Hello,
Can anyone please give this first-time landlady some advice on this issue?
I bought a turnkey from Roofstock last summer. It is out of state and I have a PM to take care of it. It's supposed to cashflow about $100/mo. But there have been a lot of fixings and left me with negative cashflow. The major fix was on the gas line, one on tub drain, and a couple minor fixes like clogged pipe.
What should I do with this property? Should I keep it and hope it would cashflow this year or plan to sell it? What would be the worst thing that could happen if I keep having negative cashflow year after year? This situation makes me nervous about rental investment now. :(
Ok. The worst thing that would happen is you would keep negative cash flowing...which adds up, and subtracts. Think of it as having a job, that you pay the employer for the privilege to work there. So you say you can cover it with your current job. Fine, then let me reword what I just said.
It's like working full time, and making enough money so you can work a 2nd job...and pay that employer for the privilege of working there. If that was the case, what should you do? Probably quit the 2nd job...right? So I ask you this, using that same thought process, what should you do with this rental?
Now, onto the property specifics. I wouldn't buy any property that only has $100/month CF...and you're seeing why now. That's not positive CF...that's negative CF, guaranteed to happen.
Any money you lost so far though negative CF is gone, and you'll never get it back, as long as this job property has negative CF. If it starts to get positive CF, then in order to start making a profit, the first thing that has to happen is get all the negative CF back...from the new positive CF. How long will that take? How long and how far behind are you?
Don't fall in love with any property. The property is just the temporary resting place for your cash/equity until said time it grows enough for you move it forward into exponential gains. The longer you retain a negative CF property, the more negative CF you have to recover, the less money you have left to recover it with, and the longer it takes to actually recover it. Cut your losses, stop moving backwards, and move forward.
Ok. The worst thing that would happen is you would keep negative cash flowing...which adds up, and subtracts. Think of it as having a job, that you pay the employer for the privilege to work there. So you say you can cover it with your current job. Fine, then let me reword what I just said.
It's like working full time, and making enough money so you can work a 2nd job...and pay that employer for the privilege of working there. If that was the case, what should you do? Probably quit the 2nd job...right? So I ask you this, using that same thought process, what should you do with this rental?
Now, onto the property specifics. I wouldn't buy any property that only has $100/month CF...and you're seeing why now. That's not positive CF...that's negative CF, guaranteed to happen.
Any money you lost so far though negative CF is gone, and you'll never get it back, as long as this job property has negative CF. If it starts to get positive CF, then in order to start making a profit, the first thing that has to happen is get all the negative CF back...from the new positive CF. How long will that take? How long and how far behind are you?
Don't fall in love with any property. The property is just the temporary resting place for your cash/equity until said time it grows enough for you move it forward into exponential gains. The longer you retain a negative CF property, the more negative CF you have to recover, the less money you have left to recover it with, and the longer it takes to actually recover it. Cut your losses, stop moving backwards, and move forward.
@Supada L. What advice has your property manager offered on potential rent growth? It might not cash flow this year but maybe when lease renewal comes up. I would also take into consideration if there are reserves to continually deal with a negative cash flow situation over an extended period of time.
@Joe Villeneuve Good analogy! And thank you for the advice. I would like to sell it and move forward, but I'm afraid I'd loose more if I sell this year because the house market in that area (Meridian, MS) is not great. I feel stuck. :(
@Michael Robbins I have not talked to my PM about the rent growth yet. I will keep that in mind when I call them next week. Thank you so much.
@Joe Villeneuve Good analogy! And thank you for the advice. I would like to sell it and move forward, but I'm afraid I'd loose more if I sell this year because the house market in that area (Meridian, MS) is not great. I feel stuck. :(
@Michael Robbins I have not talked to my PM about the rent growth yet. I will keep that in mind when I call them next week. Thank you so much.
When will the market gain in your area? You don't know, do you. Let me ask a better question. If you sell it in a down market, aren't you also buying in one? That means the deal someone else gets on your property (cost wise), you will probably get when you buy from someone else's property. It's all relative.
@Joe Villeneuve Good point. I'm not sure if I'm right about this, but I don't think I want to buy in that market again. I don't want to file state taxes in MS. I live in TX and there are some opportunities here as well.
@Joe Villeneuve Good point. I'm not sure if I'm right about this, but I don't think I want to buy in that market again. I don't want to file state taxes in MS. I live in TX and there are some opportunities here as well.
...and that is the logical path to take...that many don't.
You approved that thought! I feel more confident now. =D Thank you so much!
@Supada L. I own a property as well which is just breaking even after all the expenses and I always wonder why I bought that property in the first place. But I feel I have learned a lot more from that investment so on the positive side, you now know the investment not to get into. Real Estate is a forgiving hustle I feel sometimes so keep calm and carry on :)
It's not uncommon for a property to have a lot of repairs shortly after being placed in service. I wouldn't throw it down the well yet but would certainly be inquiring as to what you should expect in the future. (from the property manager, etc) Since you acquired it recently, I'd give it a bit more time before bailing out. But do it with the thought that you may need to. Regarding the taxes, if you're not making money, that's not really an issue anyway at this point...
@Supada L.If you plan to sell just try to make sure at worst you break even. If negative cash flow is on upper side get rid of it. Is better to take small loose then loose all. You can try again from that money. For roofstock try to do inspection once as you are doing most of the things virtually. $100 per is less for single try to do $200 but also check market for per yr rental increase and appreciation.
@Aj Parikh Thank you so much for sharing your story. It makes me feel so much better. =)
@John Teachout Thank you so much. I will talk to them for sure.
@Supada L., some turnkey companies provide a one year warranty to deal with maintenance issues, so you may have to check with Roofstock on the issues you are having. They may give you refund on the repairs even if not indicated in the contract. Good luck
I heard this often. Folks when you buy rental, you need to do cost simulation for DSCR and capex projection. If you buy something with less than 1.25 DSCR it's almost guaranteed you lose money, the only way you is appreciation. Your metric shall not be the number of dollars you're making but the ratio between NOI and actual predictable expense and unpredictable expense.
If there’s a history of rent growth I’d stick with it. You probably made tax free money with loan pay down and depreciation included. If the rent is at least $1,000 and you ONLY get 3% rent increases. You’ll be cashflow positive within a few years. But I don’t want to wait that long you say? That’s less than $3600 in cashflow away if nothing gets better until the last month. But that’s not how it works. You’ll be a little better every year.
When you sell you’re not just cash-flowing negative 6-10% (way more than holding on.) you’re actually spending that money. Right now you’re really just sending that money towards loan pay down.
@Supada L.
Properties advertised as turnkey are usually marketed towards novice investors and priced so that it is difficult to make a return. They will compare the return to that of the stock markets and argue that there's is higher than 7% or whatever number they use. However the difference is that, as much as people wish it was, real estate is not passive investing. Even if you hire a property manager you will still need to manage them. My advice is to get something in your area and manage it yourself. If it's not in peak condition try to learn how to fix minor issues like leaky faucets and clogged drains. Those things can be resolved in a couple minutes but if you call a professional they are going to charge you a decent amount just to come out. If you need a PM make sure you vet them first, And if you're in town you will still need to check periodicaly that they are doing a good job and are keeping their end of the bargain.
I would create a simple pro-forma with basic assumptions such as rent growth percentage (3%); operating expenses (15%-20%) and get NOI, this will help you to get a better view of the next 3-5 years. The point of investing in RE is to take advantage of appreciation, tax benefits and hedging against inflation. Positive cash flow can be obtained from operating and reversion.
The is a basic handbook that might help you with some financial ratios - What every investor needs to know.... by Frank Gallinelli.
Best.
A good education always cost money, for me I only invest in areas I can easily drive to within a couple of hours. Cash flow of $100 is to close for me. I know there are areas where this might work out with potential growth, but those little things , like plumbing issues, HVAC, electrical seem to always creep up . A partner has a condo make 100 a month, 1st month needed HVAC unit, $3500, dryer has went out , Small electrical issues have shown up, SO far the condo has never made a dollar. The rents in that area are low, association fees, Insurance Hikes, Increases in property taxes. have killed the partner. Loan has been serviced, and more equity has been built.
Turnkeys and flippers I stay away from. Good luck to you.
My question is-- did Roofstock sell you this property saying it was in turnkey condition or did they sell it to you as-is? As-is, you can't do anything about. But if it was in turnkey condition, I would imagine there should've been some level of scope-of-work warranty or something. Normal turnkey providers offer that, but Roofstock is a little bit different so I don't know exactly what comes with their properties.
I'm with some of the others who say... I don't know that I would've bought a property with only $100 cash flow. At least not unless there was some other major perk to it that made up for the low cash flow. But here's the thing-- your first property won't always be perfect, and you'll learn a ton! It's how it goes. So, it's okay, now you know.
As far as moving forward, that's a little tough. I would say to probably give it at least another year or so to see how it goes. If you sell now, so quickly after you bought it, you're going to lose a lot of money just in closing costs and otherwise. The other thing to know is that cash flow isn't the only way a rental property profits, so you may not be at as much of a loss as you think (appreciation, tax benefits, equity building via mortgage paydown, inflation hedging).
Before you decide anything, I would do/consider the following things as a way of doing research to better decide whether to keep or sell:
- Run a RentFaxPro report on the property and see the analysis it gives you (will give you an idea of rent rates and you can compare that to what you're getting, info on the neighborhood (appreciation potential?), comps, etc.)
- Really look at the current property manager you're using. Are they actually good and it just is about the repairs? Or are they not great? That's huge.
- Call a 3rd party property manager and give them the address and ask their opinions, tell them your situation (you can always fire your current PM and move to a new one), and see what they say. Property managers are the most in the know about specific properties and specific areas.
- Run the numbers. Really make sure you know exactly what you're working with. And maybe even compare that to what you could get on a different turnkey property... just so you know the comparison.
It's not uncommon for small repair items to come up with new tenants. See if it chills out over the next year. Still do all of those other things though, since you are working with such a low cash flow margin, but I wouldn't rush into a sale just yet.
Just for future reference, if it was a turnkey property you were aiming for, there are other companies with a lot higher cash flow margins (and with scope-of-work warranties, etc.) I work with a lot of them and they would all cover those small things for at least the first few months. Happy to chat more on the turnkey front if you feel like you need some help with it.
Hello,
Can anyone please give this first-time landlady some advice on this issue?
I bought a turnkey from Roofstock last summer. It is out of state and I have a PM to take care of it. It's supposed to cashflow about $100/mo. But there have been a lot of fixings and left me with negative cashflow. The major fix was on the gas line, one on tub drain, and a couple minor fixes like clogged pipe.
What should I do with this property? Should I keep it and hope it would cashflow this year or plan to sell it? What would be the worst thing that could happen if I keep having negative cashflow year after year? This situation makes me nervous about rental investment now. :(
>It's supposed to cashflow about $100/mo.
Who calculated this expected cash flow? Did you examine the pro forma? What was allocated to maintenance/cap expense? Was the work to place the unit in turnkey condition done by licensed contractor(s).
I suspect the pro forma was too aggressive and did not allocate enough for maintenance/cap ex. If my theory is correct, it is a poor investment and not just bad luck. If it is just bad luck, luck evens out eventually.
If the pro forma is too aggressive, the top way to recover would be via appreciation (property and rent appreciation). The problem is Meridian, MS according to neighborhood scout is a negative appreciation market for this century (meaning the appreciation rate is less than the inflation rate). Appreciation is very unlikely to save this RE investment.
You need to decide if the pro forma is realistic. Assuming it is too aggressive, you should sell. To put it differently, what other option is available? How long do you want to continue to lose money?
Good luck
$100/month CF is way too thin as you can now see as if anything goes wrong with the property, it will gulp up that $100 CF in no time and even much more, which means you will then have to throw money into the property.
The answer is simple: Cut your losses and sell this thing, as you never supposed to buy it in the first place.
This is a great cautionary tale. I see a whole lot of hype about "building your stack" and "How to become a Real Estate Milllllyonaire!" The reality is that in hot markets, particularly the hot ones that are relevant to me (Northern Utah), buy and hold properties simply don't cash flow. Any SFH that comes on the market is being snapped up at or above the asking price by retail buyers. Appreciation is great, but is that really going to be all that attractive in the long run? Do I really want to lose money in the short run for the possibility of long term appreciation? Not really.
"But, but invest OOS!" Is the counter-mantra. But that's not necessarily a good choice, either. When you invest OOS, property management is generally mandatory, not optional. So that's a 8-10% expense that you pretty much have to spend that local investors don't necessarily need to. Also, you gotta ask why these properties are cash flowing in what has generally been a hot US market? In my view a lot of it can be explained by the simple lack of economic opportunity in the areas in question.
It's not uncommon for a property to have a lot of repairs shortly after being placed in service. I wouldn't throw it down the well yet but would certainly be inquiring as to what you should expect in the future. (from the property manager, etc) Since you acquired it recently, I'd give it a bit more time before bailing out. But do it with the thought that you may need to. Regarding the taxes, if you're not making money, that's not really an issue anyway at this point...
It's not the fact that it needed repairs right away. You're right...that's not uncommon, although if you catch it when you're making the offer, you should have the cost factored into the offer, either subtracted from the offer or fixed before closing by the seller.
The problem is the very low cash flow to begin with, even before the rehab costs are applied.
@Supada L., some turnkey companies provide a one year warranty to deal with maintenance issues, so you may have to check with Roofstock on the issues you are having. They may give you refund on the repairs even if not indicated in the contract. Good luck
Thank you. I will check with them if they have the warranty.
I heard this often. Folks when you buy rental, you need to do cost simulation for DSCR and capex projection. If you buy something with less than 1.25 DSCR it's almost guaranteed you lose money, the only way you is appreciation. Your metric shall not be the number of dollars you're making but the ratio between NOI and actual predictable expense and unpredictable expense.
Thank you. Looks like I have a lot to learn.
If there’s a history of rent growth I’d stick with it. You probably made tax free money with loan pay down and depreciation included. If the rent is at least $1,000 and you ONLY get 3% rent increases. You’ll be cashflow positive within a few years. But I don’t want to wait that long you say? That’s less than $3600 in cashflow away if nothing gets better until the last month. But that’s not how it works. You’ll be a little better every year.
When you sell you’re not just cash-flowing negative 6-10% (way more than holding on.) you’re actually spending that money. Right now you’re really just sending that money towards loan pay down.
Yes. The rent growth is pretty good there. Looks like it's worth a try.