Beginner situation/Hubris/What would you do?

Question

In 2019 I purchased a Duplex in New Orleans for $219,000, I was able to refinance during Covid to a 3% interest rate. After I left NOLA, I was able to rent each side for $1,295 through a property manager taking 10%. The mortgage was also raised due to insurance issues to about $1,950… so I am not making much cash flow, more like a cash trickle. I’m on the verge of firing my property manager due to 7 months this year of at least one unit being vacant. This year I paid around 7k out of pocket which I’m attributing mostly to her error and my naivity. The owed amount is around $183,000 and the estimated value is around $250,000 the last time I checked. I just saw today that I might finally have a second tenant placed (Both to pay $1250) but I’d still like to fire her and hire someone with guarantees around tenant placement and that charges a lower percentage.

In 2022 I purchased a 3-bed/2-bath condo outside San Diego for $535,000 with intentions to buy and hold. Interest rate of 5.25%, monthly mortgage of $3,600, and high HOA fees ($450). The projected rental income wouldn't cover the mortgage and HOA at this time. The condo has some issues: a faulty breaker box, old and not well-sealed windows, and uneven floors. The current value is estimated at $555,000, and I've paid down $22,000. I'll be living here for another 1.5 years, I'll be able to pay down about another $10k. I am considering selling due to negative cash flow. If prices stay the same and I were to rent, I would be out of pocket for the entire HOA fee. I jumped into this property hoping to house hack/buy and hold after I transfer out of the area.

I had some hubris after my first investment and am still naïve in the investing world. I’m continually doing my best to educate myself more and learn from my mistakes. I have about 30k right now mostly in a HYSA and am planning to just hang on, I afford everything with my salary and roommates. I have no debt aside from the properties and regular monthly credit card debt. In a year I’ll need to make some decisions.

From what I see my options consist of:

1. Trying to sell my SD condo as is.

2. Repairing/improving to sell. (Maybe put a HELOC on the NOLA duplex to afford the SD condo repairs?)

3. Hoping (SD) rental amounts have increased and renting it out/refinance if able/eating the cost.

4. Take out a HELOC on my NOLA property and invest it into another property after learning more about buying an investment property, not just house hacking.

5. Sell both and quit.

I work full-time; I’m trying but I know there are gaps in my knowledge. With some humility, I’d like to say it’s keeping the finances separated/organized and liability protections, or everyone’s favorite question… do I need an LLC? This is messy. If you were me, what would you do? What was your greatest resource when starting?

Dan H. · Answer

I will provide some thoughts on the San Diego purchase

- virtually all high LTV mls purchases since rates started to hike have negative cash flow at purchase

- historically great appreciation

- historically great rent growth but recently flattening

- prop 13 is great benefit for long holds

- laws keep getting less LL friendly. Latest is prop 33. 3rd attempt to pass this with aids health foundation having spent mid $40m last I looked. If I donated to aids health foundation and they spent the money on rent control instead of aids research or health care, I would be pissed.

I say with some confidence if you keep the condo 10 years, you will be glad you kept it.

Good luck

Jonathan Small · Answer

You're facing a common investor challenge: learning from experience (and sometimes mistakes). It's good you're seeking advice and educating yourself! Here's a breakdown:

New Orleans Duplex: Firing the property manager is likely the right move given the prolonged vacancies. Focus on finding a replacement with strong tenant screening processes and performance guarantees. Don't take out a HELOC on this property right now.  I agree with @Michael Smythe that you need a property manager that communicates well.  My PM is key to my success.

San Diego Condo: This is your biggest concern. Negative cash flow with high HOA fees is a red flag. Repairing to sell might recoup some costs, but given the market and your limited funds, selling “as-is” is likely the best option to minimize further losses. Don’t wait 1.5 years.

Overall Strategy:

• Prioritize selling the San Diego condo. Cut your losses and free up capital. @Stephen Keighery makes a point that it may not be a good time to sell, but I recommend you test the market.  You may find a good buyer.
• Find a better property manager for the New Orleans duplex. Focus on stabilizing cash flow.
• DO NOT take out a HELOC right now. You need to simplify, not add more debt.
• Focus on education and building reserves. Your $30k should be your emergency fund and not used for new investments at this time.
• Consider talking to a CPA or financial advisor. They can help you organize your finances and create a sound investment plan.

Key Questions to Answer: What are your long-term financial goals? Are you primarily focused on building wealth through real estate, or are you open to other investment avenues? What is your risk tolerance? Selling the condo is a good first step.

Michael Smythe · Answer

@Felisha Derrick seems you & your PM are not on the same page!

They should be proactively communicating with you as to why they can't find a tenant and discussing options with you.

PM's do get busy, so before firing them, try to have an open conversation to find out why it took so long and what can be done to rent faster in the future. If they give you an attitude or seem to be clueless, then it's time to find a new one.

Stephen Keighery · Answer

Stick with it. It also isn't a great time to sell right now. I am based in NOLA and have a great property manager. Reach out to me if you want their details or help with anything.

Felisha Derrick · Answer

Jonathon Small, thank you for your thought out reply! I’ve recently talked to a property manager and a realtor for my San Diego property and found that going with a manager would put me in the hole 1k a month MINIMUM. However, if I sell I won’t have to pay out of pocket, in my 2.5 years I have paid down and my property has appreciated enough so that after all repairs the realtor estimates I’ll make 50k. I’m far more conservative with the estimate because I’m worried about repairs. I still think I’ll walk away with some money in my pocket and some lessons learned about walk through and rushing to purchase.

For the NOLA duplex I have not yet fired her, I’m worried about the unknown but her lack of communication is forcing me into that action. I have shopped for a new manager.

Hiring a financial advisor is something I still have not done as well, I’m in the same boat I was in when I posted. This will be an important step for me so I need to carve out the time.

Lastly, I want to build wealth. I’m not entirely sure what I’m doing but I care, seek council, and read to try to give my best effort. I’d like to continue with real estate investing despite its challenges. Being a military member house hacking is the easiest way but I’m also open to learning new methods and if at all possible learning from others’ mistakes.

Stephen Keighery · Answer

Awesome. Reach out if needed. I own 27 properties in Greater New Orleans (36 doors) and wholesale around 50 houses a year in this market.

Felisha Derrick · Answer

I'm very proud of my New Orleans property; it will be tough for me to sell it one day. I do truly want to hold on to it and I think I'm just nervous to change my manager, though I don't feel it is going as well as I'd like it to. Tonight I'm going to look over my statements versus our interactions and finally make the call. Negotiate with her or end our contract. Thank you so much for your insights, I already have a company in mind but if things go south you may hear from me sooner than not.

Felisha Derrick · Answer

This is spectacular insight, it's silly for me to imagine that with zero down I'm going to cash flow in 4 years. For some reason, this was out of my mind's grasp. Thank you! It may be worth it for me to hold and take a small loss monthly for what the appreciation will do.

Jake Andronico · Answer

@Felisha Derrick

Congrats on having multiple properties! What you're posting about does not sound out of the ordinary at all.

Maybe you don't want to be a landlord or own property? That's completely OK.

Sometimes getting involved for a few years makes you realize you don't like it. No shame in that.

But it's only been 5 years since your first purchase. RE is a long term game.

Taking out more debt does not sound like the best option IMO. Best of luck to you no matter what you decide!

Beginner situation/Hubris/What would you do?

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