Underwater on a house, now what?

Question

Hi, I am a new investor.  My partner Greg and I moved to Chattanooga, TN, wanting to flip houses short term to build some capital, then move to buy and hold, and eventually to apartment complexes.  We started very idealistic, thinking we could buy a fixer uoper, fix everything ourselves, and sell for a profit.

Our first house was such an embarrassing fail I don't want to talk about it.  Our second house, which we have now, is our second not so good investment.  We bought at a price we thought was great, since we had so much competition and basically just got it because our offer was first.  But, we learned that it takes too much time to do it ourselves, and that we didn't get such a deal after all.  Even doing most of the work ourselves, we have exactly the ARV into it, before selling costs, and that doesn't count for the fact that we worked for 6 months for free.

We learned alot, and I have since found a plethora of information here on bigger pockets and through the local REIA, so I am confident that our next investments will go better.

My question is, what do you think we should do with this house?  I know many people sell their own houses, but that's not really my forte, so I expect to pay 6% closing costs in a house sale, which would make a 6% loss on this house.  We are prepared for that, but are considering making the house a rental.  It's worth $135,000 and would rent for 1,400 per month.  I'm new to figuring out rental expenses (we would need to mortgage the property at 75% if we rented it...) so it's hard to figure oit if renting is a good choice, or if it's just dragging out the pain of a mistake we can't reverse.

Like I said, new investor here, so kindness and prekindergarten responses are appreciated!

Darren Budahn · Answer

@Trina Seever

Sorry to hear the flip did not work out as planned.  However, take pride in the fact that you had the courage to take action.  Most people sit on the sidelines and never get in the game.

I would definitely look into turning the house into a rental.  Take some time to learn all the information you can on BP about buy and hold investing and landlording.  After a few years, hopefully you should be able to sell at a profit if that's what you want to do.  Good luck and thanks for sharing your story.

Tom Shepard · Answer

depending on expenses you should be able to at least break even, just quickly using the 50% rule, depending on what your actual expenses are.  @Scott Weaner is right -- gather all your data and crunch it through the calculator.  Sounds like you may have your first but and hold!  If you do decide to finance I have a mortgage broker who I can give you the name of.  Also have a great agent if you decide to cut your losses and sell.  Chattanooga really is a great market and after a few years of the tenants paying the rent and a little appreciation you should be right side up.  We got our first property in Chatt as well.  It's a great market-- hang in there!  Hey -- you could have paid thousands for some guru boot camp and not learned as much as you have through this process!

Mike Baker · Answer

@Trina Seever

Have no fear. It happens to us all. My wife and I are also new investors, currently working on house hacking a duplex, with an unfinished studio apartment. Its rough, and we too have learned a lot, and I hope to put it In the success stories very soon.

I would encourage you to bite the bullet and get the PRO account. There are a ton of tools and benefits that have helped my wife and with all of the numbers we have run. Its worth every penny.

I personally had to decide that if this real estate thing was going to be my career at some point, then I had to quit being cheap. So we went PRO, got into our first deal, and never looked back.

Trina Seever · Answer

Thanks for all your advice!  I think we are going to go for renting, if nothing else it will give us a good place to start learning how to be a landlord.

Gilbert Dominguez · Answer

I would say that if you can get a new mortgage on the house at 75% LTV then you have a good rental property to buy and hold and you have enough money out now to buy a another property. You now have more experience and know better what it cost to do a rehab. Keep in mind that many times contractors can do the job faster and do it right the first time and because of their experience can be more accurate on estimating cost for you. Leave the easy stuff that you now know you can handle  yourself if you are still of a mind to do things yourself. Remember that although you are not paying yourself your time and labor are still not free.

Allot of real estate investors have made the very same mistake and allot of new investors will also make the same mistake after you.

You do not make mention of any loans which is good if you actually own the house outright and is yours now. You can take the money our through taking out a mortgage and use your experience to apply in furthering your career as real estate investors.

Curtis Yoder · Answer

Definitely has the bones of a buy and hold deal. While you won't make the quick money as many are after when they enter the REI markets this is the more realistic path. You can make a lot of money if you learn from your mistakes and are patient. Remember, just because you are upside down you don't have to panic. The numbers will work out for the rental at the numbers you mentioned and in a few years you will reap the rewards of a buy and hold. Not an ideal situation but make it a rental and don't look back! Good luck and keep learning.

Elizabeth Colegrove · Answer

Everyone has their own opinion. For us we are buy and hold investors and have similar numbers. While our numbers haven't been amazing when bought, they have been amazing rentals. The key is to decide if being a landlord interests you. While it has had tons of moments, and not the good kind. Financially it has been amazingly beneficial

Tom Shepard · Answer

@Trina Seever

Likely the boot camps attendee has not really taken any action like you two have.

When you get ready to rent check out Mike Butler's book "Landlording on Autopilot". Fantastic book and lots of great tips.  And if you buy the book you get access to tons of great forms, etc that you can make your own.  Tons of info on BP as well l, whether or not you decide to go with the pro membership at this time.

Thomas DeMoss · Answer

Call me on Monday and I'll give you some options.

Trina Seever · Answer

Thank you Scott, for the calculator, it was very helpful!  Mike, I am not familiar with a PRO account, but will be looking into it next.  Tom, thank you for the encouragement.  I actually have an aquaintnance who paid the gurus and is enjoying my failure right now :)  Call me crazy, but losing right now doesn't feel like a loss, it feels like a cheap college education!

Underwater on a house, now what?

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