Rental Property money pit

[Carolyn W.]

Dear Bigger Pockets community:

I was wondering if you could share your thoughts on my current situation.

The first rental property I bought last year has definitely been a learning experience on home repair and maintenance.

Purchase price: $59K, April 2015, Actual Monthly Rent $995 to $1050, Current ARV: $86K Zillow and Redfin Money spent:  May 2015: $12K bath & kitchen & floors improvement June 2015: $4100 new sewer pipe (June 2015) July 2017: $6700 New Air conditioner & blow in attic insulation (furnace okay) $22,800 for major capital improvements
Upcoming maintenance items: $1700 for pruning large trees, $720 to repair hole in roof from fallen tree branch.
Property has galvanized piping which my home inspector failed to warn me that eventually this will need to be replaced. The monthly cash flow for the next 17 months will be paying off the new AC. Since purchase, all cash flow has gone to other repairs not listed above.  Your thoughts?  I'm thinking sell as owner finance.

[Michael Boyer]

It is a good cautionary tale, too. 

So many properties out there may seem viable at first glance but the truth is all the juice has been squeezed from the lemon. 

The prior owner (and this is far too often the case) has not replaced the major components of the property (either milking it as a landlord or putting it off as an owner).

Then we have a "hot potato" where they sell (and often reap some appreciation) without updating the property or putting money into it. Passing it on to the next person to get burned. 

Sometimes it gets passed a few times without the updates (good commission churn for realtors and transaction folks). 

Then eventually someone holds on to it a bit and fixes it up and does the necessary work and actually improves the housing stock some. Sounds like you may be ready for passing it on,too.

Unfortunately, these properties sell all the time, often to new owners not fully aware of the deferred CAP EX and replacements costs. Whether all the replacement is factored in to the purchase price is also debatable (there may be some asymetry in information as the buyer tends to know more than the seller)...

You have a couple of choices now.

I don't think a sell is problematic as long as you disclose all you have (and have not) done. The owner finance still keeps you in the transaction, however, as note holder (bear in mind if it breaks the next owner, you may have to foreclose and sell it again). So a clear sell may be cleaner.

Or you could go for the buy and hold long haul and, as you mention, use the cash flow to recoup your expenses. If it gets close to fully updated, a couple of years to recoup it may not be outrageous. It sounds like there are some more projects in the near future but you might calculate those and see when and how you can get the property stabilized so you have the major projects done (or are setting aside reserves for them) and have some more predictable expenses. 

Silver lining-- till then, you may have a tax deduction (see your CPA or read more on BP and elsewhere on that)... And you paid for a Master's Degree in CAPEX on your first property!

Best of luck!