Almost 2 years in and haven't made any money (via cashflow)

[Steven DeMarco]

Hey BP - Want some advice/perspective on my situation.

Back in 2022, I had a strong desire to get into REI to diversify my investments and pursue a new side hustle. I envisioned real estate investing as a way to make extra money on the side and continue to build my wealth. I signed up for a mastermind class that teaches you how to invest in STRs and pulled the trigger on a 2BD/1BA house in Pittsburgh, PA to operate as an STR. This was my first real estate purchase and the final sale price was $166.5K which I purchased using a 10% down second home loan. I then proceeded to dump a ton of money into capital improvements in order to make it a competitive STR (details below). 

Since owning the property, my total cash investment is about $130K for initial acquisition, capital improvements, the mastermind course and floating negative cashflow. Here is the breakdown: Closing Costs ($30K w/ $16.5K down payment), Furniture, Setup & Design ($35K), New Electrical ($14K), New HVAC ($12K), New Roof ($9K), New Landscaping ($1K), Mastermind Course ($10K), and the remainder is floating negative cashflow ($19K).

I've been operational through 17 months (March '23 - July '24) and the following metrics are throughout this 17-month time period. My total gross income on the property is $37K and my operating expenses have been $32K, leaving me with a NOI of $5K. After factoring in debt payments of $24K ($1,400/month), my cashflow (before any capital expenses) is a total of $-19K. Averaged over this 17-month time period of operating the STR, I'm averaging a negative cashflow of about -$1,100/month.

To reiterate, I've put $130K cash into this deal. From a cashflow standpoint, I've obviously generated no return. The current Zillow Zestimate for the property is $193K, which means I'm sitting on roughly $45K of equity. If I were to sell anytime soon, with selling fees, I'd be realizing upwards of a 6-figure loss assuming the Zestimate is accurate. It may not be, as I've made a ton of capital improvements and I've seen comps sell for over $220K in the same neighborhood. Either way, selling doesn't paint a good picture.

In April '24, I hired a full-service PM which has helped tremendously with bookings and appears to have started turning the cashflow ship in the positive direction. I have been consistently within +/- $100 of breaking even for the first 4 months of the PM operating the STR. Since we have gotten momentum with the new listing on Airbnb, I am booking out well into Sep/Oct/Nov at the time of writing this post and I anticipate that the next few months will produce some positive cashflow. Over time, I also anticipate that the cashflow will improve slightly as the listing continues to excel (26 out of 27 reviews have been 5-star) and book out into the future.

My current plan is to give the PM a full year to establish the listing and then revisit what my cashflow scenario looks like. As of now, I (obviously) do not want to invest any more cash. I am a far cry away from the dream of building my wealth and it feels like I did absolutely horrendous on my first real estate investment.

Let's assume we take the happy path with my cashflow situation improving and over time, I average $500/month in cashflow after things stabilize with the new PM ($6K annual cashflow). 

The estimated rate of appreciation since I purchased 17 months ago ($166K -> $193K) is roughly $26K over 17 months (about $1,500/month). It seems unlikely that this will continue into perpetuity and let's say a more conservative estimate is 3% annually, which would equate to about $6K annually in appreciation. 

So on paper, it would take me 10.8 years ($12K in cashflow + appreciation) to net out the $130K in total cash invested.

What if the cashflow situation doesn't improve, but continues to break even or even worse begins to dip negative again? What should I do? Any help, guidance, critique, insults, etc. are welcome. I just want some discussion and perspective around this as I don't have a close network of investors to bounce ideas off of.

[Jay Hinrichs]

Quote from @Ryan F.:

@Steven DeMarco 

If you haven’t already, listen to this BP podcast with some of the most well known and successful investors.

https://podcasts.apple.com/us/podcast/biggerpockets-real-est...
BP episode 900 from Feb 22, 2024

TLDR: stay the course for long term wealth building and be patient because the hard truth is that rentals generally don’t cash flow when you have a mortgage. Time is your friend and it goes by faster than you expect.

Personally, in my 15 years of investing, my biggest mistake with rental property is that I sold. In hindsight I should have never sold anything. After enough time, equity gains and income gains are huge compared to when you purchased. Hang in there for the long haul. I wish someone would have told me that when I started. 

Yup I owned 3 homes in Palo Alto I bought in the mid 80s each for well under 500k each.. talk about wishing I never sold LOL

[Jay Hinrichs]

Quote from @Steven DeMarco:

Quote from @Pat Lulewicz:

This staging company looks like they got you. Were they affiliated or recommended by the mastermind? Would really love to get that answer? That is robbery for a 2/1.

Mastermind seems HIGH ticket for an STR tutorial. I personally wouldn't include a mastermind in your "cash invested" or ROIsince that's just a general/high lever business expense, not an investment in any particular. This also goes for what you're grouping into OpEx...some are just overall business management so the asset looks worse because of your accounting for them.

Overall though, $6k of cash flow, $Xk of principal paydown, tax benefits, and 3% appreciation seems like a fantastic investment. People seem to forget their guests are paying down a mortgage and the taxes you're saving is real dollars...consider rerunning your calc to improve your perspective. 

Don't forget RE isn't a 3 year hold...10 years (less with other benefits from above included) is not a long period of time with a physical asset. It sounds as just like you got pulled in with a mastermind class for $10k, you see shiny objects like crypto or stocks going up and think your approach/investment is bad. You need to take a 30-50 year approach.

No, staging company was not affiliated with the mastermind. I went with a different furnishing company than the mastermind recommended. I paid less than I would if I went with the mastermind's recommended designer. 

And represents all furnishing & set up costs lumped together. When I hired the PM in April, we did a small redesign including light painting, replacing light fixtures, adding a few amenities and other small touches that I also included in this cost. So it was not just a single design & setup but one initial design & setup plus another small one. Still too much, to your point.

Yes, I agree that is a valid point about the time horizon. I don't want to sell right now (after less than 2 years of ownership). I would like to look at it over 10-year period. 

the reality is 90% of investors own properties for no more than 7 years.. I suspect you will be the same.. very rare anyone holds something like this for 10 year.

[Terry Tokash]

Quote from @Bruce Woodruff:

Quote from @Nicholas L.:

@Steven DeMarco

thanks for the transparency.  i don't know if you should sell or not, but what I do know is: you didn't do "horrendous." 

So true! At least you got out there and did something, unlike most people. We've all had 'less than great' properties and deals.

Your investment is a sunk cost at this point. If someone came to you and offered this property or the cash you could get from it, which would you take. The answer probably depends on what rate of return you could get. Run your projections. Would the market return you more? Another property? Or is this one likely the best? If it’s not this one, you should sell and reinvest into something with a better return. 

[Tom T.]

Here is perhaps a different perspective. I have long term rentals but for many years I was only slightly cash flow positive and larger negative events put be back to break even and even a few negative years.

Here is the upside and how I changed my mindset. Tenants are buying me that house. Every month, I get closer. (yes it is a LONG term play) but, there is more. I get a pretty big tax break now (or then) Depreciation.  My down payment and rehab were my entry fees. I always did my best to keep those as low as possible. At the time I had a pretty good W2 job.

I am also getting slow, but steady appreciation (good area, good schools) and I am able to raise rents a few % per year....  Increasing cash flow, slowly but surely....

Fast forward 10-15-20 years...
Some houses are cash flowing like crazy now they are paid off. Others I re-financed to get cash. I sold a paid off house and put a big chunk of change in my account. Uncle Sam got a nice chunk too I might add. I could have gone the 1031 route but in the end, this was all about a retirement plan. I liked the diversity of real estate. I didn't want 100 doors. 10-12 was plenty for my plan.

There is some truth to economy of scale. 1 in my opinion is harder than 3-4. If you have 3-4 then if 1 is having problems the others can buoy the portfolio.  

It looks like you may have jumped the gun but no worries. Take it slow. I'd find another close by (LTR) so you can get some scale. Now you're wiser too.

Definitely a marathon, not a sprint. As long as you are not bleeding cash you should be able to buoy the ship pretty soon. 
Good luck and welcome to the game!
T

[Aaron Williams]

My wife and I are based in Waco, TX and have been Airbnb Superhosts for nearly 6 years. Lot's of people in the BP community (who are way more seasoned than we are) will say to make sure STR (short-term-rental) is a plan B or C. If it works for you, that's amazing. I would imagine if your stick with it and become a stellar host (especially in an area like Pittsburg where there are countless reasons for folks to be traveling), you will eventually see the gold.

Our experience right now is bookings are DEFINITELY softer than when we first started and competition was fewer. That being said, we focus on micro units (1-2 guests max) and have no problem having our units booked every weekend with scattered weekdays.

The sad thing is we used to be at nearly 95% occupancy in 2017-2019 but once everyone started joining the party and our city started throwing up tons of hotels to keep up with tourism demad, we dropped to more like 65% occupancy.

Keep your head up, man! We are all learning and you are brave to be joining the party and learning alongside all of us.

[James J Canull]

Can you give me your property managers info, I need totoi fling it to my cousin who has not had luck with his PM on his Airbnb downtown

[Simone Litsch]

would it make sense to rent to long term tenants? your expenses seem way too high. 

[Tony SanFilippo]

I would check out the long term strategy as well (But have a clause that you can terminate the lease if you sell the house).  Then watch the market as many people feel we may have a large real estate correction, if that happens you can exit if you need to and quickly if the dip in prices goes as low as Robert Kiyosaki Predicts.

[Alacia Mahnken]

Quote from @Joe Villeneuve:

Quote from @Alacia Mahnken:

Quote from @Joe Villeneuve:

Quote from @Alacia Mahnken:

Quote from @Steven DeMarco:

Quote from @Bruce Woodruff:

Quote from @Steven DeMarco:

Regarding REI specifically, my goal as of Sept '22 was to purchase 3 - 5 STRs within 3 - 5 years that each cashflow $2K - $5K per month. 

Net profit of $2-5k mo? Maybe $2k, but $5k is a lofty goal for an average STR (depending on location of course). Make sure you're realisitic and looking at pure NET profit after all expenses, including taxes...

When I initially set these goals, I was still in the "bright-eyed, bushy tail" phase of envisioning my future REI portfolio. Yes, I had a goal with NET profit of $2K - $5K per month per STR.

I now realize that this is only attainable in highly desirable locations and with larger or more unique properties. And you have to put a fair amount (25%+) down, operate in the Top 10% of your market and truly have an outstanding property.

Influencers and social media gurus make it seem like this is much more achievable than it actually is.

So very true! If nothing else, you have learned a ton with this first deal and maybe also found that for you, house hacking on repeat is the better option for your path to financial freedom.  

If I were you, I would hold the property...you have already put your money, blood, sweat and tears into it, now its time to let it work for you (with your PM). Plus, some of the cost that you mentioned are not specifically for the deal and shouldn't be factored into the calculations to determine if THIS deal was a good/bad one (i.e the mastermind course, setting up your LLC, etc). It may start to look a little nicer, if you take those out ;) I get that you are trying to be very honest with yourself and look at it from a gain/loss scenario.

You don't put more chips into a bad hand in Poker just because you have already put a lot of chips into the kitty. The more you add, the more you lose, and the fewer chips you have left to recover those lost chips.  Eventually, you're out of the game, and blaming it on bad hands. You fold.  This is no different.

I get that, but this wasn't exactly a "bad hand" and I am certainly not suggesting he put any more money into it. The numbers are skewed by added expenses that had nothing to do with the actual deal. He put a ton of money into cap expenditures on the front end. The way to recoup that is not to sell, but to hold and to continue to build equity while also working with his PM to increase his NOI.

You recover your costs (cash) with cash returns (cash flow).  You can go broke if you wait for the equity, which can be lost just as easily as it is gained, to recover your cash costs.  Equity is profit that is made at the backend.  Cash flow is what recovers your costs because your cost (cash in) is immediate.  You have to wait for your profit.  While you're waiting for your profit, and losing cash (adding cost) from negative CF, you are also losing opportunity profits because you are spending more cash on an already owned property, when it could be better spent on the next property.

 I agree that he should not hold if continued to get negative cash flow.  

[James Wise]

Quote from @Michael P.:

Sell now and reinvest in Cleveland

15% NET caps all day

I just bought 5 last week

 Get off the internet. Just connect with those doing deals.

[Henry Lazerow]

Congrats on jumping in atleast and buying, its farther then many masterclass students ever get. Use it as a learning experience for next property. To make cashflow in real estate you need to have hook ups on cheap contractor work. I give all my clients my cheap labor contacts after they close and it works out well for them even the newbies. For example for $12k hvac we can replace for $4k. For furnishing I spent under $15k on an airbnb and it gets top priced rates. For electrical I spent $2k a new panel and $1-2k if need rewire. Landscaping pay $100 to local handyman type workers who do a good job. You got to get the prices down especially on a a lower priced property if want to net out positive. Skip the masterclass and just go network with local investor friendly realtors they will know INVESTOR FRIENDLY CONTRACTORS! 

Another tip, look into higher prices. It's a lot easier to net out positive when the cap/ex is smaller % of your gross rents. Look at 3/4 unit in class B+ areas.

[V.G Jason]

So first off, I rarely ever tell folks to sell. I think joining a mastermind and landing on a 2/1 worth $166k in Pittsburgh as a str that needed $130k cash out of pocket just sounds like a losing position from the get.

If you had $130k, there's so many better options with the money. Don't sell at a loss, play catch up then go ahead and roll this into a better investment. 

[Tom O.]

Quote from @Simone Litsch:

would it make sense to rent to long term tenants? your expenses seem way too high. 

This would be my suggestion as well. Does it even break even as a long term rental? 

It's furnished though so maybe you should look at travel nurses or corporate mid term rental.