how to reverse negative cash flow

Question

first, i'd like to say "hi". been reading the posts/blog here for a few months, but it's finally time to join the forum.

second, not sure if i am posting this in the right area since the layout of the forum is a little confusing and unlike any other forum i belong to.

third, the meat of this thread - negative cash flow reversal. Not for me, but for my family member.

here's the deal. They have 2 condos in florida. Purchased a few yrs ago for 115k and 85k. They rent for $950 and $875 or around there. one has $25 positive cash flow, the other has negative $50.

now the condos are worth around 50k-70k at most. They can't sell them. increasing rent is dangerous since it might take them 1 month to find a renter and would lose money they can't recoup all year.

Told them to refinance, but the bank wont do it. they had to put down 20% to get them, but they are upside down even with that.

any suggestions? comments? questions?

Jon Holdman · Answer

Moved to the analysis and advice forum. Sorry about the confusion. Hi Homer. You might want to post in the New Member Intro post and tell us about your personal investing experience and desires. You might consider using your real name, too. Privacy settings available on your profile can hide you last name. Your family members made a couple of bad investments. These were speculative from the start. I'm sure their assumption was they would buy these, prices would continue to rise and they would sell for a nice gain. In the meantime, the rents would help pay for holding them. These never had any positive cash flow. I suspect when you say "cash flow", you mean "phony cash flow = rent - PITI". Unfortunately that's a commonly told story and is widely used to sucker new investors into crummy deals. A much closer estimate of cash flow is "rent/2 - P&I". Even that may be optimistic in these FL condo deals where there are lots of bank owned units, an underfunded (or defunct) HOA and deferred maintenance. Had they bought stocks for $200K and those stocks were now worth $120K, they could sell and walk away with the $120K. Unfortunately with real estate they probably put a small amount down. So, instead of paying $200K up front, they paid $40K and owe $160K. A few years later they still owe (say) $150K. So, to sell, they have to bring $30K plus costs (probably another $15K or more) to the table. The loss isn't any different than the bad stock investment. The difference is when you have to bring the cash to the table. They really have two choices. One is to keep putting money into the deal. Or, they can bail out and accept the consequences. They can keep these as rentals and keep paying each month. Well, it actually sounds like their rents more or less cover PITI, so they don't pay most months. They do pay when its empty, when the inevitable special assessment shows up from the HOA, or when some major work is needed. Or, they can pay all at once, sell for whatever they can get and bring cash to the table. Or, they can give up these properties. Maybe a short sale. Maybe foreclosure. Maybe a deed-in-lieu of foreclosure. All of these have consequences. Their credit will take a bit hit. They may have a big tax bill. They may have to sign a promissory note with the lenders for at least part of the forgiven amount. If they actually do have assets, this will be tougher. They're only short about $50K (roughly). If they have $500K in the bank the lenders are probably going to want to see a pretty good chunk of that $50K. If they're living paycheck to paycheck with no assets, you may find more flexibility.

Kevin Yeats · Answer

I agree with Jon with one additionaly angle From a purely investment point of view, when do you/your family member feel that these properties will be worth more than they paid? Given that these are in Florida, it will probably be many years. From an investment standpoint, if you can get a better return on other investments, those other investments should receive the funding. The hard part in this equation is what amount of additional money will you have to contribute (for repairs or special assessments) to see that future return. My first act, if I were in this position, would be to ask the tenants if they would like to purchase these units? But I would not offer seller financing. My $0.02

George P. · Answer

kevin, like the books say "if you dont make money, you hate the property/work/experience. since you hate it, you dont take care of it. since you dont update things, you get bad tenants. bad tenants will destroy you". that's exactly the case here. She is not making money, so she despises the investment. I asked her if she read books, got a "negative". told her about these types of forums, does not seem interested. I told her about all her options, and that's all i can do. Hope she realizes it one day. i thought that there's another way i am not seeing and just wanted to give the more seasoned investors a chance to respond. thanks for the reply, btw.

Kevin Yeats · Answer

Homer, I think you and everyone else that has posted in this thread realizes that this was a bad investment. Everything that you have posted indicated that this is a money pit and will only suck more money out of the owner's pocket. They only possible "White Knight would be lots of inflation or a "less intelligent investor." I suggest that your relative buys (or borrows from the library) a recent book on real estate investing. Sorry I can't recommend a title but I am sure there are plenty of threads here on BP that make recommendations. Also have your relative join BP and read. Lots of good FREE info here. I suspect that your relative is emotionally attached to this investment even though it is losing money. Good Luck

George P. · Answer

kevin, they thought the way to make money in real estate is to "start making money after the property is paid off"...dont ask me why. the current tenants can't purchase the property since one is not "legal" and the other does not have that kind of money. but yes, i agree that it's a good idea. my relative is not very good at being a landlord since she has to use a realtor to even find tenants. that eats up more than her profit (which isn't even there).

George P. · Answer

hi guys, and thanks for the reply. jon, you impress me more and more every time i come across your posts. thanks for taking the time to reply. they said the property is not maintaned by the HOA very well and the buildings look crappy. since the positive cash flow is not there, they have no motivation to make improvements inside, which is sad. it's a vicious cycle and they are in the middle of it. on top of that HOA increases the fees every year (common, expected). jon, between you, me and the fence post, they have no idea how this thing works. i will suggest selling them even if it's at a loss. btw, tried changing my name/profile. i dont think it allows me to. posted in "introductions" as well.

Emilio Ramirez · Answer

is it patty, selma, abe or the crazy cat lady? If they are losing $75 a month, they are not that bad. should be positive after taxes. with those numbers, however, I would guess they are losing more than that. why can't they sell. seems like the obvious option to me if they want out.