AZ Property Not Producing (ADVICE PLEASE)

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AZ Property Not Producing (ADVICE PLEASE)

Nik Krohn
Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes

I have done 5 deals in the last 5 years and it has been a home run every time except for my first out of state property. 

I purchased a property through a "wholesaler" in AZ. The property looked great but I clearly did not do enough due diligence on the project. I have had the property for 2.5 years and the value has not gone up.

Here are the details of the property:

Purchase Price in Nov 2013: $131k

Current Rent: $845/mo

I pay 8% for property management

Zillow zestament: $131k

Trulia estimate: $139k

I make a little money every month (pretty much a wash) but I am mostly looking on advice if I should just try to cash out (hopefully 20k after realtor fees) and roll that into a better producing property.

If this was your property, what would you do?

NOTE: I just signed a 1 year lease in Feb with a tenant

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
10y

@Nik Krohn, unless there's good chance of strong appreciation, what are you waiting for? Sell! You're not "breaking even," you're losing money. You could be putting that $20k towards another investment. An index fund would be yielding $1400/year (~7%) a good REI maybe $3-4k.

Maybe your new tenant is interested in buying...

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    10y

    @Nik Krohn, unless there's good chance of strong appreciation, what are you waiting for? Sell! You're not "breaking even," you're losing money. You could be putting that $20k towards another investment. An index fund would be yielding $1400/year (~7%) a good REI maybe $3-4k.

    Maybe your new tenant is interested in buying...

    1Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    Thanks @Jaysen Medhurst. I think im just nervous. All of my other deals have been excellent and I dont want to sell until I can make money. 

    Your advice makes sense tho!

    0Reply
  • Darren McGillvrey
    Real Estate Agent · Veneta, OR · Member since 2016 · 48 posts · 12 votes
    10y
    Nik, Have you had a real estate agent give you a market analysis? I would not recommend relying on Zillow or Trulia for pricing.
    0Reply
  • Fred Weinkauff
    Investor · Troy, NY · Member since 2015 · 97 posts · 43 votes
    10y

    Sell it. Don't wait use that cash to invest into another project. We don't ever get all home runs. Take your profit and on to the next.

    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    @Darren McGillvrey Yes I had them give me a CMA. They "expect" the value to continue to go up. It is the same price I paid.

    @Fred Weinkauff Thanks. Robert kiyosaki always says that he sells the dogs as fast as possible to put into another one. I guess it really is a game of averages

    0Reply
  • Shmuel Harris
    Real Estate Agent · Brooklyn, NY · Member since 2015 · 231 posts · 66 votes
    10y
    Nik Krohn Hey buddy and welcome to BP! Plenty of good resources here. You are definitely doing it right by getting out there and trying to ask people what we think is going wrong with a deal. The first thing that struck me when reading your post was your comment about how the price hasn't gone up. In investing you have many, many, many different strategies. When you bought into this property, what was your intended goal? It sounds like you were aiming to get some solid appreciation. If you bought the property at market value, then you would have to be in a seriously rocking market to see a dramatic increase in value in a couple years. Here in Brooklyn, one of the hottest markets in the country, in order to see a dramatic increase in a property's value in that short a period of time, you need to buy in the next wave areas before they become next waves, and then you need to gut renovate to be able to cash out on the property. Sorry if I'm kinda rambling but it's been that kinda day. My point is that it seems like the route you took would be working better if your strategy was just buy and hold. But in that case then why would you be buying and holding in an area where you will have to pay 8% to a property manager? That definitely cuts into your profits. Doesn't mean you can't use PM just gifts calculate for that amount of space. Anyways, I'm sure if you keep educating yourself, you can keep up with all the success you have been seeing until now. Gonna let other BPers jump in! Good night!
    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    @Shmuel Harris Thanks for your comment. I bought the property in AZ as the wave ended. I had a lot of my friends purchase and make 40k in appreciation in 2 years and as soon as I jumped in, it was  the top and has been that way for 2.5 years.

    If it wont cashflow or appreciate, then I think I need to move on but scared to do it. I try not to get emotionally attached to any deal but it's hard not to in this situation

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    The rent to value is far to low for my standards, No possible positive cash flow ever. I would sell now and move on. 

    0Reply
  • Greg Harriman
    Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes
    10y
    Nik Krohn just curious, what city did you buy in? I grew up in the Phoenix area, own a handful of houses there and thought I could give you a very quick opinion on market value of both the house and monthly rent. My gut tells me if it hasn't appreciated since 2013, you bought in an area with poor schools. The areas with higher performing schools have done well as of late.
    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    @Greg Harriman

    Maricopa, AZ. 

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    Is this a condo?
    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    SFH @Dan Schwartz

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Your at about 6/10 th of 1 percent rent to sales ratio. That is extremely low for return.

    Even in A locations most investors want 1 percent or higher. If they can't find 1 percent stabilized then they buy a rehab where once leased up it is 1.4% in a great area with built in equity.

    If the property isn't producing then you have dead money. AZ is not like Cali or New York where when it rises it goes fast and when it falls it goes fast. I have clients that had big equity run ups and have sold to 1031 into other states. Even though they had little cash flow they had big equity gains that way surpassed what the cash flow could ever be in those areas.

    If you buy at the right time in the cycle then just by buying and holding you can get increased equity through rising values with comparable sales with residential and cap rate compression on the commercial side. When resale cap rates have gone to low numbers then you have to create value in other ways such as rehab, new development, re-purposing something  etc. 

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    1Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    10y

    I believe the Maricopa market is still saturated, similar to the Queen Creek/San Tan market.  I doubt you will see much appreciation in the next few years.  You are almost better trading your house for something a little closer in town.  You will at least command a higher rent and more demand.  The rental market in Phoenix is on fire right now.  There are still lots of houses comparable in price to yours in c+/b- neighborhoods that would rent for 1100+ a month.

    The appreciation for the Phoenix generally has slowed down, not like 2012-2014 anymore.

    Best of luck,

    Stone

    1Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    Thank you @Stone Jin & @Joel Owens for the advice. 

    0Reply
  • George Hermann
    Real Estate Agent · Bronx, NY · Member since 2015 · 211 posts · 88 votes
    10y

    Sell, sell, sell. I was very happy to hear that your other deals went well. Get rid of this one and move on to a deal that works and makes money for you.

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    Nik Krohn The others beat me to the punch, and you have received good advice. Maricopa is going to be dead money for some years in the future. There isn't a compelling reason to for it to be a bedroom community to Phoenix anymore. Queen Creek and San Tan are at least more connected to the metropolis. If you can get out of there with your hide intact, I would do so and do so quickly. It's not that the place itself is bad, it just isn't going to give you what you want for quite some time, and I think you can find an out of state investment that performs much better than this one for you. Good luck to you!
    0Reply
  • Jake Winters
    Flipper/Rehabber · Mesa, AZ · Member since 2016 · 22 posts · 6 votes
    10y

     I strongly agree with @Stone Jin. You can easily start a great cash flow with 130k in Mesa, AZ. Maricopa is extremely saturated and isn't the best rental market. Sell sell sell!

    0Reply
  • Lindsey Keller
    Phoenix, AZ · Member since 2016 · 40 posts · 18 votes
    10y

    Maricopa is a rather general area, Phoenix itself is so pocketed that in one block properties can be 50k and a few blocks down they could be 300k.  Is the property in a nicer area of Maricopa?

    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    Thanks @Jake Winters, @Lindsey Keller, @Dan Schwartz and others for the advice. I will see if the tenant is interested in purchasing the home. 

    If they are not, am I stuck until the lease is up? I know at this point I need to sell asap

    0Reply
  • Jake Winters
    Flipper/Rehabber · Mesa, AZ · Member since 2016 · 22 posts · 6 votes
    10y

    When is the lease up? You could sell it with tenant in place.

    0Reply
  • Dan Schwartz
    Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
    10y
    Yeah, fine to sell with tenant in place. Again, I am not suggesting that it's a toxic rental by any means; another investor might be happy to add it to his/her portfolio. It just doesn't seem right for you and your goals, and (IMO) isn't a great area for out-of-state investors.
    0Reply
  • Nik Krohn
    OP
    Investor · Woodland Hills, UT · Member since 2016 · 84 posts · 31 votes
    10y

    @Jake Winters that is a GREAT idea! The lease was signed in Feb I believe. I have never sold a house while a tenant is living there. How should I approach the PM company or tenant directly? I also do not have a realtor. Should I find someone who has done this specifically with a tenant in the home?

    0Reply
  • Wendell De Guzman
    Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Joel Owens:

    Your at about 6/10 th of 1 percent rent to sales ratio. That is extremely low for return.

    Even in A locations most investors want 1 percent or higher. If they can't find 1 percent stabilized then they buy a rehab where once leased up it is 1.4% in a great area with built in equity.

    If the property isn't producing then you have dead money. AZ is not like Cali or New York where when it rises it goes fast and when it falls it goes fast. I have clients that had big equity run ups and have sold to 1031 into other states. Even though they had little cash flow they had big equity gains that way surpassed what the cash flow could ever be in those areas.

    If you buy at the right time in the cycle then just by buying and holding you can get increased equity through rising values with comparable sales with residential and cap rate compression on the commercial side. When resale cap rates have gone to low numbers then you have to create value in other ways such as rehab, new development, re-purposing something  etc. 

     This is very smart advice.

    Joel is a very smart dude. Listen to him.

    0Reply
  • Greg Harriman
    Investor · Bothell, WA · Member since 2016 · 38 posts · 21 votes
    10y
    Nik Krohn I would agree with others then that it might be time to sell and use your equity elsewhere. My opinion of Maricopa is that it exists solely because of the pre-2008 housing boom in Phoenix. If for some reason you want to keep your money in AZ, I'd recommend Tempe, Mesa, Chandler and Gilbert as cities with the best opportunities. They're all growing, within decent proximity to large employers and safe communities with decent schools (except for Mesa which has awful schools but homes are much cheaper). Just thought I'd offer up my two cents!
    0Reply
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