Need advise: Should I sell remote rental property?

Question

Longtime lurker around here - this has been a great place for me to learn over the past few years. Now, I could really use some perspective from people who have been in my shoes.

I live in a very expensive area on the west coast, and have  owned a duplex rental property in North Minneapolis MN for just over two years now. I'm in my 30's and this was my first ever. It constitutes the bulk of my investments, aside from a small IRA and an emergency cash savings. Purchased for $175k, currently have a mortgage with 106k remaining @ 5.5%. This means that payments are $1145/mo ($730 + $417 escrow). Yes, I do realize that I can refinance right now with a credit union local to the MN area, and could get an interest rate closer to 4.1% for 30yr, and that would decrease my payments by $220/mo. I haven't done that yet, because I am torn on whether I should sell due to some recent events.

Total rents for the duplex are $1700/mo. I had a tenant move in last month that appears to have lost his job and is not paying rent (I didn't do a great job of vetting). The eviction moratorium is in place at least through the year. I'm willing to work with him, but he's not especially cooperative, and this could  develop into an eviction. I had to evict the tenant that came with the building, and had countless payment issues with two other tenants that turned over quickly thereafter. I'm on my banks forbearance program right now, and it is helping me absorb the impact of missed rents. But, I'm wondering if this is going to be the ongoing experience in North Minneapolis... sigh.

The other tenant in the larger unit of the duplex is a family member that has been acting as a property manager. However, due to life changes, he is likely to move to the east coast by end of year. His rent was intentionally lowered by $200/mo as compensation, and is in line with what property management groups charge in the area for a duplex. I am VERY concerned about owning this property when neither myself, nor anyone else I know, lives in the area. I have a 9-7pm day job and which limits my ability to get directly involved. I would be OK to raise the total rents back up to $1900/mo (market) and then bring in a property management group. I am worried about high tenant turnover and their "first month's fee" each time adding up. I'm also concerned about being at the mercy of their contractors and snow removal costs, etc.

In the last two years 30k$ in repairs have been made. It has been quite a headache, but the property is at least at a point where I see no more major expenses (roof, interior, all in great shape). It is an attractive property, but in a somewhat depressed area. Due to appreciation, I could sell the property right now for about $225 and break even with everything I've put into it. This accounts for all closing costs, depreciated basis, etc. I'm getting cold-called by realtors with some regularity.

I know real estate is a long game, but this has been a very stressful and expensive 2-3yrs. Here is a summary of my major concerns going forward:

• 1. I am about to become a TRULY remote landlord, with no genuine network of my own in the area.
• 2. I expect bringing in a professional property management group will cut into margins further than the flat $200/mo I already pay my PM.
• 3. I just signed a 1yr lease with a non-paying tenant. I expect losses immediately, as well as an eviction or legal action after the moratorium ends. My last eviction was not handled well, and I'd almost certainly need to get a lawyer this time.
• 4. The property has not had a positive cash flow. My initial models had it flowing +155$/mo, but my relatively high day-job salary has put me in a tax rate that offsets it, and has also caused my passive losses to be carried over (total 16k$) instead of being used to offset gains.
• 5. Minneapolis is a sellers market now, despite my North area not being as desirable. A looming foreclosure crisis, unstable economy, and an election are in the near future.

On the other hand, I could refinance today and add $200/mo to my cashflow. Maybe professional PM won't destroy the margins, maybe my tenant will pay rent, and maybe this isn't the momentary home value peak that it feels like.

If I sell, I can use the break-even proceeds to buy a local primary residence or some other investment

What would you do if you were me?

Jordan Moorhead · Answer

@Ian Ashcroft I'd sell. Sounds like it's not working out well, cur your losses. MFH in North Minneapolis is the last place I'd want to be if the market turns too.

Mack Benson · Answer

I know some very successful land lords that focus on North Minneapolis but they are very experienced and very hands on. They are also local. With the problems you have on your hands now and the future problems you lay out I think you know what you need to do. North Minneapolis can be a great area but it is an area where even many experienced investors will avoid. I'd cut my losses, chalk it up as a learning experience, and move on.

Zachary Ray · Answer

I have the same dilemma to sell or continue to rent out. Be sure to contact a real estate attorney to see about evicting the current tenant that hasn't paid. If you sell it gives you the option to roll that money into an investment closer to you. Depends on your long term goals.

James Hamling · Answer

@Ian Ashcroft A big pat on the back and high-5 for doing so good at identification of your situation, projecting probabilities, and looking to take actions. How you got into that deal I can't say because the investor I read of you now would never get into such a property in the first place, and that evolution is something to be proud of, especially in such a crappy situation.

Without doubt you need to get out of that property asap, like tomorrow asap. The trick is how to best do that right.

There is more than 1 way to sell a property, for example taking on a terms partner. A structured terms sale to a person who has the experience, knowledge and skills to "right the ship" and actively manage the day to day of it all. yes, that includes getting non-paying tenant out NOW which is 100% doable, legally, it just requires knowledge and skill (packaging civil suite with cash-4-keys offering).

This ideal person dosn't have or want to bring the $$$$ to take property as is, which honestly I'd take it but the number I'd give you, well let's just say we'd share some ouzo before to better dull the sting. Is what it is, N Mpls property with bad tenant history, non performing tenant in place with perpetual eviction moratorium in place, yeah correct price would hurt.

I strongly advise locating a good terms partner.

Noah Chappell · Answer

@Ian Ashcroft to play contrarian, I'm not convinced you should sell. It sounds like the difficulties you've experienced are typical of real estate, and probably the same as you'd experience in any C class area when going through a rough patch. I don't necessarily see you getting a huge appreciation bump from the cap ex you just completed, so I'd ride it out. You probably could have payed slightly less, but not by much. Don't forget, this is a great appreciating market. If I were you I'd approach this property like you're looking at it for the first time as a buyer, and have the task of repositioning it. Research and put in a great property manager, you'll pay <$200/mon for sure. Evict when you can, then rely on your PM's experience to screen and put in great tenants. Consider section 8. Sounds like the place is in decent shape, surely you could get $2400 gross rents. In a few years refinance and lower monthly payments for better cash flow. The way I see it, if you walk away from this property, you walk away from real estate as a whole. Otherwise, take this as a learning opportunity and move forward.

Darius Ogloza · Answer

Given the status of the building (non-paying tenant + eviction moratorium) you should expect to take a hit on the sale price.  Nonetheless, sell.  Out of area investing in A or B neighborhoods is for the seasoned investor, and out of area investing in C or D neighborhoods (as seems to be your case) is how bright people like you lose money.  Focus on buying quality property in the future; the entry cost is higher but the ride is much more satisfactory if you are prepared to play the long game.

Randall Weatherall · Answer

You could get a PM in the area to try and find decent tenants (I know, tough to do) because it's easier to sell an occupied investment, typically.  (I know some buyers would rather place their own tenants now, but it helps if they're placed by a PM co. with a good rep in the area) and then, once the tenants are in, if you like how it's being run, keep for a while; if not, dump it while it's occupied and move on.

Corey Hawkinson · Answer

@Ian Ashcroft Mark me down as another vote for no to North Minneapolis. I think every comment I saw from someone with Twin Cities knowledge/experience is saying cut your losses and sell.

Jenning Y. · Answer

For remote rental property, if there's no appreciation potential, just sell it. As a remote landlord, you can ignore cash flow a bit (as long as can break even), but you can not make much if you  ignore appreciation.  As a remote landlord for almost 9 years myself, I found the cash flow numbers are not reliable  AT ALL -  repairs costed far more than I expected.   Sell it and buy in your local area should fare much better.

Randy Bloch · Answer

@Ian Ashcroft

Sell...out of state investing in north Minneapolis would be tricky for seasoned investor....even worse for a newbie.  Plus Minneapolis is becoming not very landlord friendly. Sell sell sell

Need advise: Should I sell remote rental property?

Most Popular Reply