What should I do with this negative cash flow rental?

50 Replies

I have a negative cash flow property out of state I bought about 10 year ago that was a mistake before I knew better.  Trying to decide to take a big hit and sell it cheap or hold on to it and hope market recovers.   I owe $182k on it and can probably sell it for $165k right now.  So that plus real estate commissions and closing costs I will lose a big chunk of change.  The house was built in 1976 and has a dated kitchen and bath.  Roof likely needs to be replaced in a few years.  Furnace and water heater are old. Other things are dated.  It's in a decent location and has good curb appeal.  Rents well.  It has new flooring.  I've lost money on it every year the last 10 with negative cash flow.  

My options:

1. Pay off the 2nd mortgage and refinance the first where it will be slight positive cash flow (will require about $44k out of my pocket to pay the loans down to the point I can refi) and get it re-rented with professional property management.  The hope here is that in say 3 years the market will be better and I won't have to take as big a loss on a sale.  Issue here is the property needs a lot of work (roof, furnace, etc...), and in 3 years when IF the market improves I will still be selling a dated house and I may have to incur more costs then expected on maintenance, repair, updates.  I do think the market does have potential to recover some in price, but it's a big IF.  But I will be putting a lot more money into a property I don't want and was a mistake.

2. Just sell it cheap and take the loss.

I don't really want to do a lease option or real estate contract because of all the legal issues with getting a tenant out if they don't pay. And even then I'm likely to get the house back in the future and tenants may cause damage. It's not a good market to do a FSBO either to try and save on commission. Don't want to do a short sale and wreck my credit either.

Any thoughts and suggestions?  Which choice is better?  I have had great success in the years after learning the lessons from buying this first loser.  But I still have this albatross to deal with from a dumb decision I made 10 year ago.

Lease-Option it for 3 years with a $10K or more down and hope they default and do it all again in 3 years for another $10K or more down.  By then it should be worth quite a bit more then what you owe.  

407-712-3285

What about Dodd Frank and all that stuff with selling financing?  What about evicting issues if they default on a LO?   I don't think I could get $10k down.  Maybe $4k-$5k down.

I'm also not there on the ground locally, so I would have to find someone locally to help me arrange something like a lease option.

Ditto JC Gauthier!  That's the right move.  Learn more about lease option strategies, how to market, negotiate and manage your lease to own tenants.  Once you commit to yourself to turn around this losing scenario you will embrace the multitude of experience available though books and reading.

'I don't want to..."  please stop speaking this way as it holds no solution for you to your dilemma.  You will lose money either way, if you hold it or if you sell it.  So if you're worried about tenants not paying, damaging, cost of eviction/repossession then just take the loss right now and you don't have the hassle.

You're on the wrong side of the loss curve to wait out property value vs. negative cash flow bleeding my friend. 

Best of luck, it's no easy situation, you actually can turn that property around in less than 30 days.  Many renters don't qualify for a mortgage but would love the opportunity to own, or be in the process of owning. 

@Rob Cee  

Where is the property located?

  I would have to know more about the location to help you. You are making a great deal of assumptions in regards to appreciation, and I am afraid you are betting the bank (and your future) on an economic climate that may or may not happen.

   I always lean towards generating positive cash flow and buying and holding, if at all possible. I understand that you have expensive repairs looming in the future, and that those may severely impact any cash flow you DO make now. However, loans don't last forever, but property does. Eventually, this loan will be paid off, you will have tenants paying you a monthly sum, and you will be able to afford all of the expenses while generating positive cash flow in the future.

     You have held on to it for ten years, why the rush to sell now? The market may be steadily increasing, but you are still facing a loss.

 The true question is how to take this dog and turn into a goldmine.

More details, please!

The property is in Albuquerque NM.  The economy is kind of in a funk right now from losing Gov't jobs.  The economy has not recovered from the recession like a lot of the rest of the U.S.  Albuquerque never bubbled in price like Arizona, Vegas, CA, FL...it is about 13% off it's peak in 2007.  Albuquerque's economy sometimes lags CA and the a lot of the rest of the U.S.  I think the Albuquerque  area does have hope (unlike parts of say MI, OH, etc... that are losing population and are hopeless to ever recover) for pop growth and future price appreciation due to climate and southwestern location.  Although that is a big IF.

The problem with holding this property long term is it did not have good numbers when I bought it 10 years ago and would have to throw a ton of money at it to pay the mortgage down and refi for it to just have a small cash flow.  And it will need a lot of updates and repairs over the next 3,5,10 years.  I'm leaning towards to taking the big loss and dumping it for a cheap price.  

@Rob Cee  -

I'm not a fan of the advice to just lease option for 10 down and hope they default to do it all over again.  If it were that easy, the only way anyone would invest is with lease options.  Possibly some of the other commentators on here have that particular niche as their expertise, but I think all would agree there is much more to that particular route than simply "just do it".  

The situation you have painted here in your post would make me at a minimum consider another route.  More than likely you are a passive investor (assumption based on your post).  I would get with my CPA and lawyer and consider dumping the property now.  You will take a passive loss on your tax return that, based on your other passive investments, can offset your passive income.  If you have no passive income today but are planning to do more investing and actually make money, then you can carry that loss forward into future years to offset that income.

You would absolutely have to consult with your CPA first to make sure you plan correctly.

I have been in business for a long, long time and one thing I have learned is that the first loss is the best loss.  Don;t waste time hemming and hawing.  In your post you don't sound comfortable continuing to hold this property because it reminds you monthly that it was a mistake.  I would (and I speak from experience) create the best loss possible and work with my CPA to offset the loss on my taxes.  It may not necessarily feel like a win, but when you have your time back and can move forward without thinking about the past mistake, you will be free to move forward faster and more freely. 

Hello @Rob Cee   I'm sorry you're in this situation, bleeding cash monthly has got to be one of the worst things...  If you do decide to consider the LO or REC route, below is a link to an Escrow company here in ABQ that may be able to help.  I haven't used them yet myself but they were recommended to me by an agent/flipper friend who has many years experience in this area.  Sounds like the owner really knows his stuff and has been around for a long time, so I'm sure they know all the Dodd/Frank ins and outs and may be able to help you.  http://www.securityescrow.com/

-Brent

@Rob Cee

Alternatively,  you could just give the property to me. :-)  

I'm kidding.  My recommendation is to sell the property on a REC. It wouldn't be unreasonable to ask for 15k down payment and to carry a dollar for dollar wrap. If you want, I can put you in touch with a great real estate attorney and trust company that can set it all up for you!

Mortgage payments at $1,061, property tax $160, insurance $50.  The house rents for about $1,200/mo.  No loan amortization as first is 30 yr fixed IO and 2nd is a high rate with very small principle pay down.  Rates were a lot higher 10 years ago.  Unfortunately no loan mod for me because I have no hardship and I'm not a deadbeat and I pay my bills.  All that great low rate load mod & principle reduction stuff only goes to the deadbeats who don't pay their bills.  

Have the folks suggest REC or lease-option ever done one on their own property?  Or just suggesting something they read about?  My worry with these is that a very high percentage of buyers that do REC or lease-option never qualify for a loan to buy the property outright & therefore you get the property back and have to do it all over and don't get rid of the headache.  Also there could be legal issues evicting people for default if they make a claim to ownership (equitable interest).  I think there may be issues to doing a REC when you have underlying financing.

Originally posted by @Brent Ecton:

Hello @Rob Cee  I'm sorry you're in this situation, bleeding cash monthly has got to be one of the worst things...  If you do decide to consider the LO or REC route, below is a link to an Escrow company here in ABQ that may be able to help.  I haven't used them yet myself but they were recommended to me by an agent/flipper friend who has many years experience in this area.  Sounds like the owner really knows his stuff and has been around for a long time, so I'm sure they know all the Dodd/Frank ins and outs and may be able to help you.  http://www.securityescrow.com/

-Brent

 Thanks Brent for the suggestions.  I have heard of security escrow and have talked to a title co. about REC.  I need to go to security escrow's site and read their 215 page REC document!  I also have referrals for some attorneys that specialize in this.  But meanwhile the summer selling season is slipping away so I need to make a decision!

Here's what I would do. I'm more of a financial market guy at the moment, but I like to employ the principles I use across all aspects of life.

Step One: You should analyze prices in that area over the past, say, 50 years

Step Two: Compare a property like yours to the national average over that same 50 years. 

Step Three: Plot out where your property or it's comparison fell annually in regards to the national average. Then, plot that on a line chart. Overlay on that exact line chart where the mean (or avg.) is.

Step Four: Plot on the line chart where you are now in regards to the national average and you will see where you fall in regards to historical and average pricing. 

Then you have a better estimate of knowing whether or not you can expect appreciation or depreciation, and how soon. In the finance world where I spend most of my days we use this same approach on the volatility (how much a stock moves) to calculate over a historical period whether volatility is high or low to help us decide whether we should be buying or selling.

On a further note, when we have a losing position, we try to reduce losses and bring in as much of an income as possible, so when the stock eventually reverses and moves in our favor, it reduces our cost basis and eventually we can at least get to a breakeven.

So, for example: You own it at $185k and can sell it for $165k. You need to create $20k in income to reduce the cost basis to $165k. So what I would suggest is that at your current rate you do a FSBO, at $165k, require 10% down which is $16,500/$20,000, find a family with less than stellar credit that still needs a place to live, just got roughed up by the economy, attach a "premium" for giving them the loan ($3,500) which you could even throw into the mortgage payment over time, and attach a slight interest rate boost for the added "risk" of taking them on. I'm not sure the specifics of Dodd Frank but this all sounds possible to me.

This leaves two scenarios:

1) They default but you still generated 10% and you repeat the process. Further extending your credit received on the next trip.

2) They end up buying the house at $165k, but you make enough money on the interest boost over the standard high credit loan that you end up bringing your cost down to $165k. The property values appreciate, and they have a home with equity and are happy as can be, and you walk away at a break even. Even if they don't appreciate it's no skin off your back. 

Hope I helped! I'm not super experienced in real estate but I like to give my two cents and try to help where I can.

Regards,

Jason Eyerly

Originally posted by @Jason Eyerly:

Here's what I would do. I'm more of a financial market guy at the moment, but I like to employ the principles I use across all aspects of life.

Step One: You should analyze prices in that area over the past, say, 50 years

Step Two: Compare a property like yours to the national average over that same 50 years. 

Step Three: Plot out where your property or it's comparison fell annually in regards to the national average. Then, plot that on a line chart. Overlay on that exact line chart where the mean (or avg.) is.

Step Four: Plot on the line chart where you are now in regards to the national average and you will see where you fall in regards to historical and average pricing. 

Then you have a better estimate of knowing whether or not you can expect appreciation or depreciation, and how soon. In the finance world where I spend most of my days we use this same approach on the volatility (how much a stock moves) to calculate over a historical period whether volatility is high or low to help us decide whether we should be buying or selling.

On a further note, when we have a losing position, we try to reduce losses and bring in as much of an income as possible, so when the stock eventually reverses and moves in our favor, it reduces our cost basis and eventually we can at least get to a breakeven.

So, for example: You own it at $185k and can sell it for $165k. You need to create $20k in income to reduce the cost basis to $165k. So what I would suggest is that at your current rate you do a FSBO, at $165k, require 10% down which is $16,500/$20,000, find a family with less than stellar credit that still needs a place to live, just got roughed up by the economy, attach a "premium" for giving them the loan ($3,500) which you could even throw into the mortgage payment over time, and attach a slight interest rate boost for the added "risk" of taking them on. I'm not sure the specifics of Dodd Frank but this all sounds possible to me.

This leaves two scenarios:

1) They default but you still generated 10% and you repeat the process. Further extending your credit received on the next trip.

2) They end up buying the house at $165k, but you make enough money on the interest boost over the standard high credit loan that you end up bringing your cost down to $165k. The property values appreciate, and they have a home with equity and are happy as can be, and you walk away at a break even. Even if they don't appreciate it's no skin off your back. 

Hope I helped! I'm not super experienced in real estate but I like to give my two cents and try to help where I can.

Regards,

Jason Eyerly

 NOTE: I see interest rates increasing anyways as the Fed sees the market improving and reduces their bond buying program, eventually rates will begin to come up, that's just how it works.

Do you have other property with equity?  If you refinanced your second at a lower rate, maybe secured by a second property that would help your combined cash-flow.  Then go after refinancing the first and that should help your cash-flow even more.  If you can do a lease option use the cash to redo the roof, if you get the property back major repair number one has now been taken care of.  You can even tell to to your lease buyer so they feel better about buying the option.

You could then sell it Subject 2 with the lower priced financing in place you might be cash flow positive.  

@Rob Cee  people like @JC Gauthier  and @Darryl Shurgin are the reason Dodd-Frank exists.  You made a bad investment, so you can pass your loss off to some schmuck who thinks you want to owner finance a house to them.  BUT all you really want is to capitalize on their large down payment and find as many other suckers to do the same to, to recover from your bad investment?

Sorry folks, this is a loser and you should man up to your own bad decision and move on to your other respectfully profitable deals.  What these people are suggesting is a pure scheme to rip people off.  Call it whatever you want, you wouldn't recommend a deal like this to your sister or a real friend - it's a pure rip off. 

Here's a suggestion - take your loss like a man, live and do your business with some integrity.

Originally posted by @Rob Cee:

Have the folks suggest REC or lease-option ever done one on their own property?  Or just suggesting something they read about?  My worry with these is that a very high percentage of buyers that do REC or lease-option never qualify for a loan to buy the property outright & therefore you get the property back and have to do it all over and don't get rid of the headache.  Also there could be legal issues evicting people for default if they make a claim to ownership (equitable interest).  I think there may be issues to doing a REC when you have underlying financing.

 You can't have everything you want. If you don't ever want to deal with any issues, as it sounds like you want to kick back and never think about it or deal with it again, then sell it. That's clearly what you want to do, you just seem to be searching for someone to convince you or tell you that it's a best move.

Originally posted by @Robert Leonard:

@Rob Cee  people like @JC Gauthier  and @Darryl Shurgin are the reason Dodd-Frank exists.  You made a bad investment, so you can pass your loss off to some schmuck who thinks you want to owner finance a house to them.  BUT all you really want is to capitalize on their large down payment and find as many other suckers to do the same to, to recover from your bad investment?

Sorry folks, this is a loser and you should man up to your own bad decision and move on to your other respectfully profitable deals.  What these people are suggesting is a pure scheme to rip people off.  Call it whatever you want, you wouldn't recommend a deal like this to your sister or a real friend - it's a pure rip off. 

Here's a suggestion - take your loss like a man, live and do your business with some integrity.

 Stupid is as stupid does. Darwinism is what it is. However, to suggest that you "take your losses as a man"? What does that even mean? How do men take losses as opposed to anyone else? Lastly, why take your loss when you can come up with many creative solutions to avoid taking the loss. He could fix up the property and hang on to it with a positive cash flow, and see it appreciate ten times over. Markets move in cycles, housing included. 

I agree with @Robert Leonard  .  We all know that you make money when you buy.  It's already a loser when you bought it, judging by your post I say cut the losses and move on. This is an expensive education, learn from your mistake , focus on getting the next winners and you should come out ahead.  Don't let this house be a liability that drag you down. I say  lease it at a discount while you selling it.  Put it in writing so that the tenants know they have to go when it's sold.  Good luck.

@Jason Eyerly  I spoke metaphorically when I said "take it like a man" as opposed to acting like a weasel or a snake to dupe some unsuspecting "buyer" to overcome a loss. Does that make sense to you?

You recommend to "fix up the property and hold on to it with positive cash flow?" Pour more money into a property you already overpaid for is no way to create positive cash flow. I also think the idea of over paying for a property to hope for it to appreciate is wishful thinking not an investment strategy.

@Rob Cee  - Some times you are better to take the hit and move on with life.  I have one of those going on right now.  Can you do a refi on your whole portfolio and pull equity out of other properties to pay down the one that you need to sell?  This way, you may sell at a loss, but at least you won't have to bring money to the table (maybe).

Remember, this albatross is not only losing money for you, but you are also losing sleep, time, and mental energy.  If you sold this thing quickly (even at a loss), could this free up enough mental energy so that you could flip a house and make up for the loss?

Originally posted by @Robert Leonard:

@Rob Cee people like @JC Gauthier  and @Darryl Shurgin are the reason Dodd-Frank exists.  You made a bad investment, so you can pass your loss off to some schmuck who thinks you want to owner finance a house to them.  BUT all you really want is to capitalize on their large down payment and find as many other suckers to do the same to, to recover from your bad investment?

Sorry folks, this is a loser and you should man up to your own bad decision and move on to your other respectfully profitable deals.  What these people are suggesting is a pure scheme to rip people off.  Call it whatever you want, you wouldn't recommend a deal like this to your sister or a real friend - it's a pure rip off. 

Here's a suggestion - take your loss like a man, live and do your business with some integrity.

 You make some great points.  I would only want to set up a rent-to-own type deal if it is a decent deal for the buyer and a win-win.  Most of the investors I know with integrity set lease-options up so people can win (principle credits, realistic option price, etc...).  John Schaub a guru out of FL who has a lot of integrity and has material on lease-options, when I've heard him speak he says he gives most of the option deposit back to buyers who fail on a lease-option (minus any damages or repair costs to property).   I have also heard that something like 90%+ of lease option buyers fail to exercise the option and get a loan to eventually buy the property.  Setting up someone for failure and keeping a large option deposit is definitely shady.

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