Need advice for investment deal gone bad

[Pratik Patel]

Hello all,

I will appreciate any advice on this out of state investment deal that has gone bad due to higher than anticipated property tax. This was my very first investment in real estate. I had entered real estate investing with goal of long term buy & hold.

I bought a new built SFH for $293,000 (4bedroom,2.5bath, 1800 sq ft) from a turn key company. Based on their proforma, property tax was estimated $3500. Actual property tax bill is now $10,000. I bought this property using a traditional 30 year mortgage with 25% DP and 6.125% interest rate. This investment deal was breaking even accounting for all expenses (PM, insurance, property tax etc.) prior to this high property tax bill.

Now with higher property tax, it’s negative cash flow of $1000/month.

What is the best financial move with this property? Sell it at a loss?, Do a 1031 exchange for another investment property with positive cash flow?, refinance to a lower mortgage rate?. Other options? 

I will really appreciate any advice your can offer.

P.S. I missed deadline to appeal property tax with county. Based on another property in same subdivision that is similar to mine, their property tax was less by ~$800 less so appealing property tax may certainly help some but it is not going to transform this deal into a break even or positive cash flow deal.

[Stuart Udis]

@Pratik Patel  I’m not following the numbers here. There appears to be more at odds with the original assumptions than solely the property taxes. If the property was breaking even under the initial estimate of $3,500 per year in taxes, it should not suddenly be $1,000 per month negative simply because the actual tax bill is $6,500 per year more, or roughly $540 per month. While the tax assumption miss is significant, that difference alone does not account for such a large swing. Where else were the underwriting assumptions off?

From there, you have to ask whether there is any reason to believe this property will achieve meaningful appreciation or rent increases in the near term. That question has to be balanced against the cost of exiting the investment so quickly. Once you account for transactional expenses such as brokerage commissions, transfer taxes, and other closing costs, the decision becomes more complicated. You also need to consider potential inspection-related repair addendums (these turn keys tend to have a lot of issues on re-inspection), as well as whether the property, if leased, will be marketable to the highest-paying buyer. In some cases, maximizing the sale price may require vacating the unit and turning it over before listing. This will be market and neighborhood specific.  All of those factors should be weighed against the possibility that holding for a few years could produce a better outcome