Cut losses and walk away?

Question

Bought a condo at a ski resort in CO in May 2022 for $510k. Put down 15%, borrowed the rest at 4%. Originally planned to move in, or at least use substantially, but life had other plans so have been listing on Airbnb. First 12 months brought in $42k revenue. After all expenses, I sit around breakeven. This includes cleaning fees of around $7,500, which is 18%, HOA fees of $660/month, PITI at $2,200/month.

Since then, HOA has doubled from $325 to $660+ due to HOA insurance, property taxes increased. Maybe I can cover those costs with increased nightly rates, but also potential for less Airbnb traffic. It's a crap shoot. HOA would more likely continue increasing than decreasing.

Being an Airbnb host and managing from across the country has been a pain in the ass. There's always some issue with guests so I am constantly on call. I wanted out so my realtor listed for $549k. I have an offer at $500k that I am leaning toward taking, just to get rid of the hassle. After closing costs, I would walk away with around $45k that I would put in the S&P and not think about again. I don't anticipate a better offer will come in, and it's unlikely listing again in the spring after ski season will yield much better either.

At the same time, I am getting advice that my initial outlay could be worth $1M in 15-20 years, with someone else covering all or most of the expenses. This is not a property I anticipate being heavily cash flow positive at any time. In theory, I could get a property manager at around 30%, which would include the cleaning but cut into my razer thin margins and could be the difference between breakeven and a loss. This is an old property, and I can definitely see everything falling apart in the next few years and needing to replace appliances, window frames, etc.

Does it make sense to continue holding this property, or am I better off cutting my losses and spending my time elsewhere and not dealing with the headache?

Leo R. · Answer

@Sarah Poole

Here's my TLDR suggestion: run as many financial models as possible (including models that project into the future), and that will give you a better understanding of what to do.

Experienced real estate investors don't make any moves without running all the relevant financial models first.

Specifically, consider the following, and run the associated models:

1. If this property is cashflow neutral, or even a bit negative, how is that affecting your taxes?  Often, a cashflow negative property can have some tax advantages--since your CPA will list it as a loss on taxes. Talk with your CPA to understand how much of your tax bill / tax refund is affected by a cashflow negative vs neutral vs positive property--ask your CPA to run each model with hypothetical numbers. It's always painful to have a property that's cashflow negative each month, but understanding the benefits that brings at tax time might ease some of that pain.

2. What's the appreciation potential? You  alluded to this--it sounds like there could be good appreciation potential...so, run the models. Run some projection models and see where you'll stand in 5 years, 10 years, 15 years given different appreciation outcomes (including catastrophic depreciation, 0%, 2%, 5%, 10%, etc., etc.).

3. If you're not already doing this, make sure your "sell" model includes capgains tax, all selling fees/costs, AND depreciation recapture--talk with your CPA and realtor to make sure you understand these items and any other fees/expenses/tax ramifications of selling. I often find that once you consider these factors, selling a property becomes very un-appealing (unless it has an enormous equity position).

4. When you run your models projecting 5 year, 10 year, 15 year etc. outcomes, don't forget to do models that anticipate rent changes. Run models with catastrophic rent decreases, 0% rent increases, 2% rent increases, 5%, etc., etc., etc. ....which brings up the natural question: what (if anything) can you do to increase rents on this unit, and how would that affect your models?

5. Especially since this is a STR, run models with various vacancy scenarios (increased vacancy, steady vacancy, decreased vacancy)...again, this brings up the natural question: what (if anything) ca you do to decrease vacancy on this unit, and how would that affect your models?

6. When you run your models projecting into the future, don't forget to include mortgage paydown...what will you owe in 5 years, 10 years, etc., and how would that affect your assessment of the property? What opportunities might arise as the mortgage is paid down? (e.g.; you could refi to lower your payment, you could cashout and use the money to improve the property to force rent growth & appreciation, etc., etc.)

Have your CPA and realtor look over your models with you to double-check your math and your assumptions....and to the folks who would say "my CPA and agent wouldn't spend time running numbers with me", I say: well, mine do. If you want to be a serious real estate investor, you need a serious CPA and agent that have your back. (and if you want to be a serious CPA or agent, you need serious clients who will bring you millions of dollars in repeat business--the way to get that type of client is to provide A+ service). End of story.

Ultimately, the more financial models you run, the more thorough you'll understand the situation, and what course of action makes the most sense.

Good luck out there!

Chris Seveney · Answer

I would walk away if it was me, but its also your personal preference.

V.G Jason · Answer

This seems like a pain to you, I would sell it if it was I you.

Many people are in similar situations, this isn't what it was all cooked out to be. I would cut losses and move on, take it as a learning lesson for getting into real estate.

Ned J. · Answer

Your post has "I don't want to be doing this anymore" written all over it......you walk away now or rationalize yourself to deal with 8-10 years of misery in the hopes that it appreciates a ton (which it may very well do).Up to you.....

Brett Deas · Answer

If you get to the point where you are questioning if it's worth it or not, it's probably not worth it. When you get that far in your mind there isn't much coming back.

Basit Siddiqi · Answer

Turning a $500,000 asset into a $1,00,000 asset in 15 or 20 years is not a 'great investment'you are talking about a 4.75% return over 15 yearsYou are talking about a 3.6% return if over 20 yearsIt seems like this property is stressing you out which an investment shouldn't do.I would consider selling it.

Randy Rodenhouse · Answer

One option would be to sell the house with owner financing at an interest rate of 8-9% and you make the spread on the difference between your 4% underlying note and the higher rate.  So if your loan is $430,000 ( I made some assumptions based on your down etc) and you owner finance and sold it even at the same price you bought it and the same amount down (15%), you then would cash flow roughly $1000+ (quick calculation).  Since you're not the owner you are not responsible for taxes, insurance, HOA fees, property management, etc.

Joe Villeneuve · Answer

Your real question is this.  Should you:

A - Stay in what is now a losing deal, and which will continue to lose each year, adding up to bigger total loses, or...

B - Take a one time loss, still walk away with cash, and take that cash and invest in a a property that will make you money, which will recover the losses up to this point as well as profits in the following years.

Travis Timmons · Answer

Smack that bid into next week and be done with it.

Michael Smythe · Answer

Sell

Cut losses and walk away?

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