I understand your passion, but “run” is the solution.
You’re trying too hard to creatively, shoe-horn a bad deal into something worthwhile.
You’ve got a property that unfortunately you are either not marketing well enough, paid too much for in the first place, put too much into, or perhaps committed a half dozen other mistakes.
Don’t feel beat down, yet! You’ve learned, hopefully, how not to make the same mistake twice. Luckily the mistake you’re outlining here was cheap mistake. If you don’t mind parking your money for a long while, you could theoretically claw back the losses with rental income. But what does a 20k house pull in (net you) with 35% expenses based on total annual rent, without a mortgage? It may take longer than you think.
Meantime, maybe the smarter move is to borrow some cash out on the 28k house and use that borrowed money to buy more property? After all, now you control two properties with the cash you used to buy the first property, but for free since your renter is paying for your borrowed money. Just a thought.
Frankly, I would cut my losses and sell the first house for what I could get, and not babysit the thing. Prices are DROPPING everywhere, and will be for the foreseeable future.
Take your remaining net cash and buy a profitable deal the next time.
BTW, next time, know your comps and holding times better. If you can’t find three comps within 10% of the size and square footage of the house you’re considering buying, within the last 90 days, within a mile, you’re gambling again.
On this completed deal waiting to sell, let’s work backwards on the figures just for giggles and see what we should have paid if the after repaired value had actually been $28,000.
$28,000 ARV (obviously not, but for the sake of discussion)
- $8,400 (less 30% discount off ARV)
=$19,600 Discount Price
- $8,000 (less repairs)
=$11,600 Maximum Allowable Offer (“M.A.O.”)
Now, if you had wanted to flip this house quickly for a fee, you would have deducted another couple thousand from the $11,600, or whatever you think your fee should have been and then assigned the deal to a rehabber.
So, you needed to buy at $11,600, not $20,000 to make this deal work, and make some profit.
First off, dealing with cheapo properties is very dangerous. There’s hardly any room for error. Labor and materials don’t get cheaper just because you’re working on cheaper houses. I’ll just go out on a limb here and say the costs are the same regardless of the price point. The difference is the risk of loss at either extreme. Meantime, the percentages to allow for always stay the same.
Your rehabbing formula for success:
“ARV minus 30% (or 40% depending on what’s next door), minus repairs equals MAO”
You will not go wrong following that formula. It’s tried and tried and true.
Run from the 2nd deal. It’s a loser. :flush
