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Updated over 9 years ago on . Most recent reply

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Alex Johnson
  • Health Care / Part Time Investor
  • Santa Cruz, CA
0
Votes |
20
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Quick Opinion on an underperforming property?

Alex Johnson
  • Health Care / Part Time Investor
  • Santa Cruz, CA
Posted

Hoping to tap into some of the insight and wisdom of the community to find possible options for my underperforming property. 

Before Bigger Pockets, I bought/over paid for a condo in 2009 as a primary residence on an adjustable rate FHA loan in a North Carolina college town. Circumstances changed, I moved out of state and have been renting the place for the past 4 years. The issue I am running into is that after the 10% property manager fees (brought them on when I moved across the country), and the condo association dues (would not buy a condo again, these are killing me), cash flow is at a break even for the year . Any maintenance or turn over costs push me to a net loss for the year. The comps over the last 4 years have seen property in this particular community of 500 condos decrease by about 15% as newer, bigger construction goes up all around. I have not had an appraisal in 6 years but looking at the current comps I would say I only have about 15% equity in the property. The location is very good and the rental history has been solid, the community itself is just getting outdated and passed by newer, high dollar investments.

So what would you do?

1) Keep the property as is, not cash flowing but maintaining mortgage pay down and slowly building equity.  Its on an adjustable rate, which isnt ideal.

2) Cut ties, sell the property and invest in a better cash flowing opportunity.  I know a lot more know thanks to BP!

3) Aggressively pay the mortgage down and refi it on a fixed rate mortgage with the intention of holding it long term.  This would cash flow, but I still have the overhead of property management and condo dues.

4) Increase rents by updating the unit or furnishing it.  This community and market could support $150-200/month increases in rent with about 5k in updates, but then again Im renting to college students!  Furnished rentals are not commonplace currently and I worry about the necessary turn over costs and possible damage with this population.  

5) Forget long term leases and rent it through Air bnb.  This totally negates the idea of passive income but would increase cash flow for the time being.  There are lots of people in the area who would turn the place over for 15$/hr, 

6) Any other options that have worked for you??

Any experiences youve had or ideas would be awesome.  Love to hear if anyone out there has had success in a similar situation.

Thanks so much!  Alex

Most Popular Reply

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Dharmesh R.
  • Investor
  • Irvine, CA
4
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22
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Dharmesh R.
  • Investor
  • Irvine, CA
Replied

@Alex Johnson

Here is how I am doing math for my rental property.

Inflow of capital:

  1. 12 months of rent
  2. Yearly appreciation

Outflow of capital:

  1. Cost of capital
  2. Expenses
  3. Reserves for long-term, big ticket items.
  4. Vacancy - lost rent (1 month)

To simplify the matter, I take the properties current value and at 4% rate, I just calculate the cost of capital. Now you may have 85% mortgage that you are paying about 4% interest and the 15% equity, where you are losing 4% interest income as that money is not accessible to you. Call it opportunity cost. Either way, your cost of capital is x% on entire value of the property.

Expenses are what they are - Insurance, HOA, Repairs, Gardner, property mgt., etc.

You can choose to set aside certain $ every year as reserves for big ticket items (paint, carpet, etc.)

I factor in 1 month of vacancy as my cost. It is conservative, but one can allocate less/more.

Finally, I do not bring in principal paydown/equity into my calculation. The way I see equity is just a transfer of funds from your checking account to your own "property" account. It is still your money, just not accessible that easily. So, it is neither income nor loss.

When you do the Inflow minus Outflow, you should see positive number. I'd cut loose the property if outflow is higher. I'd choose conservative appreciation 1-2%, and if I get lucky with higher appreciation, great! From your post, I wasn't sure if your property values are declining year after year. So, that's something to consider.

I hope this helps.

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