Need Advice: My First Rental Property is a Pig!

[Mark Aiken]

I made all of the rookie mistakes and now I must learn and hopefully recover from them.  I purchased my first rental property in May 2021 sight unseen through an online auction.  There were 60 properties for sale and I was only able to walkthrough six of them.  However, the one I purchased I did not see nor drive by.  My decision to purchase was purely based on the numbers, online pictures, and my conversations with the seller.  

I should have known to stay away, because of the homes I did see, all but one were in terrible condition (smells, damaged walls/exterior, sinking flooring).  This should of been a red flag that the owner was more of a slum lord and neglected normal maintenance.  But I ignored the signs because I was excited to land my first home and begin my journey as a real estate investor.  I was the highest bidder on two homes and after appraisals, I found out the bank would not finance the deals (2nd major red flag).  I decided to cut the bank out and purchase a single family home with all cash because I was blindly eager to get started.

The "deal": purchase price was $37,000, rent is $795/mo, and insurance/property tax are $1,100 per year.  I was extremely happy because I would make my money back in 5 years and have a cash-flowing property thereafter.  Turns out the home has foundation issues because the gutters have been dumping water underneath the property for years, the roof is rippled, the floors are sinking, and the home hasn't had any repairs probably since it was built in 1901.  To make matters worse, the tenant is 3 months behind on rent (seeking assistance) and the HVAC went out and I replaced for $5,400.  

I figured I could get the place completely rehabbed for $30k and start fresh.  I brought a contractor out and he quickly shattered my optimism by informing me the minimum cost for what I wanted would be $70k due to the foundation issues.  Homes are only appraising for $80-$90k fully rehabbed, so the contractor suggested I demo the house and donate the land once the tenant moved out.

I don't want to give up, but I'm very tempted to cut my losses.  I might be able to sell the home for $15-$20k as is (fingers crossed).  Or my other option is to try to keep the tenant in as long as possible and hope rental assistance starts coming in, which will only last 15 months.  Then I hope she will start paying after that and stay at least 5 years to recoup my costs and pray the house doesn't fall down.

Has anyone else made the same mistake?  If so, should I cut my losses now or stick it out long-term?  I feel like I've already failed at real estate investing and just got started.  Does anyone have any advice that will help me look at this situation optimistically? 

[Greg Scott]

Sounds like you got into a pickle.  Still, I don't think all is lost. It could work out in the long run.  The returns won't be great but they might not be a train wreck if you can get the property stabilized again.   I'd break the problems into two parts.  1) Figure out the rehab and 2) Figure out the tenant situation.  Attack both simultaneously and independently.

If it were me, I'd get more than one GC out there.  Anytime I get bids on projects, I get a wide variation of prices for the same work.  Not sure why that happens, just does.  Get at least 3 GCs out there for quotes.

Next thing I would attack is the scope of work. A full gut job might cost $80K, but what would it cost to make it clean, safe, and functional?  There are probably a lot of things you can cut out of that original $80K quote. 

I'd also talk to a mortgage broker that understands rental properties.  Understand from their perspective what needs to be fixed so that they would provide a mortgage.  Any scope of work you do should include those repairs.  Once the repairs are done, you are going to want do a cash-out refi to recoup as much cash as you can.

As far as the resident, start eviction proceedings.  If IndyRent comes through for you, you can always stop the eviction. I'd get professional help on the eviction.  There are plenty of attorneys in the area that can handle it.

Good luck.

I"m connected with a group of Indy buy & hold investors.  DM me if you would like to get email notifications of their meet ups.