I need your advice on whether I should get rid of my problematic out of state SFR rental property or take a loan to gut it.
It's a 120-year old 4br 1ba SFR in a not-so-good part of Allentown, PA - very typical to the area. We bought it in May 2019 for $66k. The tenant pays $900/month and all utilities, my PITI is $517/month, I pay 10% to the management company to collect rent, do quarterly inspections, repairs, and evictions if need be. A generous cash flow of $290/month IF it weren't for something constantly breaking.
We bought it in May 2019 with bad tenants. The eviction took (all in all) about two months + a 3wk bed bug treatment $900). I had to put around $5k in junk removal and repairs (wall, gutters, electrical, stove...), while also putting a lot of sweat into it myself (cleaning, painting, caulking, minor repairs I knew how to do). We got a good tenant by mid-October. My cash flow has been murdered by repairs that keep adding up. The latest quarterly inspection showed
- sewage leak in basement
- door and window issues
- toilet sinking into the floor
- weak spot in the roof (leakage)
Estimated repairs possibly in the thousands (waiting for a quote). The problems seem never to stop. I’m already losing my sleep over this house. My wife doesn’t even want to hear about it anymore.
Now, what would you do? In my mind, my options are:
- sell asap and let someone else deal with the issues. Realtor says I’d get max $75k.
- take a loan, put some $30k into renovations and charge higher rent (max $1200 in this market)
- fix for some $30k and flip, which (per my local realtor) is not an option in this market
It's important to note that SFR is not a strategy I want to stick with. Owning +100 SFRs sounds like a nightmare to me. I want to move into multifamily investing. So from the strategy POV there's no point in me keeping this property. I never expected to make money off of it (certainly not get rich, obviously), but I also don't want to lose any. The main point for me with buying this property was to take the first step into REI, to take action, to pull the trigger, and to learn - the whole journey with this house has been a phenomenal learning experience (albeit painful). I guess the main reasons I'd want to keep the house are 1) ego - to be able to say "I own a rental property" and 2) hope for things to magically turn around and one day sell for profit (gambling...)
What would you do in my shoes?
This is a fairly standard experience for purchases in low income areas with higher cash flow- you typically sacrifice passivity for the higher monthly returns. Personally, I don't think it's worth it and maintenance and capex can completely wipe out your cash flow while the property is likely not appreciating in any way that would make the equity worth the trouble- often values are stagnant or retreating.
I'd start looking for a different neighborhood or market that offers some cash flow and some appreciation- a place that has a growing population to some extent- a place people WANT to live rather than a place they HAVE to live. Many newbies look at appreciation as a bonus and only pay attention to cash flow, but the reality is you need both. One without the other will stop you from growing.
Anyhow- once you find your new market- and yes, your new investment will cost more than $66k, sell your current place and move your equity to the new market. On the upside, you probably won't have to worry about the stress of a 1031!
Best of luck-
@John Kutrzeba Hi John, i also have a SFH in the not so good allentown area. 4br 110 years old so i can relate. I bought mine all cash and had issues getting a good tenant. I did a full gut and after my first ever tenant, i had to evict and had more repairs afterwards. It was truly a stressful time indeed. I did get the home repaired after the eviction and fortunately found a great tenant who seems to want to stay for a while and paying $1320 no section 8. Im not sure which street your on or the finishes you did but i think you're under charging and can make this situation a lot better. I also self manage from NY and dont feel the need for management at this stage. I also have a full time job but it hasnt gotten in the way so far. Happy to chat more if you want to connect. Best of luck.
Thank you! Let’s connect.
Sell it. Why are you keeping it with all of the problems...and don't say "it's the cash flow"...because cash flow can be found in another property.
Never fall in love, get emotionally attached, or in any other way connected to any property. The property is nothing more than the vehicle your money rides through to get your profits or cash flow. If your car broke down like this, you'd replace that in a second.
Dump the problem and put the cash you get out in a different property....and there is no "magic" in REI. REI is a numbers game, with $$$ in front, not street names behind. Follow the money, not your ego (your words). Get out of this property (notice I didn't say "deal") faster than ASAP. The longer you stay in it, the more money you lose. The more money you lose, the longer it takes you to get to a profit because it means more losses you have to recover first...and, you have less (and less, and less...) money to get there.
Ego and Rationalization are the two most expensive words in the REI's dictionary...so NEVER use them. You can't afford them.
I have about 400 rentals in Allentown. Its an old housing stock. Most buildings are over 100 years old and come with significantly more maintenance issues than newer housing. Compound that most of the buildings have had a ton of deferred maintenance over the years and they are a lot more expensive to run maintenance wise than most people think. I budget $2000 per unit per year in maintenance, capex, repairs etc for single family rows in Allentown and I have my own full time maintenance guys to do the work. Paying subcontractors or your property management company’s subs to do the work will be more expensive.
How many sqft is the house?
@John Kutrzeba What did the inspection show when you bought the property. They usually will not loan on a property unless their is 5 years left on a roof. Did you do a scope of the sewer line. How much are you allocating to reserves. For me it is a minimum of 23% of rental income. A house of this age would be more likely 30%. I like to have a reserve at least 1 1/2 times enough to repair the most expensive item.
@John Kutrzeba sorry to hear you’re having a bad first experience in Allentown. I agree with what your realtor is telling you about your options. I don’t think a flip will be profitable based on what you’re describing and taking a loan to rehab and re-rent may eat into your cash flow, even with the increased rent. I’d cut my losses, sell it, and take what you’ve learned to the next investment. Hopefully you’ll have better luck. All the best!
Thanks, Joe. Something inside me tells me I needed someone to spell it out for me.
Thanks Joe that’s quite an impressive portfolio! My house counts 1332 SF.
The previous owner had tenants there at $1100/month. However they were months behind their rent and had to be evicted so I guess it doesn’t count. It took us a couple of months to get a tenant and had to go as low as $900 in rent as I desperately needed someone to start covering my mortgage ASAP.
Thanks Tim. Inspector said the roof has at least another 5y on it and his photos didn’t show any visible problems. Then we had the roofer go up there a couple of months later and there was a big hole in the chimney, a big hole by the edge near gutters, and a bunch of other visible problem areas. Do inspectors intentionally miss these not to kill a deal? I even spoke to an attorney about this thinking I’d sue but he said it’s not worth it as inspectors have solid disclaimers in their contracts.
I didn’t climb on the roof myself as it’s very high and I didn’t wanna risk my life having my wife pregnant with no life insurance.
We bought the property with our last savings (a big risk) and I had my toughest year as a real estate agent so far (made a lot less $ than the year before) so had nothing left for reserves. The management company fronted all the money for repairs and have now started to charge 10%/month in interest as a lot of their landlord clients were carrying high balance, they say.
Hey Jeff so great to see you here again. I also follow your feed and informative posts on LinkedIn. Sounds like your business has grown! I think I’m gonna take your (and others’ advice). I’d ask if you had buyers for this but guess you’d be breaching your fiduciary duty to them now that you know what I’m going through 😬
@John Kutrzeba Most of the investors that I work with are looking for multi-families, so not sure I'd have a buyer for you anyway. Thanks for following me on social media... I appreciate it! Good luck to you on this... hope it works out for you!
@John Kutrzeba Definitely I’d dump it / get rid of it. If it’s not a good area with good tenants, why do you want the headaches. Like others have said, this is about making money and it definitely doesn’t look like you are going to be able to with what you’ve presented.
It is a 100 year old house that was bought for $66K. What did the inspection report say when you bought it? I would say either go through the home with an inspector and get an estimate for the major repairs required or sell it.
The inspection report pointed out the issues that the seller fixed prior to closing. But new issues keep coming up.
As others have said, Allentown is filled with older homes that have had deferred maintenance. I've dealt with a version of most of your problems both first-hand and with/through a property manager.
I think you've got to follow the numbers on this to see if it's worth it. As I see it...
1. Your rent is low. Not sure what your exact area/street/finishes are, but I've seen as good or better performance, both in terms of monthly rent and the amount of time it takes to fill the property with a tenant.
2. You've hit a lot of bad luck early, and it looks like you're in a tight spot between what you've already put into it, the vacancy you've incurred which hindered cash flow/accumulation, and reserves going into it. The advice of cutting losses and not throwing good money after bad are both sound if you believe the bleeding will never stop.
3. If you stick it out, there's money to be made. But without knowing exact details, I can't say whether or not it's worth it for your situation or how long it would take to have you see a good year.
4. I would read your property management contract. I'm not going to say whether or not 10%/month in interest is usurious, but it can certainly add up quickly. Also, the way it's framed in your post makes it feel like it's very unexpected.
Best of luck. Let us know what you ultimately decide
Unfortunately, this is not abnormal. Your rent is def low, but these properties are very old and require a lot of maintenance.
If you use a PM, it’s even harder to make money. Mainly because they will up charge you on the maintenance and it will be extremely expensive to manage the property.
Most of the guys I’ve seen successfully invest in the Lehigh valley’s cheap markets, manage it themselves.
Honestly, even at $75k, It’s a bad deal for an investor to purchase that house. I don’t buy many SFHs, but when I do, they have to be a steal. My last 2 were for $41k and $44k. Both worth over $85k after my minimal Reno’s, both purchases within the last few months.
@John Kutrzeba, if I were you, I would sell it. Whatever you put in is sunk cost, so it should not be included in your decision making process. What you need to calculate is how much more you are going to put into the deal and how much cash flow you are expecting to get from now on. Don't forget to put your stress level and your wife's into the equation. Thinking about potential health cost associated with long term stress and lack of sleep. If you can find similar cash on cash return in a different market with better quality houses, I would go to that market instead
Fix leak asap. Take time fixing other issues. Keep collecting rent. You've made it this far. If you really did finally find a good tenant than you can finally relax for a minute
@John Kutrzeba. I would sell as soon as possible. Out of state and super old house is not a good recipe. This will be a money pit
Sounds like you bought wrong 66k! and thought you’d try the out of state investing thing everyone praises on around here . This is very common to OOS investors in expensive markets sadly . I’d just sell it your PM is probably screwing you too so
@John Kutrzeba I only invest in multi family homes built after 1984. Those older homes tend to have a lot of issues. It might be easier to get a loan and fix those larger issues then sell in 2 yrs if possible. Another option might be to sell it to another investor at a meet up.
Sell. If you dont have the reserves for massive repairs, buy newer or, save up til you can buy something less of a money suck