Bad Deal—Help for 1st Investment

it seems like if you sell it at $275k, you'd be closer to break even than negative 30k. can you share the math that indicates that loss?

Dominic Pizzi

Lender · Freehold, NJ · Member since 2022 · 236 posts · 85 votes

3y

Hey Turner! You brought up some good options, I think a cash out refinance might be useful to you as well. It will get you out of that 11%+ interest rate and can maybe get some money out for you if your payoff on the property is low. This way it would minimize your losses on the property, will get you residual income, and can potentially get you some cash out to put money into another property.

Send me a PM and maybe I can help you out with this!

4 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

3y

I'd ignore the Realtors, figure out yourself what you think it's worth. I think doing a mid level remodel and then renting is a good idea. If it doesn't work out after 6 months, then you can sell.....

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Why did you do a 1 year IO loan? There's your problem

Jacob St. MartinPro Member

Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes

3y

Have you considered options other than traditional long term renting to boost the revenue and make it so that you aren't losing money? If your area has solid short term rental demand that could be the best option but if not perhaps a medium term rental or long term rent by the room? For any of these options you would need to do either a mid level remodel or full remodel and then refi out of your hard money into a loan with better terms. Also, would it be possible for you to move into the property? If so you could maybe refi into a low money down conventional loan and pull out more capital than you otherwise would be able to. If you moved in you could either rent out the other rooms, airbnb the other rooms, or maybe your current primary residence would cash flow better than this one would.

2 Reply

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Nicholas L.:

it seems like if you sell it at $275k, you'd be closer to break even than negative 30k. can you share the math that indicates that loss?

$277k purchase price + $22k cash at closing = $299k ALL IN. If all I can get is $180k for it (per realtors), then that is $10k + 6% commissions ($10,800) + any 'extras' I might have to do after the buyer's inspection--rounded up to $30k.

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

3y

Quote from @Turner Wright:

Quote from @Nicholas L.:

it seems like if you sell it at $275k, you'd be closer to break even than negative 30k. can you share the math that indicates that loss?

$277k purchase price + $22k cash at closing = $299k ALL IN. If all I can get is $180k for it (per realtors), then that is $10k + 6% commissions ($10,800) + any 'extras' I might have to do after the buyer's inspection--rounded up to $30k.

I think you meant $280k...? Why not get a new Realtor and try to sell this thing for more? Fluff it up a little...

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Dominic Pizzi:

Hey Turner! You brought up some good options, I think a cash out refinance might be useful to you as well. It will get you out of that 11%+ interest rate and can maybe get some money out for you if your payoff on the property is low. This way it would minimize your losses on the property, will get you residual income, and can potentially get you some cash out to put money into another property.

Send me a PM and maybe I can help you out with this!

Thanks Dominic! Cash Out might be a good idea. I didn't think of that. But, I'm leaning towards room sharing with PadSplit. I'm going to meet with someone this week to explore this option.

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Joe Villeneuve:

Why did you do a 1 year IO loan? There's your problem

Hi Joe! The loan I signed came with a 1 year term. This was the best of 4 loans I was approved for. What loans do you normally work with?

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Jacob St. Martin:

Have you considered options other than traditional long term renting to boost the revenue and make it so that you aren't losing money? If your area has solid short term rental demand that could be the best option but if not perhaps a medium term rental or long term rent by the room? For any of these options you would need to do either a mid level remodel or full remodel and then refi out of your hard money into a loan with better terms. Also, would it be possible for you to move into the property? If so you could maybe refi into a low money down conventional loan and pull out more capital than you otherwise would be able to. If you moved in you could either rent out the other rooms, airbnb the other rooms, or maybe your current primary residence would cash flow better than this one would.

Hey Jacob! Funny you should mention renting rooms out! I just got off the phone with someone who rooms shares his properties using PadSplit. We are going to meet this week to develop a plan to convert my property into 4-5 bedroom rental. He is doing very well with his properties and believes I can do well, too. Thanks!

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Turner Wright:

Quote from @Joe Villeneuve:

Why did you do a 1 year IO loan? There's your problem

Hi Joe! The loan I signed came with a 1 year term. This was the best of 4 loans I was approved for. What loans do you normally work with?

30 year amortized/compound interest..

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Turner Wright:

Quote from @Nicholas L.:

it seems like if you sell it at $275k, you'd be closer to break even than negative 30k. can you share the math that indicates that loss?

$277k purchase price + $22k cash at closing = $299k ALL IN. If all I can get is $180k for it (per realtors), then that is $10k + 6% commissions ($10,800) + any 'extras' I might have to do after the buyer's inspection--rounded up to $30k.

The original post showed $177k purchase so I thought you could get out OK doing the rehab and flip. If the agents are correct on ARV at $285k and you paid $299k (still in need of rehab), your options are limited. I believe your likely lowest loss is to sell as fast as you can without doing the rehab. This will be an expensive lesson.

Even at $310k ARV, I do not see this as not loosing money. at $285k ARV you are in a bad position.

How did you derive your ARV? Did you use a realtor? If you did, did you consult with him on your intentions? If you did, I think your realtor let you down.

I am sorry you are in this position. I wish you the best on this problem.

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

3y

I still can't follow your numbers... and it seems like you're mixing up your down payment and closing costs with the proceeds from the sale...

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

3y

Builder grade finish it, then rate/term refi out of that soul-crushing 11.25% loan.

Then I would do a 12 month lease option with a solid tenant-buyer.

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

@Dan Heuschele

Thanks Dan! An investor/Realtor, myself, and even a licensed appraiser came up with an ARV of $310k, but it seems the market cooled down a lot while securing financing. I've decided on room sharing with PadSlpit.

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

@Steve Vaughan

Solid plan, thanks! I did consider lease option. Believe it or not, though, my interest-only loan at 11.25% is better than what I was quoted with a PITI loan at 8.125%, so I'm going to ride this loan out full-term.

I’m also considering room sharing with PadSplit.

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Turner Wright:

@Dan Heuschele

Thanks Dan! An investor/Realtor, myself, and even a licensed appraiser came up with an ARV of $310k, but it seems the market cooled down a lot while securing financing. I've decided on room sharing with PadSlpit.

I do not think $310k ARV changes anything, but with the various typos in your posts I could be missing something.

$299k (acquisition costs) + $60k rehab costs + holding costs (at 11.25%) + selling costs is very much greater than $310k.

in your initial post the acquisition was $199k ($177k + $22k). I thought at $285k ARV you could come out without a huge loss (basically $259k after rehab not including holding and selling costs would not be too much greater than $285k if you could complete the rehab quick).

I have never used PadSplit, but I did house hack a SFR when I was young (renting out the bedrooms). my view of rent by room is it can provide a better return, but it requires more effort, has higher vacancy, and due to higher turnover, higher turn over costs. Less passive than LTR and I do not consider LTR to be passive.

Glad you found something that may work for you. Good luck

Mohammed Rahman

Real Estate Broker · New York, NY · Member since 2020 · 2k+ posts · 1k+ votes

3y

Hey @Turner Wright - it's your first investment property, and you're learning a lot from it. Don't beat yourself up much about a possible financial loss, money can always be made again.

In terms of this deal, seems that even if you sold for $275k, your total loss wouldn't be $30k or so - but I'm guessing you're also accounting for budget overrun and other costs.

Would it be totally a bad idea for you to switch to a conventional mortgage (after remodeling) and just rent it out for a year or so while you wait for rates to come down. As rates come down, the demand will come back and you can profit then while you have the tenants offset your mortgage costs.

Just my $0.02

[email protected]773-456-4644

Sarita ScherpereelBusiness Member

Real Estate Agent · Chicago, IL · Member since 2018 · 659 posts · 376 votes

3y

Sounds like some tough lessons. One day you'll look back on this and it will be the stepping stone to bigger things. Like other's mentioned, I would definitely refi that loan as soon as the numbers make sense. I'm from Houston, depending on when the reno is done, make sure you get the tenants lease to correlate with prime rental season. It will help with maximizing how much rent you can get. Best of luck

Sarita Sells4.933 Reviews

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2 Reply

Jonathan Taylor

Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes

3y

@Turner Wright what you are experiencing is just the market at this time. As to which option is best, I would suggest a medium reno to utilize the F/F loan and get more value out of it to cover your monthly. Refi into an Interest only bridge without a PPP once complete and see what the market does.

Brady Hales

Rental Property Investor · Provo, UT · Member since 2021 · 46 posts · 50 votes

3y

@Turner Wright what I have to say on this may not help you now but will in the future. Most wholesalers (including me) are taking 10% off of ARV for any comp that was sold more than 90 days ago. In this case taking that 10% off of $310,000 puts you at about $279,000 (right in the stated range assuming original ARV is good).

If you don't know about it, @Jamil Damji has a YouTube channel where every Sunday at 5 pm (MST) he runs a live comping session where you can bring him your addresses and get more eyes on the ARV as well. It is geared towards wholesalers but is really good for anyone trying to get into real estate;)

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Brady Hales:

@Turner Wright what I have to say on this may not help you now but will in the future. Most wholesalers (including me) are taking 10% off of ARV for any comp that was sold more than 90 days ago. In this case taking that 10% off of $310,000 puts you at about $279,000 (right in the stated range assuming original ARV is good).

If you don't know about it, @Jamil Damji has a YouTube channel where every Sunday at 5 pm (MST) he runs a live comping session where you can bring him your addresses and get more eyes on the ARV as well. It is geared towards wholesalers but is really good for anyone trying to get into real estate;)

Thanks for sharing, Bradley! I'll definitely check him out!

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Jonathan Taylor:

@Turner Wright what you are experiencing is just the market at this time. As to which option is best, I would suggest a medium reno to utilize the F/F loan and get more value out of it to cover your monthly. Refi into an Interest only bridge without a PPP once complete and see what the market does.

Hi Jonathan! You lost me at F/F loan and PPP. Can you explain? Thanks!

Turner WrightPro Member

OP

Investor · Houston, TX · Member since 2019 · 87 posts · 38 votes

3y

Quote from @Mohammed Rahman:

Hey @Turner Wright - it's your first investment property, and you're learning a lot from it. Don't beat yourself up much about a possible financial loss, money can always be made again.

In terms of this deal, seems that even if you sold for $275k, your total loss wouldn't be $30k or so - but I'm guessing you're also accounting for budget overrun and other costs.

Would it be totally a bad idea for you to switch to a conventional mortgage (after remodeling) and just rent it out for a year or so while you wait for rates to come down. As rates come down, the demand will come back and you can profit then while you have the tenants offset your mortgage costs.

Just my $0.02

Renting it out is an option, but I'll be losing money every month to pay my note. I was quoted at 8.125% for a 30-year fixed mortgage loan, which put my monthly payments around $2,700. Max rent I could collect, according to a couple of realtors I spoke with, is $1,550. Not to mention, I will have to come up with closing costs. This is why I am considering owner financing and lease options. With both, I will receive a nice downpayment and inflated monthly payments, which will help with paying my loan. Thanks for replying!

Jonathan Taylor

Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes

3y

@Turner Wright PPP means pre payment penalty. If you refinance or sell within the Pre payment term, then a penalty is charged, usually a percentage of the original loan amount. F/F mean Fix and Flip loans. Loans specifically designed for the BRRRR investor.