Rehab is $14K House Has Been Underperforming. Advice?

Question

Hello BP!

I am am trying to look at things logically and think bigger picture, long term. But in the micro, at the current moment, I am really losing motivation on this asset that's honestly been through nothing but issues. The house is fine, but maybe it's the luck or something. I own this out of state.

It is a 3 bd, 1.5 ba, 1155 sqft property in IL.

Purchased for $100,000 I purchased it in 2018, 25% down.

In 2018, it went un-tenanted for an entire year. I'd attribute that to the poor management company / lots of miscommunication and just general incompetence. Eventually changed them out and went with a new PM.

As far as rehab costs, the costs in 2018 into 2019 were about $12,000

In 2019, it rented for $1900, with a mortgage of $1150 and PM fee of $171, so CF was ~$579. Didn't require much maintenance that year.

Now in 2020, was going fine up until March where COVID hit and things went wrong. Essentially, I went without rent for 6 months, on top of a $2.3K rehab/repair bill. Tenant was living free while we tried to get funds from the state to pay for SEC8. Tenant was taking advantage of the eviction moratorium.

Now, tenant finally decided to move on.

The PM got a quote for $14,000 in repairs. This will cover changing out the floor for sturdier flooring and making it rent-ready.

The Agent believes he can get $2,000 for the rents. The PM also lowered my PM fee by .50%.

I believe the PM is being honest, and believe the construction company is also being honest.

I'm trying to keep things in perspective. My plan is to get an appraisal afterwards and see what the price of the house could be. I've been negative in the deep red with this house over 3 years. I could wait 2 more years to see what happens. I don't think the CF will help recoup my investments / rehab funds within 10 years.

Only solace I have is knowing I get to claim these large rehabs on my taxes, but even that may not truly off set anything or be worth while.

I'm trying to rationalize keeping this. It's a solid property, that I believe has just been through terrible luck and I want to believe it can be turned around.

Worse case, I get my appraisal back, maybe it's jumped up a bit (Zillow says its worth $110K, Redfin says $160K) and I can 1031 it for something else, or just keep it.

Trying to look in the long term, I told myself if an asset doesnt perform within 5 years, I should dump it.

Looking for any input.

Thanks!

Jaron Walling · Answer

I'd sit down and look at the numbers again and base nothing off what the lender says. If it's not cash-flowing $150+ per month with a loan, capex, vacancy, maintenance, insurance, and property taxes I'd sell it. That's just my opinion. 2021 could be roller coaster with market values after the eviction memorandums end. Don't base anything on more appreciation.

Jaron Walling · Answer

The costs make a lot more sense now that you explained the details. The question you need to ask now is this property going to cost $14K every couple of years?? I would pray to god it wouldn't but I haven't seen the overall condition of the home. It's obviously killed the first few years of cash-flow. That obsoletely CANNOT continue. I would be updating, cleaning, repairing, and prepping to list it in spring if that's the case. Good luck man!

Yuuj V. · Answer

Appreciate the word -

The first PM was terrible, the current PM is a rockstar.

Yea, COVID's been a PITA, especially this eviction moratorium. Can't be mad at forces I can't control.

Yuuj V. · Answer

Appreciate the response.

After looking at it from all angles, I think I overreacted to the number versus what value is actually being put forth.

I'm giving this rental another 2 years to turn around. All else fails, I'll sell out of it.

The comforting thing is, the mortgage lender/real estate sites says the house has appreciated in value (close to $50,000), but that of course isn't based on anything real, like an appraisal. But I can at least feel a little better, right? :P

Yuuj V. · Answer

I wish I could, but I'm in the Middle East and travel to and from the States back to work is not ideal without causing some costlier mistakes. (time off work, 14 day quarantine with no pay, plane tickets, etc, etc)

The two biggest costs are:

1) Removing the rug, replacing with fake wood flooring. (about 6K)

2) Repainting the entire home, ceilings, walls, etc. (About $5K)

The rest are small electrical, cosmetic and few safety items. And removing trash from the property left by the tenant.

I'm trying to look at this from a bigger picture - down the line perspective. I think I'll feel better once I get it rehabbed and get an appraisal done to see what the actual cost of the house is/could be.

Benjamin Seibert · Answer

Never hurts to get a quote from an agent on what this would sell for. If it is a good number then it may not be a bad idea to sell.

It is extremely important to have a really solid team when investing out of state and it sounds like you ran into a bad PM. Make sure you always interview multiple PMs and compare them. If you can make the trip and meet your team in person, that's even better. Good luck with the property, I know COVID has been tough on many people - including owners.

Jaron Walling · Answer

"The PM got a quote for $14,000 in repairs. This will cover changing out the floor for sturdier flooring and making it rent-ready."

Is this a joke?? It's an 1100 sqft house. How much damage was done? If that happened to me I'd be taking a work trip to visit the property and inspect it myself. In my opinion all of the things you paid for are high at least compared to my market and similar size rentals.

Rehab is $14K House Has Been Underperforming. Advice?

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