Creative ideas to minimize loss?

Question

Hi all,

I currently own two rental properties and have owned a few additional about a decade ago when I lived in another state.
I'm currently in the process of starting to build my portfolio again, almost through a BRRRR on another right now with hopes to get into yet another within 6 months max.
My question:
One of my rentals was purchased by me as a primary residence when I was 28 yrs old or so. Its a Condo, and I bought it at the absolute PEAK of the market in 2005-2006 and lived there for 10 years. Terrible purchase.
I have since moved out of there. It was not purchased as a rental at the time, but due to the crashing market, it was/is underwater and I had to convert it to a rental because I couldn't sell it.
I have a great tenant in there (going on 3 years with slight rental increases every year). He takes great care of the space, does minor maintenance himself, and I get the rent usually EARLY by a day or two. Rent is currently at market rate or maybe $25 below, can't really raise it much anymore right now at all.
However, since it was not purchased as a rental in 2005, it doesn't make monetary investment sense. It still loses money each month, to the tune of about $150/mo. On top of that, the condo association (very small, 6 units only) is a disaster and is nearly bankrupt, the shared space (i.e. yard, parking lot) are in terrible shape, and the current association officers won't take steps to collect against past due association fee owners. I ran the association in 2009-2012 or so, and I filed court papers and garnished wages against deadbeat owners. Unfortunately, they quit their jobs and escaped the garnishment, and the local sheriff is not helpful when it comes to chasing these types of things as its considered "small potatoes". Getting the money due to the association from the deadbeat owners is basically impossible.
I can't refinance because the crash of the market versus the amortization of my mortgage on the space means that the balance due (principal) is basically equivalent to the appraised value of the property. The mortgage companies won't touch a ReFi because they'll only refi at 80% of appraised value. I can't sell it because when I factor in closing costs, commissions, etc I'll have to bring at least 10K to the table.
Any creative ideas to minimize this loss now? It doesn't seem like a ton of money, but owning this one is definitely slowing my progress toward picking up actual money-making investment properties. Its eating into my other rental income profits and slowing my ability to have cash available for purchases when a hot deal crosses my path.
Thanks for any ideas you can throw at me!
Brian

Brian Stike · Answer

Thanks for the tips everyone.  I've been leaning heavily toward trying to dump it for about a year.  In about 9-12 months the amortization should be such that I will ALMOST break even if the market stays close to where it is now.  That'll be the goal - unload it in 9-12 months and take a small loss and move on.  Thanks!

Will Gates · Answer

Might be best to get rid of it, clear yourself of the burden and focus your time, efforts, and money elsewhere on a deal that can make you money.

Andrew B. · Answer

If you had a great HOA, I would tell you to consider holding it if you can carry the loss and you expect some more appreciation in the area. However, with a failing, nearly bankrupt HOA I would RUN, do not walk away but RUN AWAY from this. Right now you are losing $1800 per year. it'll take 5 years of ownership to make selling a better option, but if there is a major capital expense that causes special assessments, it'll screw you and kill your condo's value.

Don't forget opportunity cost of what you can be doing with that $150 per month. I know you wanna be emotional because you spent a lot of money and held it so long, but that's all sunk costs. Investors don't consider spent money because it's already gone.

Final note, talk to your CPA. Maybe you can write off the $10k loss, and save a couple grand in taxes.

Thomas S. · Answer

There are no creative ideas in my opinion. You are in a bad situation that is likley only going to get worse based on your assessment of the HOA. Smart investors know when to shed themselves of a bad investment. You need to sell now, before it gets worse, and cut your loses.

Alex Deacon · Answer

@Brian Stike i think your best course of action is to continue to rent the property and take your small loss each month. I own well over 100 units and quite a few are losers. Some small and some large but in the long run and in the grand scheme of things if you hold onto to real estate long enough it will typically appreciate and dig itself out of a hole. The question is how long that will take and how much loss can you sustain. My other properties more than make up for the bad investments I have made.

The other option is to sell for what you can get and take the loss now. If you can afford to come to closing with a check then get out now and learn from it.

I dont think there is an easy answer for you but these are the two things that I have done in the past due to similar circumstances as you have stated.

Joe Villeneuve · Answer

Sell it, take the $10k temporary loss, and move on with the cash you do take out of it.  Staying with this deal, and continuously losing money is foolish.  You must stop the bleeding.  Once you are out of the bad deal, you can take the cash you do get out of it, and invest in a property that will make money...meaning, you will recover the temporary losses you have now, and start making a profit again.

Staying with a bad hand, and continuously "betting on it", will get you out of the game fast.  Just move forward.  As long as you have money to move forward, you haven't lost anything.