Tenant damage; low remodel bid; high remodel costs... Now what?

[J. B.]

Age 40.  Owner of a singe-family rental home

Purchase price 15 years ago:  $200,000 (zero down payment)

Current value: $400,000+

Current mortgage:  20-year fixed with 19 years remaining @ 2.875%

Seeking advice and opinions to help me decide what to do.  I've owned this rental home for 15 years.  I started off renting out on my own and went through a few tenants over a few years.  While every tenant passed the background and income verification, they all had issues at one time or another with late rent, sometimes for several months, the last of which I was in the process of evicting when I took advantage of a technical opportunity to get them out for good.   At that point, I turned it over to a property manager, and they handled things for about the past decade.

Early last year, I refinanced the home into a 20-year mortgage (2.875%) and also took about $30,000 cash out for a personal expense.  Little did I know what was in store a little later on!

The home had a long-term tenant paying $1,300/month, who last year in 2021 ended up claiming a supposed financial hardship due to COVID.  They then moved away after having gone several months without paying rent due to the "COVID" excuse.  When they left, the property manager showed me the home and the place looked like an absolute disaster. 

The tenant had painted the walls without permission, and they painted right over the electrical outlets and allowed the paint to drip down over baseboards.

The tenant had allowed water to leak under the kitchen sink for an extended period of time and totally rotted out the cabinet and the floor beneath.

Every appliance (7 years old) was trashed:  Nearly every handle was ripped off, dishwasher full of something disgusting that rendered it ruined, oven caked with burnt something or other, dryer broken.

Several holes were found in the walls.  Holes in a couple of the doors.

They left so many of their possessions behind, including furniture, I think in total it must have filled a 20-cubic-yard dumpster.

Come to find out later, the tenant moved with their family into a whole new "dream" residence.  I think the COVID excuse was just so they could skip paying rent and pocket the money to help with their moving expenses.

I later learned that the tenant had several unauthorized people living there, and they must have been renting out the garage as well.

As far as repairs over my entire 15-year ownership of this home, I have not really put much money into it.  I painted the interior a couple times and painted the exterior once or twice.  A new roof was put on perhaps six years ago.  Between tenants, I recall replacing carpets and once replacing the vinyl flooring in the kitchen/dining areas.  This was all work done by myself with help and wasn't really a professional, proper job but more to just get by.

So now in 2022, after the property manager shows me the condition of my house, I knew it was time to fix it up and do it right.  I had an absolutely horrible time trying to even get bids to do the work.  I was presented with a bit of about $110,000, which I thought was pretty good.  That gave me confidence to even include some extra work that I thought should be done just for practicality's sake and weren't really 100% necessary.  But the amount of the bid meant that I was willing to spend money on those little extra tasks since the overall bid was reasonable to me.

Well, the work of the contractors has been very good, I must say.  And they are great to work with.  They know how to do a proper job.  However, one problem is that we're now nine months down the road, and the work is still going on.  I'm out about one year of rental income so far.  It's been a long process, but it's nearing the end.

The other problem -- and a big one -- is that the costs of this work are approaching double the initial bid!  I'm almost certain we're going to hit $200,000 in total costs by the time this work is done.  Certain costs were outrageously underestimated on the original bid -- so underestimated that we surpassed that category's budget in the first month.  On some categories, what was estimated to be a few hundred dollars is now several thousand.  And it was an item that should have been estimated much more accurately.  The contractors also found electrical problems, which have ended up costing 20% of the initial bid but was something that was hardly even planned for.  Now the newest surprise is that the exterior of the home needs serious work, and I'm waiting to hear a quote for that.  Obviously the exterior is important and needs to be done right in order to protect the house from the elements, but it's yet another unexpected expense.

To fund this project:  I contributed $10,000 cash.  I took an equity line out on my own residence for $100,000 at 2.75% interest for a few years.  I have funded $45,000 with 0% credit card offers for an 18- to 24-month term.  Now to meet the rest of the expenses, I've taken out a $45,000 personal loan at 6.2%.  I do have about $250,000 in a brokerage account, but I do not desire to liquidate that account.  Retirement fund balances are about $1 million, and obviously I will not be accessing those.

Before this project started, I had zero credit card debt, the one 20-year rental property mortgage at 2.875%, and my own residence's 15-year mortgage at 2.5% with 30% loan to value on my own home.

So in a month or two from now, I will have a beautiful rental property worth 400 grand (hopefully more after all this work!), and I'll probably be able to get $2,000/month rent.  Maybe more? 

What upsets me is that the property manager wasn't doing regular walk-throughs of the property and wasn't protecting my home.  The long-gone tenant will probably never pay anything even though they're being sent to collections.  The timing of this whole thing means that I missed out on being able to take cash out during my refinance in order to fund this renovation and probably choose a 30-year mortgage instead of a 20-year mortgage.  The bid from the contractor was obviously ridiculously low, but I'm so far into the work at this point that I just need to finish it and get the place rented.  I'm also disgusted that the financing situation means that I am carrying so much revolving debt that is obviously going to pull money from my own personal cash flow every month for quite some time into the future.  It's also hard for me to not have feelings of disgust that some new tenant is going to be living in this brand-spanking-newly-renovated home that's nicer than my own and that the money is going to be coming out of my own pocket that allows them to do so.

Honestly, though, this is not likely to break me.  I still have a net worth that is many times over the average net worth for people my age.  I will be able to make payments on this debt; it's just going to reduce the amount that I will be able to save in my retirement accounts until the debt is paid off.

So, in sum:  Should I keep this rental house, get a reputable property manager, and just tough it out until the debt is paid off and one day the tenants over the years have paid for this house in full?  This home is 40+ years old and was never updated before.  I'm hopeful that these updates I'm making will last another 40 to 50 years.  If I chose to sell, it would probably be about 40 grand in seller costs, which seems like a huge waste.  Any input from the more experienced here would be appreciated.