Bad deal - what should I do next?

Question

Hi, community!

I'm down to my 4th single-family deal, I am an out-of-state long-term investor and I'm still learning a lot. My last one is not turning out great. I take all this as a learning lesson on how to not do things in the future and I'm still very optimistic. My other 3 deals are cash-flowing nicely over $700/month, even though one took a while to stabilize to get there.

Here's some information about the deal:

- Purchase Price with closing costs: $138,000

- Expected Rehab: $30,000

- Expected ARV: $210,000

- Expected rental: $1,900

- The Rehab turned out to be $55,000 --> a lot of unexpected problems, broken pipes, mold, roof, city requirements and overall bad due diligence on my side. I still would need to put in another $10k to pass the inspections (the city is asking for a lot, like changing the garage door).

- The Appraised value came back at $175,000 --> we got delayed on the rehab and the latest comps didn't help, and pushed the appraisal down

I paid with a Heloc, so holding costs are interest-only for ~$1,000/month for 5 months. So now I need to decide:

- I listed the home on sale for $195,000, and in just a few days I got an offer at asking. Now the buyer is of course asking for $5,000 in credits. My total expense right now is over $205k, so selling for $195k, plus all the fees and credits, I will lose ~$20k on this deal. I think I can offset this from my w2 income, so at least there's that.

- The other option is to refinance. I locked a rate for $6.8%, and I would be getting $145k back. So I would have a lot more of my own cash in the deal than I would have liked it. Then I could rent for $1,900. Mortgage + Insurance + Property tax is at $1,450. Now add capex, vacancy, etc...the real cash flow is very low.

I would like to see what the community suggests in this situation. Would you sell for a loss, or rent leaving a lot of your own money in the deal and playing the very long-term game?

Thank you all

Travis Biziorek · Answer

Hey Alex, sorry to hear this one hasn't gone as planned.What was the original intent with the home? It sounds like you wanted to keep it as a rental, yeah?If so, I'd stick to the plan. Real estate has a way of bailing out bad outcomes over time. I've been there and almost threw the towel in on one but fast forward a couple years and all my cash is out and it has been headache free.

Walter Pineda · Answer

Thank you for posting this, in my humble opinion I would hold it and wait 5-7yr until the rates come down and then refi and by then it would have appreciated. Goodluck on whatever you decide. "Courage, strength and honor" be our Matto.

David Oechslein · Answer

Keep it as a rental. You haven’t lost any money as long as you hold it. You just transferred your money from your bank account to equity in the home. Since it will cover monthly expenses as a rental, just be patient, hold it and rent it. Wait for time to work it’s magic and eventually the house will appreciate and rent will go up. It doesn’t take but a few years for a so so property to perform much better. If you sell, you guarantee the loss. Even considering the tax loss potential, a $25,000 loss against W2 income is only going to save a few thousand on taxes. You’re still out the $15,000-20,000 from the property. -Dave

Bud Gaffney · Answer

@Alex Mitt sell, cut your losses and move on

Austin Ralls · Answer

Either way you are losing money between both decisions. But refi the asset and getting majority of your money back, either cash flowing or breaking even on an appreciating asset is the road I'd go down and refinance again like some people have suggested. If its in a good area you could turn it into a STR and make more off of it that way as well or a mid term rental for a traveling nurse. I always run the numbers as many times as I can in every scenario imaginable to see what each exit will bring me.

Rod Hanks · Answer

Been there and done that a couple times. I would refi and rent and wait on appreciation.

Alex Mitt · Answer

yes but only $150. I also got into phantom cashflow, because i had the veyr bad habit of not counting well capex, maintenance fees or vacancy. Mortage with insurance + taxes is $1,450. Rent is $1,900.

Theresa Harris · Answer

Are you still going to cash flow if you hold it and rent it? Remember rents go up over time (as do some expenses).

Alex Mitt · Answer

the area is experiencing a pricing correction. Several are sitting for weeks in the market and it is common now to see price drops. It is a class C neighborhood, so it is "expected" to see the price going down a bit quicker in these areas given the current situations, right?

Chris Davidson · Answer

@Alex Mitt if you are wanting to build a LTR portfolio just keep and and accept it wasn't a slam dunk. You can float it from your others, and now you have a property where you fixed everything. Push back some on the city, replacing a garage door seems like over reach on their part. I can get if it needs something to meet code like spring hinges but a whole door, and if it is a car door that definitely is over reach.Best of luck!