Should I give up and sell?

Question

Hello! This is my first post so if I make a mistake I'm sorry! First I’d like to say I’ve enjoyed reading Jay Hinrich’s posts; they’ve helped me get a firmer grasp on real estate investing and I’m grateful for that, and for all the information I’ve learned here.

I bought my first investment property, a duplex, in 2020 in Salem, OR using a VA loan. My family lived on one side and rented the other for a year, then moved out and rented out both sides. I thought I had enough knowledge to start investing - for a year I read blogs, biggerpockets.com articles, and most of the books filed under the 333.33 dewey decimal system at the library before I took the leap. Everything I know about real estate (not much I’m sure) told me this duplex was a good investment but since we moved out the rent has covered the mortgage only 3 times. Every month there is something new that needs to be repaired or replaced. Our emergency fund is gone now and this month I’ve canceled contributions to our IRAs and TSP. I'm frustrated and sad. I was wondering if I could do a 1031 exchange and invest in a real estate syndication? I don’t know if I can keep the duplex since we don’t live in it and I don’t know if I should even try. If it helps, here are the numbers:

6 bed 5 bath duplex built in 1999

Purchase price $466,000

$5051 Closing costs + Inspection (VA loan so no down payment)

$2465 Mortgage @ 2.875% + tax + insurance

$250 ($125 each side) Property management

$1695 x 2 = $3390 Rent for 2020 and 2021

Aug 2022 rent increase $1895 both sides

JD Martin · Answer

$2300 for two toilets is crazy talk. I don't know who's charging you or where you are getting your prices from but that's insane. As for the fence, it was either a total piece of crap when you were there, about to fall over, or it was an issue that should have been turned into insurance if it was some massive storm. Anyway, 10 grand pretty much buys a brand new fence around the property unless you have some acreage.

Where are these repairs coming from - are they coming through your PM and is S/he the one that is selecting your repair personnel? If so it sounds like you are getting royally ripped off. I can have a brand new toilet put in for $250 and that includes the toilet. Even if it's double out there on the West Coast there's no way you should have paid that kind of money for two toilet replacements.

Regraded gutter means it wasn't hung properly for water to flow to the downspout. That was probably an issue when you were there and you just didn't notice or didn't care. So some of these repairs sound like deferred maintenance you just didn't take care of, and some of them just sounds like you're getting completely hosed.

If these costs came through your PM I would seriously consider changing PMs. If you didn't get a complete brand new fence out of $10k in fence repairs you were ripped off. A fence that just falls over because of a few rotted 4x4s or chain link posts doesn't cost $10k to stand back up. I'd like to see some pictures of what this looked like.

Bill B. · Answer

You’re getting $3800 in rent, minus $250 in PM fees = $3550. And you can’t cover a $2450 mortgage payment? You have $1,100 repair every single month? Luckily you’re going to run out of things to fix soon and you’ll start raking in the cash.

You say your payment is $2465 PLUS taxes and insurance. But you also say you only paid $466,000 and your loan is 2.875%. You’ve got a problem. $466k at 2.875 is $1983. I tried 3.875% and I tried 15 years but neither of those numbers is close either.

So figure that out. After that, the good news is you’re making an extra $8500/year in loan paydown, while getting approximately a $13,500 tax deduction for depreciation. So you’re making $8500 tax free and lowering your taxes due by your tax rate times $5,000.  This can be considered you’re retirement plan. Your 401k/ira doesn’t cashflow and this should.

This should be bringing in $20k in income while sheltering $13,500 from taxes once you’ve replaced every single item in the property. Your return on investment or COC is nearly infinite.  It’s 400% if you count the $5,000 in closing costs infinite if you only count your 0 downpayment.

You won’t get anything close to this in a syndication and there’s no reason to do a 1031 as you’d only be taxed on the appreciation and you’d probably have $30,000 in selling costs. Even if it went up 15% in 2 years that’s only $70k. Minus $30k to sell is $40k gain. So you’d owe $6k in taxes and walk with $34k. Less than 2 years of profit. Not a great plan.

Bill B. · Answer

$500 is toooo much for 2 toilets.

Why does the fence on one side cost 3,000 and ther side 6,000?

Value and water supply line could run $250 I guess, if you got “hosed”.

Any repair over $300 you’re going to have to start getting 2nd quotes on. I’m not saying you were over charged, I’m saying you were literally ripped off. But those numbers are so far out of line it’s almost your fault you didn’t question them.

Better luck in the future. Maybe start interviewing PM’s now while it’s not an emergency. Send them copies of the receipts and see if they don’t gasp in horror.

Dallas Regimbal · Answer

@Terra Joa Yu I am sorry your first experience in real estate investing has been a bad one, but I'm glad you are not giving up and that no matter if you sell or not you are wanting to continue your journey towards finial freedom by building wealth investing in real estate! I want to dive into the numbers a bit first so we are on the same page. The new rents total $3790 a month for both sides and the mortgage (2.875% which is a great rate), taxes, insurance are $2465 combined correct? Then property management is $250, then setting aside 5% for vacancy $189.50, and setting aside 35% for expenses $1326.50 totaling $4,231 a month for a negative cash flow of $441. Of course, I'm not sure what you were setting aside for vacancy, repairs and capx so our numbers could be different. What numbers were you using for vacancy, repairs, and capx when you were looking at the property to purchase, and what have they been since you purchased? What sort of repairs have been coming up each month? I just want to get a full scope of your situation in order to give you an accurate opinion. I do believe this property looked like a good deal when you were factoring in living there as an owner occupant, but it may not have been a good deal for when you moved out and turned it into a rental on both sides. There is a great episode on house hacking with Chris Lopez where is talks about analyzing for both on the BiggerPockets YouTube that was just uploaded yesterday I recommend watching it for some extra insight.

Colton Hahn · Answer

Something to keep in mind is not all syndications allow 1031 as usually this requires a TIC, which is a process to get into place. Also, for quality syndications often times they are limited to accredited investors. Good luck!!!

Patrick Crehan · Answer

You need to think long term when planning these kinds of things. I noticed first that for a duplex, the thing is expensive. Altho you may get away with cash flow depending on your location. Second I noticed you put nothing down with your VA loan. So inevitable higher mortgage= lower cash flow. I would have recommended buying cheap, fixing up the property and then renting it out. Lower mortgage, less maintenance to worry about and higher cash flow to leverage. If interest rates hadn't tripled in the last 6 months I'd suggest selling the property, and then buying like 3 subpar condition single families, fix them up a little and rent them out. Or you can just sell now and wait until market returns in your favor. Either way, if your property is turning into an alligator then sell it.

Drew Sygit · Answer

@Terra Joa Yu definitely focus on maintenance cost reviews with your PMC.

You should understand everything they do completely!

Also, ask for before and after pics or videos.

Even a great PMC may not always spend the proper amount of time reviewing costs.

David Hedges · Answer

I had actually thought his property management costs are fairly low. Most property managers I've seen want around 10% unless you have a large number of properties you can bring to them.

David Hedges · Answer

did you live in it for at least 2 of the past 5 years? if so, don't bother with the 1031, it'll complicate things more than needed. also, you likely can't 1031 into a syndication.

what where the repairs you had to do? where they deferred capex items that aren't likely to need repair for a long interval?

I had one like this before also, where the margins where so slim that it would lose money most months. I spend about 5 years before I was able to refinance, bringing down the mortgage cost to the point where it would start to become profitable. If this is your first one and it's eating you alive, it may be better to just sell, and look for something where the numbers do work. nothing down is great in some cases, but if it leaves you in a spot where you just can't get the property profitable, it's not. I wouldn't suggest refinancing now, because it's likely that it'll just increase your costs and make it even less profitable.

Matt Lyons · Answer

@Terra Joa Yu

First ask yourself WHY you bought it?  Long or short term win? Cash flow or appreciation?

After that here is where I see your issues:

If these are 3 bedroom places you should be at $2k per month based on stats in your town… so your rent is too low if three bedroom units.

Property management at $125 per month seems high if all they do is rent it when vacant. If you can self manage that puts $250 a month in your pocket. If you are fairly local (within 2 hours) it should be easy to self manage

And finally, repairs happen but usually it’s one time per fix and even if a slight bleed this month you will make it up over the long term.

Sorry one last thing: your rate is great don’t give up the property

Should I give up and sell?

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