Need help with my real estate investments - should I sell or keep?

Question

Hi, I am new to this forum, and new to real estate investing. I started out investing in real estate without knowing much about it in 2005 which is the peak of the market, and now found myself in a bit of trouble because of the current market condition. I'd greatly appreciate it if someone can make a suggestion to my situation. Any help is very much appreciated. I bought 4 houses in Idaho (Boise & Meridian), and 2 houses in NC (Fayettevale) in 2005 with 20% down on each one of them. They all have 30 year fixed financing, the cash flow however is not very good. I only have breaking even cash flow on two of them, and on the rest of them, I have negative cash flow of about $1000 in total. On top of that, I also got a very bad property management company for the Idaho properties, and lost quite a bit of money at the beginning due to poor management. Btw, if any of you invest in Idaho, make sure you don't hire Park Place Property and Chapman Property, they are horrible with managing properties. I was hoping that I can hold the property for a few years, so that I can get some appreciation out of the investment before I sell them, and in the mean time my tenants are covering most of the mortgage payment. I would like to find out from other more mature real estate investors if this is ok to do, or I am just doing the wrong thing. Thank you so much in advance for any input. I am also seeking for some analysis on Boise real estate market and Fayettevale real estate market. Also, does anyone know a good property management company in Boise area? Thanks again and have a nice day.

Diane Menke · Answer

Catherine I am with the others about the lease option idea to unload the non performers.

Ditto the management company. Fire the rats. You will have to get all your ducks in a row, know the facts and then get tough with them. Or have your lawyer get tough with them. You have one right? Ours charges $150 for a letter to go out and it always seems to work.

I don't think you should expect to be CPA or do your own tax filing any more. I don't know why people will try to do this themselves. Would you drill your own teeth?

You have property now in several states with up tick and downticks in income, lots of tax impact there. If you do a refi or sale, again, more complicated taxes. Spend the money for a GREAT CPA. You will be able to plan for taxes, business growth, all kinds of great things.

The accounting classes for you will be a bonus because then you can keep your books which WILL save $ because you can work with the CPA when he/she inputs the info. They will for instance have you shift allocations on occassion so to save you tax dollars. I'm telling you its SO WORTH IT. Hire a pro.

Just like any profession there is Art involved in interpreting the application of the laws and principles. A CPA with RE experience and small business experience will get you on a good foot so you can move forward in a positive fashion. Our CPA cleaned up all kinds of messes and now we run like a REAL BUSINESS!

Best is not to panic. Look at all your options. Plan and then execute.

Have you spoken with a reputable realtor in the areas where you are thinking of selling or having rental shortfalls? What are the comps? Can you get a corporate tenanant, grad students, military, hospital employees, how about a teacher or a police officer?

You can tell a lot about rent rates from Craigs List. You can even list the places there for rent.

Any chance you can just up the rent by $50 or $100 per unit? Throw in a ceiling fan or two to help ease the hit?

Diane

Mark N.A · Answer

Catherine:  Fayetteville NC is a military town.  If you believe the military will grow and that the base there will not be moved this means you will probably be assured of tenants.  Any appreciation will be a factor of rent increases and what other investors desire as a return.

Lease options sound like a good idea for your other properties.  Read up on it.  You might also google John T. Reed for a less sanguine view of lease options.

Then hire a good local real estate attorney for the paperwork.

Best of luck.

Jim Doine · Answer

Catherine, you should be able to get higher than market rents, from a lease option buyer. I've heard Wendy Patton has written some excellent books on lease options. google her name for more info.  Jim

Catherine Smith · Answer

Hi Douglas,

Thank you so much for taking your time to explain the concept of Lease Option.  I've never done it before, but I sure have heard about it a lot...never got a chance to do some research about it, I think I should now.  Ok, let me talk to my tenants first to find out if they are interested in owning a home.  I do have a couple of concerns with this approach though:

1. The tenants living in the properties now were found through property management company.  If I go with this route, the property management company might not be happy about it.  If I cut them out, they will probably sue me for it.

2. If my tenants agree with Lease purchase option, how do I make it legally binding?  I guess I can do some online research to see what it takes to complete the whole process.

Thank you so much once again for your word of encouragement...it sure makes me feel much better.  At lease I feel I am not alone, and I have some support from many nice people out there.  Your help is truely appreciated.  Have a prosperous new year in 09!

Catherine Smith · Answer

Hi D, thank you very much for your question and suggestion.  I haven't really talked to a CPA yet.  We usually file our income taxes using Turbo Tax software, and we did see a good amount of tax refund with these properties...basically we'are able to get all the tax back except the withhold for social security and medicare.  I will take a course for personal income tax at a Jr. college, and plan to do some self study to educate myself about maximazing my tax shield.

I've been monitoring the economy in ID more than NC, since most of my properties are in ID, and I would like to sell one or two properties in ID first.  But I don't seem to be able to find a lot of information online.  I am just glad I ran into this website that has so many helpful and brilliant people.  Once again, your comment is greatly appreciated.  Good luck to you too in the new year.

Douglas Christian · Answer

Hello Catherine

How long is your agreement with the management company?

What would it cost to terminate the agreement?

First speak with the tenants and see where they are.  Look back over your agreement with the management company and once you find out all the info that you need, you can then terminate and put a LEASE/W OPTION to buy in place.

Also, you can let the management company know that you are going to sell the place and you will give the tenant the opportunity to purchase and if they do not want to purchase you must terminate your agreement with them.

If tenants want to purchase, then you have to do a lease with option to buy and put that in place.  Notify the managment company that you are moving forward to sell.

You can also terminate your agreement with the management company based upon POOR performance.  If they are reputable then they will let you out of the agreement knowing that they have not done as per the agreement.

Also, you can let them know that you have others that you will notify that they are not GOOD.

Bottom line speak with tenants and see where they are.

SUCCESS BREEDS SUCCESS

Douglas Christian · Answer

Can you convert the renter that is in the Idaho property to a Lease Option tenant?

This basically means you would go back to them and find out if they would be interested in purchasing the house.  You would do up a three yr lease agreement and they would put down less say 10% which would go towards the purchase price of the house.  Then they would continue to make a monthly payment based up a 7-7.5 percent interest rate.

Now you do not have to worry about a management company in Idaho because that renter is going to take care of the property as a homeowner.

You should look at speaking with each tenant and seeing if they are interested and if they are that would help solve the negative cash flow issue by now having a chunk of the leasees downpayment to cover any payouts that you have.

This is HUGE in todays market with so many people getting their credit dinged for FORECLOSURE of MEDICAL or late credit cards.

If you do not understand completely that's okay the key is speak with the tenants and ask them if they have considered becoming homeowners?  Then I can show you how to make that negative a positive.

SUCCESS BREEDS SUCCESS

Catherine Smith · Answer

Thank you all for sharing your thoughts on my situation.

Hi Mike OH, thank you for showing me the worst case scenario so that I can realize the severity of my mistake. I guess I've been too optimistic about the future outlook. It's time to face the reality :(

Caitlyn, thank you for your analysis. I am in CA too...not a very smart Californian investor though :(

Jon, thank you very much for the update on Boise and NC job market. I guess I can sell one of the houses that has the biggest negative cash flow of about $500 per month. That should release my burden a little every month.

Rich, thank you for bringing me some hope. Answers to your questions: 1. I think I should have the power to stay a bit longer, maybe for about 3 years, that's just my plan for now. 2. Yes, we do pay a lot of income taxes...that's the initial purpose of our investment...to find some tax shield, also look for some appreciation. Now I'm not sure if we are doing the right thing with the market being so depressing for sellers. I was too new and did too little research before I started investing. And now I guess I have to pay for my mistakes.

Diane Menke · Answer

Have you discussed these properties and the tax implications with your CPA?

In our area we are seeing renters becoming first time home buyers. I expect a little uptick after the innaguration. Have you been watching the economies in the areas where you own these props?

Good luck
D

Rich Weese · Answer

I'm usually the contrarian on here Cathrine. No one asked you a couple of important questions in my mind.
1. Do you have the staying power to keep at it for a few years?
2. Are you paying income taxes? The negative isn't so bad if you can derive some benefits taxwise.

I'm assuming you are well set up income wise. To buy all those properties at once with 20% down was a bigger chunk than most on this board could do, imo. Most projections have shown Boise is nearing the bottom and economy is still good(housingpredictor.com). If you can handle the negative, take advantage tax  wise, I'd hold onto them.