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 $100/month CF...and you're seeing why now. That's not positive CF...that's negative CF, guaranteed to happen.
Any money you lost so far though negative CF is gone, and you'll never get it back, as long as this job property has negative CF. If it starts to get positive CF, then in order to start making a profit, the first thing that has to happen is get all the negative CF back...from the new positive CF. How long will that take? How long and how far behind are you?
Don't fall in love with any property. The property is just the temporary resting place for your cash/equity until said time it grows enough for you move it forward into exponential gains. The longer you retain a negative CF property, the more negative CF you have to recover, the less money you have left to recover it with, and the longer it takes to actually recover it. Cut your losses, stop moving backwards, and move forward.
I would get rid of the property manager and keep that money. You can manage it from out of state. Talk to the tenants and tell them to report any issues to you directly. When you buy houses there are always unexpected costs out the gate. Once you fix them you should be smooth sailing after that. Everything you fix is one less thing to have to fix later. And when you do finally sell you can advertise all those items have been upgraded / fixed which means you can recoup those losses.
Thank you. I didn't look at the situation this way. I'll see what I can do with the PM.
Most people dump a few hundred dollars a month into a savings account without thinking twice. If you're losing a few hundred dollars a month I don't think that's a big deal. Think of that property as a savings account. Except that the mortgage balance is getting paid down ($), you get great tax write offs ($$), and if you bought a decent property then the rent will increase ($$$) and the value will go up over time ($$$$).
If it was me, I'd keep it and move on to the next deal. You can always reposition it later (refinance, re-rent etc....).
I bought a deal that was a negative cash flow from day 1 because of my financing (13% interest rate), and I knew it was under valued but that the market hadn't caught up to it yet. I purchased it for 90k and based on the current available comps the appraiser also said it was worth 90k. But I knew it was worth at least 120k, but there were no comps to support it. So I bought it anyways and lost about $300/m. I have a great tenant pool in that area FYI (very important). 15 months later it appraised for 125k and I refinanced into a small positive cashflow but a huge equity position.
Not all negative cash flow deals are bad.
Thank you so much for sharing your story. It's very encouraging. I've decided to hold it for another year and reevaluate the situation. Thank you. =)
>I've decided to hold it for another year and reevaluate the situation.
You have indicated the pro forma is too aggressive. I showed, with cited references, that the historical rent and property appreciation is below the rate of inflation. Another poster pointed out the city has a declining population. I did not verify this information, but it seems likely seeing, in inflation adjusted dollars, the property value and rent has been declining.
What do you expect to happen in the next year? I suspect a best case, but unlikely because it has an aggressive pro forma, is that you get $1200 cash flow over the next 12 months. The more likely scenario is that you continue to have negative cash flow.
The negative cash flow would not bother me if there was good evidence that it would improve. Without rent or property appreciation (meaning the appreciation is less than the rate of inflation) I see little chance of the situation improving.
Some questions/thoughts:
Good luck
Thank you for your questions/thoughts. I'm not sure why the rent rate on Rent Jungle and Zillow do not match. This rental is 3BD/1BH. I'm renting out at $850. Zillow estimates $1000. I agree that the appreciation is not good. =(
It is my belief that in these low rent markets (especially for OOS investors), the 50% rule is too aggressive. However, I am curious what the 50% rule would place the cash flow.
You have a 3/1 for renting for $850/month. What is your monthly debt service (mortgage payment not including taxes and insurance)?
$850 * 0.5 - (MonthlyDebtService) = cash flow. If you debt service is over $425/month, the 50% rule would indicate this is a negative cash flow property.
I believe for your OOS, low rent property that the 50% rule is too aggressive. I suspect even if debt service is $400/month that you likely have negative cash flow.
Good luck
@supada l
Yes. I sold a few a long while back when the crash occurred mainly due to 1) high insurance 2) so many properties went on the market that the rental rates went below my hold ability 3) I had a handful of these and couldn't hold onto them easily. I sold them about 2-3 yrs in. I mainly sold them as they were going to negative cashflow longterm at that point. Not short term. I have bought other properties since knowing that there was some deferred maintenance needed and got that all done then kept my reserves in place so that I could easily handle anything coming up.
@Supada L. Turn key companies are notorious for skimping on remodeling. Don't ever buy anything for a turn key provider. U should immediately find a new property manager to take over and get real costs figured out. You will probably have to spend a bit of money the first year to fix all the cheap half *** turn key remodeling job. But STAY THE COURSE. Trim your personal expenses and try and build up a cushion of savings. Maybe you can do a refinance and have a real contractor do a small renovation to be able to get top rents. Roofstock is just another legal scam with a license to RIP you off.
@Joe Villeneuve. Hey joe, how do you feel about positive cash flow around $240 a month? 
It's $140 more than $100/month? That doesn't tell me anything. I don't know how much cash was put into the property as a DP. I don't know what the equity of the property is when it was closed on. I don't know how many partners are involved. I don't know what my plan told me I needed for CF at the time I closed on that property...for that matter, I don't even know if there is a plan to tell me that.
Not enough info. You might just as well ask me if the dinner you ate tonight would have tasted better with more salt. LOL
@Joe Villeneuve wow! You missed your calling as a politician. 😂 sorry if I wasted any of your time, sir....
If you don't understand just say so. If you're looking for a quick shortcut answer, you've come to the wrong person. I'm not a politician. I don't give answers where they are not based on all the facts. If I don't have the facts, I don't give answers.
It is not uncommon to purchase a property with inherited tenants with below market rents that is netting you very little cashflow. Any investor acquiring inherited tenants will almost always encounter this issue, so I would not sell yourself short yet. You need to look at the future potential and stabilize the property which requires raising the rent to market value and possibly getting new tenants. I'm sure you realized by now that $100 a door is not enough. I personally aim for $300+ per door. Also you should always have reserves when your property is not stabilized as the current cashflow will likely not cover it. Every investor and situation is unique, but raising rents in the beginning can sometimes be better as you have yet to develop a relationship with the inherited tenants.
@Felicia Feliciano I am confused by your comment
@Supada L. Did you say $100? Why would you do that? Did you read the book?
@Supada L. Personally not a fan of turnkey out of state rentals. All profit for the seller and little cash flow or equity for the buyer. Good luck!
I'm curious. When you bought the property, what was the calculated cash on cash return for year 1? I've been browsing Roofstock lately and I don't see a lot of "good" returns there within the 3-stars and above neighborhoods. I wonder what it showed when you bought it.
@Ali Boone I've been looking at roofstock for a while now and wasn't aware of other companies out there. Not sure what the etiquette is...so I figured I'd reach out and ask you directly of what/who these other companies are?
I would get rid of the property manager and keep that money. You can manage it from out of state. Talk to the tenants and tell them to report any issues to you directly. When you buy houses there are always unexpected costs out the gate. Once you fix them you should be smooth sailing after that. Everything you fix is one less thing to have to fix later. And when you do finally sell you can advertise all those items have been upgraded / fixed which means you can recoup those losses.
Thank you. I didn't look at the situation this way. I'll see what I can do with the PM.
First investments can be a lesson or an opportunity at times. I wouldn't let that deter you from future investments, just take this as a learning step and prepare better! A great way is to have an exit strategy going in. "Can I turn this into short term rental?" "Can I flip this if it doesn't cash flow?" "Should I rent by the room?" Those are some exit strategies. On multi family I am ok with $100 cash flow per door after expenses or "reserves". Property should pay for itself always. Single family homes I would personally do $200 per home after reserves are met. It also depends what kind of market you're in. Cyclical, hybrid or linear market. Rents and property values fluctuate. But the investment should make sense at purchase. I wouldn't expect greater than what you're getting. Anything better is a plus! Best of luck.
@Ali Boone I've been looking at roofstock for a while now and wasn't aware of other companies out there. Not sure what the etiquette is...so I figured I'd reach out and ask you directly of what/who these other companies are?
Feel free to message me, either on here or at my email address. Roofstock isn't even what I would consider to be a truly turnkey company... they just offer turnkey properties. I much prefer to work with actual turnkey providers. Happy to explain the differences and give names and such if you message.
I had a similar experience on my first deal. I bought an old house that was purported to be "turnkey" - not through a turnkey provider but from a seller who performed some shoddy rehab work. We've had a few surprise big ticket repairs (electrical, plumbing) in the past couple years, and right now considering what to do about a tub that needs to be replaced.
Our cash flow is pretty thin (about $100/mo), and accounting for the repairs it is clearly negative cash flow. On the other hand, the property has appreciated since we bought it.
A few of things to consider:
1) Cash flow is only one component of return. Appreciation and amortization are the big ones.
2) Your loan is a dollar short position, and as the dollar loses value, the value of the debt does, too. Inflation-induced debt destruction, though, takes many years to play out.
3) Your tenant is paying down the loan for you.
4) Rents will rise with inflation, putting you in a better cash flow position over time.
As one of my mentors says "Most people feel foolish when buying rental properties" because in the short run, there is very little if any cash flow to justify the problems that come up. Your post is a great illustration of this.
Most people dump a few hundred dollars a month into a savings account without thinking twice. If you're losing a few hundred dollars a month I don't think that's a big deal. Think of that property as a savings account. Except that the mortgage balance is getting paid down ($), you get great tax write offs ($$), and if you bought a decent property then the rent will increase ($$$) and the value will go up over time ($$$$).
If it was me, I'd keep it and move on to the next deal. You can always reposition it later (refinance, re-rent etc....).
I bought a deal that was a negative cash flow from day 1 because of my financing (13% interest rate), and I knew it was under valued but that the market hadn't caught up to it yet. I purchased it for 90k and based on the current available comps the appraiser also said it was worth 90k. But I knew it was worth at least 120k, but there were no comps to support it. So I bought it anyways and lost about $300/m. I have a great tenant pool in that area FYI (very important). 15 months later it appraised for 125k and I refinanced into a small positive cashflow but a huge equity position.
Not all negative cash flow deals are bad.
Thank you so much for sharing your story. It's very encouraging. I've decided to hold it for another year and reevaluate the situation. Thank you. =)
>I've decided to hold it for another year and reevaluate the situation.
You have indicated the pro forma is too aggressive. I showed, with cited references, that the historical rent and property appreciation is below the rate of inflation. Another poster pointed out the city has a declining population. I did not verify this information, but it seems likely seeing, in inflation adjusted dollars, the property value and rent has been declining.
What do you expect to happen in the next year? I suspect a best case, but unlikely because it has an aggressive pro forma, is that you get $1200 cash flow over the next 12 months. The more likely scenario is that you continue to have negative cash flow.
The negative cash flow would not bother me if there was good evidence that it would improve. Without rent or property appreciation (meaning the appreciation is less than the rate of inflation) I see little chance of the situation improving.
Some questions/thoughts:
Good luck
Thank you for your questions/thoughts. I'm not sure why the rent rate on Rent Jungle and Zillow do not match. This rental is 3BD/1BH. I'm renting out at $850. Zillow estimates $1000. I agree that the appreciation is not good. =(
It is my belief that in these low rent markets (especially for OOS investors), the 50% rule is too aggressive. However, I am curious what the 50% rule would place the cash flow.
You have a 3/1 for renting for $850/month. What is your monthly debt service (mortgage payment not including taxes and insurance)?
$850 * 0.5 - (MonthlyDebtService) = cash flow. If you debt service is over $425/month, the 50% rule would indicate this is a negative cash flow property.
I believe for your OOS, low rent property that the 50% rule is too aggressive. I suspect even if debt service is $400/month that you likely have negative cash flow.
Good luck
I've not heard of 50% rule before. Another thing I learned today. Thank you. =)
My mortgage payment (not include taxes and insurance) is $500, over $425 you mentioned. =(
@supada l
Yes. I sold a few a long while back when the crash occurred mainly due to 1) high insurance 2) so many properties went on the market that the rental rates went below my hold ability 3) I had a handful of these and couldn't hold onto them easily. I sold them about 2-3 yrs in. I mainly sold them as they were going to negative cashflow longterm at that point. Not short term. I have bought other properties since knowing that there was some deferred maintenance needed and got that all done then kept my reserves in place so that I could easily handle anything coming up.
Thank you so much for your response. I'll keep these in mind.
@Supada L. Turn key companies are notorious for skimping on remodeling. Don't ever buy anything for a turn key provider. U should immediately find a new property manager to take over and get real costs figured out. You will probably have to spend a bit of money the first year to fix all the cheap half *** turn key remodeling job. But STAY THE COURSE. Trim your personal expenses and try and build up a cushion of savings. Maybe you can do a refinance and have a real contractor do a small renovation to be able to get top rents. Roofstock is just another legal scam with a license to RIP you off.
Good point. I learned it the hard way. And thank you for your advice. That's going to be my next steps. =)
It is not uncommon to purchase a property with inherited tenants with below market rents that is netting you very little cashflow. Any investor acquiring inherited tenants will almost always encounter this issue, so I would not sell yourself short yet. You need to look at the future potential and stabilize the property which requires raising the rent to market value and possibly getting new tenants. I'm sure you realized by now that $100 a door is not enough. I personally aim for $300+ per door. Also you should always have reserves when your property is not stabilized as the current cashflow will likely not cover it. Every investor and situation is unique, but raising rents in the beginning can sometimes be better as you have yet to develop a relationship with the inherited tenants.
Thank you so much. I'll hang in there and try to improve it. The lease is ending next month. I will discuss with my PM about rent increase.
@Supada L. Did you say $100? Why would you do that? Did you read the book?
Which book? I only read a couple and rushed to jump in. My mistake.
@Supada L. Personally not a fan of turnkey out of state rentals. All profit for the seller and little cash flow or equity for the buyer. Good luck!
Thank you. I've learned to stay away from them.
I'm curious. When you bought the property, what was the calculated cash on cash return for year 1? I've been browsing Roofstock lately and I don't see a lot of "good" returns there within the 3-stars and above neighborhoods. I wonder what it showed when you bought it.
It showed 9.8% cash on cash return.
@Ali Boone I've been looking at roofstock for a while now and wasn't aware of other companies out there. Not sure what the etiquette is...so I figured I'd reach out and ask you directly of what/who these other companies are?
I was not aware of other companies either, but someone mentioned Norada in this post, I think.
I would get rid of the property manager and keep that money. You can manage it from out of state. Talk to the tenants and tell them to report any issues to you directly. When you buy houses there are always unexpected costs out the gate. Once you fix them you should be smooth sailing after that. Everything you fix is one less thing to have to fix later. And when you do finally sell you can advertise all those items have been upgraded / fixed which means you can recoup those losses.
Thank you. I didn't look at the situation this way. I'll see what I can do with the PM.
First investments can be a lesson or an opportunity at times. I wouldn't let that deter you from future investments, just take this as a learning step and prepare better! A great way is to have an exit strategy going in. "Can I turn this into short term rental?" "Can I flip this if it doesn't cash flow?" "Should I rent by the room?" Those are some exit strategies. On multi family I am ok with $100 cash flow per door after expenses or "reserves". Property should pay for itself always. Single family homes I would personally do $200 per home after reserves are met. It also depends what kind of market you're in. Cyclical, hybrid or linear market. Rents and property values fluctuate. But the investment should make sense at purchase. I wouldn't expect greater than what you're getting. Anything better is a plus! Best of luck.
Thank you so much. I'll look at the exit strategy as you mentioned as well.
I had a similar experience on my first deal. I bought an old house that was purported to be "turnkey" - not through a turnkey provider but from a seller who performed some shoddy rehab work. We've had a few surprise big ticket repairs (electrical, plumbing) in the past couple years, and right now considering what to do about a tub that needs to be replaced.
Our cash flow is pretty thin (about $100/mo), and accounting for the repairs it is clearly negative cash flow. On the other hand, the property has appreciated since we bought it.
A few of things to consider:
1) Cash flow is only one component of return. Appreciation and amortization are the big ones.
2) Your loan is a dollar short position, and as the dollar loses value, the value of the debt does, too. Inflation-induced debt destruction, though, takes many years to play out.
3) Your tenant is paying down the loan for you.
4) Rents will rise with inflation, putting you in a better cash flow position over time.
As one of my mentors says "Most people feel foolish when buying rental properties" because in the short run, there is very little if any cash flow to justify the problems that come up. Your post is a great illustration of this.
Thank you for your response and reminding me that there are othere things I could benefit from the property. =)
And you live in Austin, too!