Losing money on turnkey property. Should I sell?

Question

About 20 months ago, I bought a turnkey property in a C class neighborhood in St. Louis, MO. Despite it appraising for the purchase price, I likely overpaid. In September 2023, the renter stopped paying, leading to eviction in January 2024, resulting in a loss of five months' rent. Estimates to make the property rental-ready now stand at $8,000, meaning a total loss of about $13,000 in five months. I initially bought the house for $80,000 and could sell it post-repairs for $65,000 to $70,000, or "as is" for around $50,000. Given the uncertain neighborhood prospects, I'm torn between enduring potential long-term losses or cutting them now. Would experienced investors stick it out or minimize losses by selling? Any insights appreciated.
Current rent: $850. I owe about 60k on the mortgage.

Travis Timmons · Answer

I'm a believer in selling the losers as soon as you figure it out. Eat your losses and move on to the next one. I lived in Saint Louis for a handful of years and grew up a couple of hours away. I know that market really well. If it is in the one of the areas/neighborhoods that I assume it is in, it is more likely to go down $10k in value than up $10k in the coming years. Just sell it and call that tuition to the school of life.

Engelo Rumora · Answer

Hey mate,Sorry to hear about your troubles but it's not too uncommon.I've been in the turnkey biz for 10+ years now and have often been called the "bad guy" as we only sell to investors looking to purchase with cash.Many believe that because we only accept cash buyers, that we inflate the properties price which definitely isn't accurate.Quite on the contrary when looking back I feel that we under sold them lolWe can justify every one of our property prices with a CMA independent of our in-house sales.Whoever believes that financing a turnkey property makes it safe is wrong.Most turnkey providers or affiliates push the financing model (Even in today's high interest environment) to make more sales.They have "in-house" lenders or community banks that they establish relationships with and promise large volumes in loans.This in return get's rewarded with various favors and many are easily able to manipulate appraisals.Having flipped over a thousand properties, I know how easily an appraisal can be manipulated so for anything reading, "NO", financing a turnkey property doesn't necessarily make you purchase it for fair market value.To answer your question:When S#%@ hit's the fan like it did for you with this deal, I personally would always look to cut my losses and move on smarter and more experienced.Granted, over the years I have witnessed many investors buy 1-2 properties from my company and expect miracles only to get disappointed. Sometimes a bad run can happen on 1 or 2 properties so I always stress the importance of building a large portfolio especially when investing in sub $100,000 B or C class properties.The likelihood of 1 or 2 properties being vacant within such a portfolio is quite high so it's vital to own 5-6-7+ properties.While the others are performing, some won't and at the end of the day it will level out the portfolio for a decent cashflow return. Sub $100,000 properties require volume to work and to make an impact to an investors monthly income.1 or 2 won't cut it.Financing such properties makes things much more difficult IMO and that is another reason why we don't sell via financing.Just my opinion and wishing you much success

AJ Singh · Answer

@Jonathan C.Do repairs on the house and sell for 65k to 75k..expensive lesson but thats what happens to OOS investors in class C areas. Make lower yield but invest in B plus area when investing out of state and always take your PM advice before you invest.Once you select a city, go and interview some prospective PMs for advice.

Brad S. · Answer

Here's my brief 2 cents based on actual experience and #'s. Bottomline to me is what are you goals and does this property meet or is likely to meet those goals within the time frame you desire? If you are not confident the area will appreciate (value and/or rents) or grow in demand within your time frame, then you may want to think about a plan of how to best dispose of that liability. Because, in that case it is more likely a liability than an asset to you. Don't believe anyone who says any real estate is good to own and the 'ol "buy real estate and wait," don't "wait to buy real estate." Those are people that don't have anything at stake in your situation and they most likely don't have experience in that specific market area and those statements depend on your time frame and are market and property specific. Now, here are 2 specific examples of properties that I owned that I would've been happy never owning. They contributed to additional stress, liabilities and spent energy and money at times throughout my ownership. And in the end didn't make me money and the loans I had on them actually prevented me from getting additional loans on other better deals. Anyway, here are the specifics: 1) purchased 7/1997 @ $80k, $500 down payment, cashflow appx $150/mth as long as there were no major repairs or maintenance items, great % returns but very little $ returns. Sold 5/2016 @$67k, after about $7k rehabwas about $250/mth cash flow at time of saleOh, and it took many months to sell, therefore costing me additional holding costs with no cash flow 2) purchased 9/1998 @ $71k, Similar and same area as #1 - $500 down payment, cashflow appx $150/mth Sold 4/2016 @$72k,after about $9k rehabwas about $250/mth cash flow at time of saleand also took many months to sell For fun, I just looked up their zillow as of today and 1 recently resold for $85k Now, today, there are a lot more resources to easily research market areas, etc, so I now do more research to find markets with more demand and growth potential. I hope this doesn't reflect exactly on your situation, as your area and property may do much better over time. But, it is meant as a cautionary tale to keep in mind when evaluating your situation. You may decide to dump it and then an amazing deal may come up which may make you a lot more than you gave up. Good luck

Logan Laperriere · Answer

That is a tough situation. Were you covering all your expenses by renting the property at $850? if so how long would it take for you to get your $8K in repairs back? will the repairs help you raise the rental value? Selling the property now may mean around a $40K loss for you after all expenses. ($50K sales price, 5K lost rent, 5K in commissions and closing costs) Account Closed has a good option. Lease option may be your best solution given your scenario.

Mark S. · Answer

I have never heard anyone recommend an S-corp for rentals. Did your tax pro suggest this? Seems incorrect.

Account Closed · Answer

People who have invested before usually compare what they might earn later to what they are losing now. For you, choosing will be based on different things such as how steady the area is where your property is, your plans for investing over a long time and the state of your money matters. If you sell "as is," maybe you lose less money now, but if the place could grow in value or you think the property has good future, keep it because this might give more profit later, even when there are problems now. Talking to someone who knows about real estate in your area or a person who gives advice on money can help choose what's right for you. Good luck!

Jonathan C. · Answer

Brad,Thank you for your post. I have a feeling that my situation may not even be as "good" as your situation. I purchased the house for the cash flow and a small amount of appreciation. Given the expenses I foresee in the future (lots of dead trees on the property, HVAC won't stay new forever, roof with about 10 years left, high renter turnover in the area), I am not sure if my cash flow will ever be positive. Considering I paid over fair market value for my turnkey, it will be 10+ years before the house may appreciate to what I paid for it as this is a low income community.My goal for this house was to not to make a lot of money. I just wanted to get into the real estate game and start learning. At least that goal was accomplished.

Jonathan C. · Answer

Thank you to everyone who replied!Logan: Yes, the rent covered my PITI as well as 5% for vacancy, 5% for maintenance and 5% for cap ex. After all of my expenses, I had about $100 left over. Even if I increase my rent, I figure it will probably take 4 to 5 years to recover the 8K as well as a couple of years to cover the lost rent.I will look into the lease option. Unfortunately this is a low income working class area. I am not sure how many of the locals are looking to purchase, but you never know.

Basit Siddiqi · Answer

20 months ago, interest rates were prolly much better which makes sense that the value of the house is down given interest are higher.The thing with low priced properties is that you have to hit close to 1.5% rent to price ratio for the numbers to make sense.The thing is that the cost of rehab, for the most part is the same regardless of how cheap or expensive your property is.Roof replacement isint cheaper because you have a cheaper house.HVAC Replacement isint cheaper because you have a cheaper house.It looks like your appreciation and cash flow are negative.Unless you anticipate them to change, I would sell it.