Novice: My First Rental: Keep or Sell?

Question

Hi! I am a total novice and have just started on my journey to buying real estate even though I own one rental property. In 2009 we bought a primary home in Baltimore for 202k. We relocated for a job in Utah, and couldn't afford to sell it, since we didn't have $25k to unload it. We have had several sets of decent renters in there (about 2-3 years each ), but never can charge enough to cover the mortgage. We lose about $75-$100 a month. I would have sold it years ago, but the market has never really come back. I could only sell it for $200k right now even being over 10 years into the property. We have a great property manager, but the house is in need of major repairs.... new roof, new kitchen, basement rehaul, split system AC... prob $25 -30k. We owe $155k and so selling it now, wouldn't even give us enough for a downpayment for a new property. If I pay down the mortgage quickly, which I could do, I could have it paid off in about 6 years, and then it would cash flow $1500 a month. I have put so much blood sweat and tears into this house (termites, broken water main, 26k eviction before I got a property manager) I just feel really confused on what it the best step. Keep in and fix it up to be a great rental long term, or sell it and take my loses. I'd love some advice. Keep going..... or cut my loses and sell? I do have a rental property in my house in UTah that is amazing. Rents in a day, amazing tenants, great rent prices. I don't mind having a long distance rental, and feel my property manager has great resources and a team and has been very on the ball!

Would just love some advice for people who have some experience.

Chris Mcdonald · Answer

@Stacey NelsonFor most of MD we are at the top of the market again and my clients are getting into constant bidding wars. If your going to unload it now is the time. Who knows what’s going to happen in 6 -12 months with Covid, elections, crazy unemployment etc. Sell now!!! I can help.

Alan C. · Answer

You might work out a creative finance deal to sell it. Think about rent-to-own or wraparound financing. Sell it "as-is" to a handyman type who doesn't have the best credit, but can make the repairs and can make payments that will, at minimum, cover your mortgage. There are only two negotiating points in any real estate deal: Price or terms. If you offer the right terms, you can pretty much name your price. If you hold out for cash now, your potential buyers will dictate the price. Selling properties with some type of owner financing allows you to get a higher price and will draw many more potential buyers than a straight cash sale.

Ozzy Sirimsi · Answer

The first thing what is the location??The second how quick can your property manager rent it each time a lease ends?It seems like, you could put it on the market for 155k, but with all that needed updates, could you get it?I personally look at those houses a learning experience, you got an MBA on Real Estate property. Mine cost me 35K, I dont even use it :D)), so you could sell if you dont want to deal with it.There is always another deal, there is money to be made.

Stephen Kehoe · Answer

pretend you don't own the asset. Would you buy it now? Thinking of it that way is a good way to avoid sunk cost fallacy

Will Gaston · Answer

@Stacey Nelson I can only speak from my experience and have (unfortunately) purchased plenty of bad deals. I bought a triplex in 2012 for 207k and sold 12 years later for 166k AFTER losing $300-$400/month for 120 months. I bought a SFH in 2007 for 24k and spent 35k "rehabbing" and sold it 10 years later for 17k. These are not typos.There has never been one single moment that I wished I still owned them. The sunk cost fallacy is very real. It's hard to do but the best thing to do is to sell.

Sam Lewis · Answer

@Alan C. What Alan said!

William Hochstedler · Answer

Have you looked into refinancing it? Right now rates are great and you might be able to lower your payment to not have to feed it.This is a tough one and I'm getting these calls a lot. Ask yourself if you want to own this property for another decade. Because if you don't sell now, your next chance might not be for several years to get anything better out of it. You bought at the top of the market in 2009 and you might be at the top of the market now. If it's not worth $200K again for 10 years but you've had these capital expenses, are you any better or worse off? Does the tax benefit help you?Then the much harder question is if you have $25K do have any better place to put it? Like you said, it's not enough for a down payment, but it's enough to get started as an active hand's on investor. You could partner on a flip or two. You might be able to find a seller finance deal with a high LTV. Etc.And not to get all Dave Ramsey, but if you don't have 6 months to 1 year of savings and all that. Now would be a good time to stress test your personal finances and make sure you have adequate reserves for your family.Tough decision indeed.

Bjorn Ahlblad · Answer

@Stacey Nelson normally I would not advocate for selling RE. But in this case there is no upside-so sell!