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.

@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.

@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.

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.

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.

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!

@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!

How much are your mortgage payments? How much of that is principle reduction monthly? How much does it rent for?

What should I do with this negative cash flow rental?

Nick Fitzpatrick

Property Manager · Santa Rosa, CA · Member since 2014 · 56 posts · 16 votes

What should I do with this negative cash flow rental?

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