lose $20k in time, money, and energy/headaches, etc. 

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