how to reverse negative cash flow

[George P.]

first, i'd like to say "hi". been reading the posts/blog here for a few months, but it's finally time to join the forum.

second, not sure if i am posting this in the right area since the layout of the forum is a little confusing and unlike any other forum i belong to.

third, the meat of this thread - negative cash flow reversal. Not for me, but for my family member.

here's the deal. They have 2 condos in florida. Purchased a few yrs ago for 115k and 85k. They rent for $950 and $875 or around there. one has $25 positive cash flow, the other has negative $50.

now the condos are worth around 50k-70k at most. They can't sell them. increasing rent is dangerous since it might take them 1 month to find a renter and would lose money they can't recoup all year.

Told them to refinance, but the bank wont do it. they had to put down 20% to get them, but they are upside down even with that.

any suggestions? comments? questions?

[Jon Holdman]

Moved to the analysis and advice forum. Sorry about the confusion.

Hi Homer. You might want to post in the New Member Intro post and tell us about your personal investing experience and desires. You might consider using your real name, too. Privacy settings available on your profile can hide you last name.

Your family members made a couple of bad investments. These were speculative from the start. I'm sure their assumption was they would buy these, prices would continue to rise and they would sell for a nice gain. In the meantime, the rents would help pay for holding them.

These never had any positive cash flow. I suspect when you say "cash flow", you mean "phony cash flow = rent - PITI". Unfortunately that's a commonly told story and is widely used to sucker new investors into crummy deals. A much closer estimate of cash flow is "rent/2 - P&I". Even that may be optimistic in these FL condo deals where there are lots of bank owned units, an underfunded (or defunct) HOA and deferred maintenance.

Had they bought stocks for $200K and those stocks were now worth $120K, they could sell and walk away with the $120K. Unfortunately with real estate they probably put a small amount down. So, instead of paying $200K up front, they paid $40K and owe $160K. A few years later they still owe (say) $150K. So, to sell, they have to bring $30K plus costs (probably another $15K or more) to the table. The loss isn't any different than the bad stock investment. The difference is when you have to bring the cash to the table.

They really have two choices. One is to keep putting money into the deal. Or, they can bail out and accept the consequences. They can keep these as rentals and keep paying each month. Well, it actually sounds like their rents more or less cover PITI, so they don't pay most months. They do pay when its empty, when the inevitable special assessment shows up from the HOA, or when some major work is needed.

Or, they can pay all at once, sell for whatever they can get and bring cash to the table.

Or, they can give up these properties. Maybe a short sale. Maybe foreclosure. Maybe a deed-in-lieu of foreclosure. All of these have consequences. Their credit will take a bit hit. They may have a big tax bill. They may have to sign a promissory note with the lenders for at least part of the forgiven amount. If they actually do have assets, this will be tougher. They're only short about $50K (roughly). If they have $500K in the bank the lenders are probably going to want to see a pretty good chunk of that $50K. If they're living paycheck to paycheck with no assets, you may find more flexibility.