I bought my very first single family house for investment. Here is what has happened since I bought it.
It took me about 5 months to find a tenant. I was paying two mortgages during that time. It was painful. Even after I got tenants paying rental, I was still putting $400 of my own money to pay for the mortgage. I know it’s bad deal to go cash flow negative, but my hope was that the price of the house would go up to still make it a good deal. After 18th months of buying that house, my agent tells me that the price of the house hasn’t gone up all at and advised me to eat the cost, take the money and invest somewhere closer and more predictable. If I sell right now, I will be losing total of 30k. The agent and I are supposed to go talk to tenant to see if they are interested in lease option or buy the property from me, which will reduce the loss to 10k.
I’ve learned some important lessons through this experience, but I would like to get your thoughts on the current situation.
Do I keep holding onto it and lose $400 every month in the hope of the house appreciating?
Right now you’re losing nearly $5,000 per year ($400/mo) in actual monthly cash outlay. Unfortunately, over time, you’ll discover that you are actually losing MORE than this, because you haven’t had anything bad happen yet. If you have rentals long enough, you will have tenants damage your rental; you will have evictions; you will have captial expenses; etc, etc, etc, etc, etc.
In my opinion, generally you should cut your losers quickly. When you say that you will lose $30K, does that include the $7,500 that you’ve already lost in cash outlays?
If you decide to stay with REI, you need to do some serious research into the business aspects of rentals, such as actual operating expenses, cash flow, etc. How many $30K mistakes can you afford? In the real world, you either understand business or you’re out of business.
The 30k includes all the money I lost since I bought it. Any thoughts on whether it makes sense for lease option or FSBO?
yrush2000, as for the equity, I took a line of credit from my resident house to pay 20% on the rental property, but I went ahead and paid it back most of it with my cash because I didn’t want to pay +7% interest on it. I have 10k on the line of credit. The mortgage is current.
With that said, I was thinking of refinancing yesterday. This would make my cashflow “even.”
It generally won’t make sense to lease option if it doesn’t make sense to rent. Lease option “buyers” typically don’t buy the property and are in reality just renters. While you’re waiting for that one in a thousand renter to come along who has a significant option premium (but terrible credit), you have lost several months of rent.
It does make sense to FSBO it, if you can sell it fast enough to offset the advantage of having it listed on the MLS by a realtor. Since the vast majority of houses are still sold by realtors and through the MLS, the delay in waiting for a FSBO buyer can offset any advantage to saving the realtor fee.
How will refinancing the house help with the negative cash flow? Interest rates have gone up in the last 18 months since you’ve gotten your loan. Are you thinking about an interest only loan or other gimmick loan?
I give you a lot of credit for admitting your mistake.
I’ll leave you with this… Without exception, everytime I’ve lost money I paid for a lot of education. You’ll get out of this. The knowledge you have gained by this experience is more valuable than you know right now. The key is DON’T MAKE the bigger mistake and decide investing isn’t for you. 16 year old kids get into lots of car accidents that’s why it costs lots of money to insure them. 16 year old kids don’t stop driving because they have an accident, hopefully, like all of us, they get better and learn from the mistakes. Your a 16 year old driver in real estate investing. You just learned a TON about what you have to pay for a rental in order for it to CASH FLOW. Take that knowledge, be patient, and when the next REAL DEAL comes along you will make money. Hang in there.
Im a newbie myself,sorry about your situation. This is just a thought, but could you sell your personal residence and move into the rental. You could list it fsbo while your there and maybe get lucky, or If nothing else, ride it out long enough to get back on your feet. I know thats not a desirable option, but in my case, I would rather tough it out for a couple of years than take a 30k loss on my first deal. hope it works out
I’m new to investing also but I would refinance and keep it. If I could break even for a couple of years. The market might come back around or maybe the tenent might be in better shape and want to buy it?
If you can get an interest loan for 2 years and save up some money and purchase a deal, you might can make up the lose on this property with another. I know that is risky but just a thought.
Here’s a little bit of advice that most people don’t seem to realize. The price of the property has to go up about 8-10% in order for you to break even. If real estate just keeps up with inflation, then the price goes up by 3-4% per year. So at a minimum it should take 2-3 years just to break even. That 8-10% is based on realtor fees, closing costs and other costs associated with purchasing and selling.
Of course even in a down market, if the price of real estate goes down, then you’re in even more trouble and it would take even longer to make money. Real estate isn’t really a get rich quick type of investment, it’s a get rich slowly type of investment.
Without really knowing what’s going on in your market, it’s hard to say what the best thing to do would be. If you can’t take the loss, sell it. If you can refi into a lower rate, and you never mentioned what you had now, that might be the way to go and just hold onto it. It may break even in 3-5 years and you might might money if you hold on after that.
Also on that 30k loss, is that after you’ve done your taxes? You can write off all your expenses and take the depreciation. That might lessen the 30k hit.
nextsean,
Can you please explain where this deal went so badly wrong…What did you pay?,Did you buy sight unseen?..Was there a tenant in when you bought it?..Did you follow Mike’s rule of making sure the property is making %2 montly in rent of the selling price?..I’m just curious where this deal turned so ugly so fast…Please explain …ty
nextsean…
After doing some research on your old posts I found what went wrong…I cut and pasted this from your old post…This deal was doomed from the jump…I hope you can bail out…You broke 2 major rules…You bought basically for speculation purposes and the rent vs asking price was deeply negative cashflow…You needed a monthly rent of 6-7k for this deal to make sense…I’m looking at a property with the same 1200 a month rent roll and I’m paying 70k…Maybe you should move into this place and sell your current home and take the profit from your primary residence to offset this mistake…
In Seattle, I’m looking at:
Sales Price: 350K
Taxes:3500k
Insurance:500
Expected Maintenance: I really don’t know??
Management: $0 - I’m planning to do it myself
Vacancy: minimal - I’m thinking that vacancy will be minimal in Seattle (Maybe I’m kidding myself)
Expected rental income: $1200 - $1400
I just did a quick windermere search in Fort Lewis area and see $1200 - $1300 rentals. not bad.
Actually, the old post you found is not the one I bought. I bought the rental for $225k. The monthly loss is ~$400.
I don’t know if I want to sell my current house and move into the rental. If it was closer to where I work, I would consider it, but it’s just too far from Seattle downtown.
The 30k loss I mentioned does not include the “re-coup” from the tax.