Almost 2 years in and haven't made any money (via cashflow)

[Steven DeMarco]

Hey BP - Want some advice/perspective on my situation.

Back in 2022, I had a strong desire to get into REI to diversify my investments and pursue a new side hustle. I envisioned real estate investing as a way to make extra money on the side and continue to build my wealth. I signed up for a mastermind class that teaches you how to invest in STRs and pulled the trigger on a 2BD/1BA house in Pittsburgh, PA to operate as an STR. This was my first real estate purchase and the final sale price was $166.5K which I purchased using a 10% down second home loan. I then proceeded to dump a ton of money into capital improvements in order to make it a competitive STR (details below). 

Since owning the property, my total cash investment is about $130K for initial acquisition, capital improvements, the mastermind course and floating negative cashflow. Here is the breakdown: Closing Costs ($30K w/ $16.5K down payment), Furniture, Setup & Design ($35K), New Electrical ($14K), New HVAC ($12K), New Roof ($9K), New Landscaping ($1K), Mastermind Course ($10K), and the remainder is floating negative cashflow ($19K).

I've been operational through 17 months (March '23 - July '24) and the following metrics are throughout this 17-month time period. My total gross income on the property is $37K and my operating expenses have been $32K, leaving me with a NOI of $5K. After factoring in debt payments of $24K ($1,400/month), my cashflow (before any capital expenses) is a total of $-19K. Averaged over this 17-month time period of operating the STR, I'm averaging a negative cashflow of about -$1,100/month.

To reiterate, I've put $130K cash into this deal. From a cashflow standpoint, I've obviously generated no return. The current Zillow Zestimate for the property is $193K, which means I'm sitting on roughly $45K of equity. If I were to sell anytime soon, with selling fees, I'd be realizing upwards of a 6-figure loss assuming the Zestimate is accurate. It may not be, as I've made a ton of capital improvements and I've seen comps sell for over $220K in the same neighborhood. Either way, selling doesn't paint a good picture.

In April '24, I hired a full-service PM which has helped tremendously with bookings and appears to have started turning the cashflow ship in the positive direction. I have been consistently within +/- $100 of breaking even for the first 4 months of the PM operating the STR. Since we have gotten momentum with the new listing on Airbnb, I am booking out well into Sep/Oct/Nov at the time of writing this post and I anticipate that the next few months will produce some positive cashflow. Over time, I also anticipate that the cashflow will improve slightly as the listing continues to excel (26 out of 27 reviews have been 5-star) and book out into the future.

My current plan is to give the PM a full year to establish the listing and then revisit what my cashflow scenario looks like. As of now, I (obviously) do not want to invest any more cash. I am a far cry away from the dream of building my wealth and it feels like I did absolutely horrendous on my first real estate investment.

Let's assume we take the happy path with my cashflow situation improving and over time, I average $500/month in cashflow after things stabilize with the new PM ($6K annual cashflow). 

The estimated rate of appreciation since I purchased 17 months ago ($166K -> $193K) is roughly $26K over 17 months (about $1,500/month). It seems unlikely that this will continue into perpetuity and let's say a more conservative estimate is 3% annually, which would equate to about $6K annually in appreciation. 

So on paper, it would take me 10.8 years ($12K in cashflow + appreciation) to net out the $130K in total cash invested.

What if the cashflow situation doesn't improve, but continues to break even or even worse begins to dip negative again? What should I do? Any help, guidance, critique, insults, etc. are welcome. I just want some discussion and perspective around this as I don't have a close network of investors to bounce ideas off of.

[Nicholas L.]

@Steven DeMarco

thanks for the transparency.  i don't know if you should sell or not, but what I do know is: you didn't do "horrendous."  a lot of people just aren't honest about their costs - they'll put $50K down, pay $10K in closing costs, spruce up for $15K, and spend $3K to market and place a tenant, and then they'll make $88 in month 3, and say "i made $88."  well... what about the $80K you spend to get the property?  

so you're just being honest and you're actually tracking everything.  kudos, you're looking at it like a business.

maybe in a few years you could refinance if values have gone up enough?  this would hurt your cash flow, but you'd get some capital back.  only you can decide which is more important.