Cash flow cunundrum. Restructure mortgage and lease or sell?

Question

Ok, here we go. I need to separate emotion from business.

I have recently started becoming serious about investing into buy and hold properties. I have purchased 2 properties so far in 2018. I have a third property that I have owned since 2003 and have rented since 2005 when I deployed to Iraq. I have had good and bad tenants. Current tenant has been there 2 years, is now a single mom and has a good job as a nurse, but is constantly late on rent. (just separated and getting it together with her 2 children) She is currently on a month to month lease. The property does not cash flow in its current form. Do I terminate the lease and raise rent or sell and take capital to invest in a better cash flow property? I am searching for a multi family and could do a 1031.

Here are the numbers:

I owe $97K and it will sell for $180K.

Mortgage with interest and escrow is $1225

Current rent is $1500, but I could get $1600.

The property has a pool, and I have a service that cleans it at $150/mo (don't trust tenant to do maintenance).

So NOW, I get $1500, pay $1225 Mortgage, $150 Pool Service, $75 Vacancy (5%), $150 Maintenance (10%). That is negative $100 cash flow.

To continue to hold, I could refinance to lower mortgage to about $1000, increase rent to $1600, cancel pool service and cash flow about $360.

Or terminate lease for a struggling single mom and take the cash to turn into a larger investment. I was thinking of giving her till the end of the school year.

What are your thoughts?

Rawn Wilson · Answer

Yep. I have an appraisal on Monday. Pool is due a replaster. That is 4K easy. Time to stop loving the house and move on.

Mark Fagan · Answer

@Jason DiClemente my thoughts exactly, pool is a no go for me! All the other variables are repairable, Refi, raise rent, ect, but the pool can end up costing thousands!

Joe Hines · Answer

Thanks for your service, @Rawn Wilson!Short answer: Sell. It's not cash flowing. Even if you raise the rents to meet the market, you're still not looking at a great ROI. That's the primary issue. 1031 the money into a new property that can get better rents.

Michele B. · Answer

First, Thank you for your service. Next, you are running a business, you are not cash flowing and that is not good. Offer her to stay there for 100 more a month or she shows receipts for the pool being cleaned. If she can not do either of those things then I would let her know that you are selling it ASAP. She might move out on her own after you talk to her or she might agree to pay for the pool or increase the rent. I applaud you for consideration you are showing that she is a single mom and needs help. Last idea I have is offer her to buy the property. You could do seller financing and take payments of 1500 a month for x amount of time. 180 k x 5% for 15 years=270 k in the 15 years. I know this doesn't allow you to 1031 into another property but it does make you 275.00 a month income until it is paid off, at which time you will make 1500 a month. Hope this helps!Again thanks for your service!!

Jeremy Bartlett · Answer

I think it all depends on long term goals. I am always super hesitant to sell a property because even if you aren't cash flowing, you are still getting tax benefits and appreciation/equity that will benefit you long term - as long as the day to day bill are being covered you're still winning in some sense. I do think you need to restructure to ensure your bills are being covered - because if this property is causing stress and no active benefit than taking the cash and running is the right answer. Re-financing doesn't make sense because it is still going to cost you ~$6-$8000 (not out of pocket, but still in the long run), and interest rates right now are climbing. Find a way to reduce your bills and minimize your risk and increase rents to turn it into a winner. Then find something like a HELOC to buy your next property.

Rawn Wilson · Answer

LOL! Then it pops out of the ground and creates a great skate park. Can I charge for entrance?I am leaning towards the sale as I have already come across other solid cash flow opportunities I could invest in. Loose the pool, and loose the liability. I am getting an appraisal next week to confirm value and that will help with decision.

Vinay H. · Answer

Easy peasy. Drain the pool, cover it with a solid pool cover and tell her pool is closed and post no trespassing notices.. You just saved 150 a month. You're welcome :)

Jason D. · Answer

@Rawn Wilson I would sell.... 1. I wouldn't have a rental with a pool. 2. It doesnt cashflow well and refinancing to a lower payment is basically just having your equity make monthly payments to you, you aren't really gaining anything. 3. If you 1031 you can defer the taxedls and have $60k - $70k to invest in a cash flowing investment, without a pool 😉