D area properties eating my cashflow, time to sell?

Question

Back in 2016 I bought three 4plexes in Phoenix, one for $176k, and two for $190k.  Sometimes they have made $4k a month net, but quite a few months they have lost money.  Last year they lost $30k total due to needing to completely rehab 3 units in one building, but their value has gone up considerably.  In December I did a cash out refi and pulled $350k out of all three buildings.  I attempted to buy more buildings out of state, but thankfully they all fell through right as COVID took over.  So I am sitting on about $420k right now including my savings.

Fast forward to today.  I had to replace an A/C unit for $4150, and it looks like two more are about to go soon as well.  Due to the new mortgage payments I only net about $1900 a month before any maintenance or CapEx.  Now, after every monthly cost I'll be lucky to get $800 a month for the rest of the year, and that's before maintenance or CapEx.

They're all valued between $350-360k now.  I'm thinking about selling them, but kind of on the fence about it, due to the fact that Phoenix has very few natural barriers and can consistently grow.  If anyone has been in a similar situation how did you handle it?

Michael Noto · Answer

Sell them, these kinds of properties are not worth your time. Use the money to buy in better areas. If they are true D class properties, it is great that you had some appreciation over time and you will be able to cash out and put some money in your pocket. Most people who buy in D neighborhoods do not have the benefit of any kind of appreciation.

in 2012 I sold a D-class property I owned and the amount of stress it alleviated for me was incredible. It allowed me to focus my energies on growing my businesses instead of dreading phone calls from the tenants.

Account Closed · Answer

I'm thinking to sell them and buy up - maybe closer to home.

Kyle Benham · Answer

@Bud Dwyer

I think there are some great points here. Maybe take a look at the property management. Maybe you are being over charged for fixing things or they aren’t putting in quality tenants. For what it’s worth, my last renovation finished mid April (right during the peak of the pandemic) and that’s the one renting for $975 now. I had 2 good applications with decent credit history, clear background check, and good previous landlord reports. So it’s possible to renovate right now and fill the vacancy.

But I also think that if you want your time back and to alleviate the stress and frustration, then selling them is a good option. You could take that capital to a nicer area with better properties, maybe you won’t have as many doors, but you could probably still get similar cash flow with less headaches.

Ujwal Velagapudi · Answer

I would sell ASAP. You typically go into a D neighborhood of the low barrier to entry price points but primarily with the possibility of a very high cash flow. You expect to have little appreciation, or at least less than in nicer neighborhoods. So if you're not able to get solid cash flow, or in your case next to nothing or possibly even a loss, then I would run from it and cash out your investment ASAP. It seems you've made some good equity on it already, which is a great bonus in D areas if you can get it, so even if you don't quite get the $350k mark and have to settle for a couple bucks less, just sell. Lower income neighborhoods will also unfortunately be hit the worst with the current pandemic/economic unemployment as we've seen it's mostly lower wage earners losing jobs.

Just a hunch, but if your buildings legitimately went up in value by that much and you still lost that much money last year, even if it was related to deffered capex, then this may be the result of poor management. I would do a thorough analysis of your property manager and consider talking to a couple of other PM's in the area for a second opinion.

Bud Dwyer · Answer

@Kyle Benham

That's pretty much the exact same situation I'm in.  All my buildings have 2b/1ba units.  I have two in South Phoenix and one in North Mountain.  The building I renovated rarely needs more than $200/month in maintenance now.  Where as before I was paying for all the things the previous owner didn't fix.

The total rent roll is about $8200/month right now, but I have long term tenants and should they leave I can probably get it up to $9550.  With COVID I don't think it's a possibility to renovate the rest of the units right now.  Which is partially the reason I'm thinking of selling.

Kyle Benham · Answer

@Bud Dwyer

I bought what I would consider a D class property in Phoenix last year. My first REI. It’s a 4-unit small multi-family. All 2-bedroom, 1 bathroom units about 750sq ft. Maybe different than you, I bought it with the intent to try and make it into a B class property. It’s near GCU, and the area is slowly improving. Fast forward a year later, I’ve fully remodeled 3/4 units, replaced 2/4 air conditioning units, re-foamed the roof, and painted and fixed up the outside. There is still one unit remaining to renovate whenever they decide to move out (rents slowly increasing to market) and some exterior plans still ahead. I’m slightly over budget on renovation, but my targeted rents have been surpassed making my COC return slightly above my target, so a win. Rents have gone from $625, $685, empty, $625 at purchase, up to $675, $975, $900, $950 currently. The renovations were top of the line.

I say all that not to say it’s been smooth, I definitely was hoping not to have to do so much deferred maintenance in the first year and that set me back, but to give you a comparison to see if this is similar to what you’re seeing, or different (maybe good, maybe bad). But I definitely don’t have too much maintenance on the completely renovated units. In fact, it’s less than $100/month on average now. I do set aside $400/month for a rainy day fund which will pay for all A/C units, water heaters, roof, etc.. So $500/month for all MX/CAPEX, but by doing that I get a consistent income each month instead of it fluctuating when an A/C unit goes out, because that money is already there.

I hope some of that helps as a comparison to see what another small multi-family investor is experiencing in Phoenix in a similar neighborhood.

Diane G. · Answer

@Bud Dwyer

If this is D property, there is a higher probability that tenants would stop paying rent...If that happens it would be a lot harder to sell...

So, I would likely hurry up and sell

Bud Dwyer · Answer

I live out of state and have always used a PM.  My risk appetite doesn't mix well with flipping.  My goal is to get enough units to not have to work.  I'm just wondering should I sell them, or bite the bullet and put however much is needed in to this next building now, so I don't get eaten by CaPex?

Alex Olson · Answer

Are you self managing? Maybe you don't like managing? Sounds like they appreciated well and you did a good job getting tenants. Maybe you just like buying and stabilizing and having someone else manage or maybe you like to flip them? It didn't lose money if you pulled out that kind of cash. You did cap ex on it and took it out. Sounds like a BRRR strategy.

D area properties eating my cashflow, time to sell?

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