** Please Help!! Property Analysis/Decision **

15 Replies

Hello and thank you in advance for your ideas/guidance and help. It is honestly much appreciated!!

I purchased my first rental property 11 years ago with zero knowledge of what I was doing and today things are only worse...The house address is 5120 NE Ash Grove Drive, Lees Summit, MO 64064 in the Lakewood area. It was built in 1987.

The house is 3600 sq ft, 5 bedrooms (4 above grade, 1 below) 4 bathrooms (3 above, 1 below). Above grade square footage is 2100 and below grade walk out basement is 1500. Also in the walk out basement is a full kitchen, living room, etc. 2 car garage.

I paid $262,000 in 2006 and purchased it with a $0 down payment, no income, no verification interest only loan for the first 10 years. The current balances are:

1st loan $208,000 at 6.75 Monthly payment is $2,152.56 PITI with 29 years remaining.

2nd loan $47,326 at 9.75 Monthly payment is $456.48 with 29 years remaining. 

The tenants have been there for 10 years and pay $2,150. The interior of the property is very bad (appraiser told me most foreclosures are nicer!) and i'm guesstimating it would need approx $75,000 to bring it to selling condition. Earlier this year I put on a stone coated steel roof for $28,000 and had it repainted/wood rot siding repaired for $3,600

With the $75k repairs it would be worth approx $300k on the low end and $325 on the high end. 

I have no idea what to do with this property, I'm 40 years old and really don't want a foreclosure on my credit report and I also don't have the $75,000 needed for the repairs (although I could put together $50k during 2018)

Thank you, Paul~

was the appraisal recent? does it appraise for more than you owe? you could put it on the market in the spring for what you owe and see if you can find a buyer willing to do the Reno for a discounted selling price. it sounds like even if you fix it up you'd be lucky to break even if it really needs $75k worth of work, and the comps are between $300k-$325k. if it sold for less then what you owe can you come up with the difference to pay off the mortgages? it would be better than a forclosure.

Hi Josh, thanks for the quick reply! The appraisal was last week and the appraiser said the smell was so bad from the animals and the way the tenants live that he couldn't even give me an immediate accurate number! But, he said he'd estimate $175k to $200k.

Take on a cash Partner that buys in with $145k (50% of ARV = $290k) and give them 50% of the deal (or whatever you can negotiate).

Pay off the 2nd mortgage.

Do the rehab....and use the excess cash from the buyin as needed to cover monthly costs while rehab is being done

Refi to get your monthly payment down with a lower interest rate.

Turn your house into an AirBnB.  Rent the rooms and the bsmt (separate) daily/weekly/weekends based on the golf course...and market it that way.  You should be able to get at least 1.5 - 2 times the total monthly rent you're getting now.

Market the golf course as your big pull for the AirBnB.

With the lower interest rate, and the ABnB income, you should be clearing at least $1500/month in cash flow....of which half of that would be yours.

If you are married to the idea of selling the house ignore this post.

I would recommend raising that $50k in 2018 and using it to bring the property up to rentable condition. This is a bit cheaper than sellable condition because you don’t have to deal with a home inspection. You can delay repairs that are necessary but not urgent and focus on cosmetic issues. That way you get it rented and buy time to raise capital. You are already losing money monthly, but you clearly not going to find another renter as it is, so let them stay while you raise the cash to do repairs. Just as soon as you can, kick them out and keep the security deposit, because it sounds like they were awful. Then do the repairs quick and re-rent it for at least what you pay monthly. Once you have the house rented and you aren’t losing money you can look into refinancing if that is an option for you or else save up to finish the repairs and sell it from a position of power rather than desperation.

Originally posted by @Jeffrey Taylor :

If you are married to the idea of selling the house ignore this post.

I would recommend raising that $50k in 2018 and using it to bring the property up to rentable condition. This is a bit cheaper than sellable condition because you don’t have to deal with a home inspection. You can delay repairs that are necessary but not urgent and focus on cosmetic issues. That way you get it rented and buy time to raise capital. You are already losing money monthly, but you clearly not going to find another renter as it is, so let them stay while you raise the cash to do repairs. Just as soon as you can, kick them out and keep the security deposit, because it sounds like they were awful. Then do the repairs quick and re-rent it for at least what you pay monthly. Once you have the house rented and you aren’t losing money you can look into refinancing if that is an option for you or else save up to finish the repairs and sell it from a position of power rather than desperation.

 There are a few problems with this solution:

1 - If you let the renters stay while you are making the repairs, and thus far they've shown they are not taking care of the house already, what are the odds of the repairs being trashed as well?

2 - Based on the numbers, after the rehab is done, the rent would need to be raised at least $500/month just to break even.  Not likely.

3 - Rehab + current payoffs = +$300k.  After Repair Value = $290k.  This would NOT be from a position of power.  Plus, add the $2100/month loss of income (tenants gone during rehab) due to vacancy while rehab is being done (I'm guessing at least 3 months). 

Have you looked into ReFinance?  Those loans are really high and no principle is being paid down.  250K @ 5% for 30 year fixed is what? around 1300 or 1400 a month?   There has to be a better financial vehicle than those two loans.  

Some paper work and some money and you could cash flow your way to have the money for improvements.

We are talking about stopping the hemorrhaging of money and preventing a foreclosure or short sale, so there isn’t going to be a really fun solution.

Here’s my thought process:

1) I said repairs after you kick out the tenant

2) I don’t know the market there, I’m in Virginia. The rents there might or might not support a $500 rent bump, but I am talking about a major update so some increase is certainly reasonable.

3) The loss of rents for 3 months is a total of about $7k, so the repayment period on that assuming you can get a $200/month margin vs. losing $500/month would be 10 months. That assumption might be unreasonable though, I honestly don’t know in that market. Considering those interest rates you should be able to save some some money on interest with a refinance, so add that to the rent bump.

4) it’s an option that doesn’t involve finding a cash investor willing to accept a very small ROI. The ones I know want to make $25k minimum on a deal.

I very much like the Airbnb idea, but that will be a lot of management, I’ve seen it down before and it is a part time job managing a weekly rental property.

Originally posted by @Jeffrey Taylor :

I very much like the Airbnb idea, but that will be a lot of management, I’ve seen it down before and it is a part time job managing a weekly rental property.

 Yes, and no.  Most of the management is in the maid service...which you hire out.

Originally posted by @Jeffrey Taylor :

We are talking about stopping the hemorrhaging of money and preventing a foreclosure or short sale, so there isn’t going to be a really fun solution.

Here’s my thought process:

1) I said repairs after you kick out the tenant

2) I don’t know the market there, I’m in Virginia. The rents there might or might not support a $500 rent bump, but I am talking about a major update so some increase is certainly reasonable.

3) The loss of rents for 3 months is a total of about $7k, so the repayment period on that assuming you can get a $200/month margin vs. losing $500/month would be 10 months. That assumption might be unreasonable though, I honestly don’t know in that market. Considering those interest rates you should be able to save some some money on interest with a refinance, so add that to the rent bump.

4) it's an option that doesn't involve finding a cash investor willing to accept a very small ROI. The ones I know want to make $25k minimum on a deal.

 Virginia and MO markets are very different.  Virginia market as a whole, has little to do with this specific micro-market anyway.

The market rents in that area, of which there are very few listed, are all between $2000-2200/month.  There will be no increase in the rent of any kind after rehab is done.

When the property is refinanced to a lower interest rate, giving the cash partner a higher return %, and/or taking a lower cash buy in, gives the cash partner around a $15-18k/year.

Originally posted by @Andrew Gristina :

Have you looked into ReFinance?  Those loans are really high and no principle is being paid down.  250K @ 5% for 30 year fixed is what? around 1300 or 1400 a month?   There has to be a better financial vehicle than those two loans.  

Some paper work and some money and you could cash flow your way to have the money for improvements.

That payment he mentioned was PITI. Based on my numbers, even if he eliminated the 2nd, and got a 5% rate on the remaining 2st, it would still be negative CF due to the tax.ins./month.

Originally posted by @Joe Villeneuve :
Originally posted by @Andrew Gristina:

Have you looked into ReFinance?  Those loans are really high and no principle is being paid down.  250K @ 5% for 30 year fixed is what? around 1300 or 1400 a month?   There has to be a better financial vehicle than those two loans.  

Some paper work and some money and you could cash flow your way to have the money for improvements.

That payment he mentioned was PITI. Based on my numbers, even if he eliminated the 2nd, and got a 5% rate on the remaining 2st, it would still be negative CF due to the tax.ins./month.

Agree. But IO for 6.5% for the primary and 9.5% for the I/O second there has to be a savings there. Although it might not be enough to turn the deal. Unless original poster has looked into a couple brokers to consolidate that thing, I think it is worth doing.

 Also OP is really paying ITI (ha punny!)- no principle is being paid if I read that right.  And we're talking a reduction of almost 2% of the loan potentially for the interest optimization-although the second makes it hard to calculate precisely.  Insurance might be able to be optimized.  Clearly taxes can't, but principle, insurance and interest can.  

Originally posted by @Andrew Gristina :
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Gristina:

Have you looked into ReFinance?  Those loans are really high and no principle is being paid down.  250K @ 5% for 30 year fixed is what? around 1300 or 1400 a month?   There has to be a better financial vehicle than those two loans.  

Some paper work and some money and you could cash flow your way to have the money for improvements.

That payment he mentioned was PITI. Based on my numbers, even if he eliminated the 2nd, and got a 5% rate on the remaining 2st, it would still be negative CF due to the tax.ins./month.

Agree. But IO for 6.5% for the primary and 9.5% for the I/O second there has to be a savings there. Although it might not be enough to turn the deal. Unless original poster has looked into a couple brokers to consolidate that thing, I think it is worth doing.

 Also OP is really paying ITI (ha punny!)- no principle is being paid if I read that right.  And we're talking a reduction of almost 2% of the loan potentially for the interest optimization-although the second makes it hard to calculate precisely.  Insurance might be able to be optimized.  Clearly taxes can't, but principle, insurance and interest can.  

His numbers work out to carry PITI. There is a savings, but not enough to be cash flow positive. I agree there should be a refi, but it can't happen to the 1st with the 2nd still in place, and there isn't a high enough PV to get a new refi that would cover both...so, you have to get rid of the 2nd before you can refi the first...and it will still be CF negative.

Thanks everyone for the responses - I've read them all and the insight is greatly appreciated.

Both loans were interest only for the first 10 years; for the past year they have both included principal.

There is no room to raise the rent again as it was just raised $100 in December.

I can't currently refinance because of the condition it is in.

The estimated $75,000 for rehab is based on making it top notch (granite counter tops, premium finishes, all new fixtures, etc) I should be able to get into general sellable condition (not fancy or updated but livable meaning new paint, refinished floors, new carpet, etc) for approximately $45,000

Thanks,

Paul~

Bump.

Thank you everyone for the responses - With the clarified information from above does anyone else have any ideas?

Thanks and Happy New Year!

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