Thread: I Think I Bought an Alligator

The Property: 650sq/ft, 1bd/1ba, new construction
$175,000, 20% down, 30yr fixed @ 5.75%
The Market: A growing bedroom community for a nearby resort town. Median home price $587,000.
The Analysis: Using Randallg99's spreadsheets, I see that market rents will not cashflow. (I'd have to get 131% to break even in five years.) With modest appreciation, I'm still projected to profit 1.1%/year. I think my money was better off in the market.

You can see the condo I bought here.

So now what?

I'm sorry to hear that. I would look at ways to cut costs and increase rents. Could you appeal your property taxes to get them lowered? Shop insurance costs, you may find someone to cyt your rate significantly. Are you paying a property manager? You may have to manage it yourself. How anout living in it and renting out your current residence?

Work with the other landlords and PM's in the area to keep the properties and neighborhood up. Then you may find a buyer to sell this property to. Many of these properties make great places to live just not places to cashflow from rents. Good luck.

Originally Posted by Runum

...Could you appeal your property taxes to get them lowered? Shop insurance costs...Are you paying a property manager?...How about living in it and renting out your current residence?

Thanks for the tips!

Since it's new construction, the appraised value, sale price, and taxable value are all $175K.
I've got very low insurance bundled with my other policies.
No property manager, but I've got about $1,000/yr in HOAs.

FYI: I'm actually living for free somewhere else, so I'm doing no worse than someone paying a mortgage on his own home... I just want to be doing better.

Kiyosaki says there are 4 other great reasons to invest in real estate. Is a lack of cashflow enough to make me hate this property?

It depends on what you want out of the property. Lack of cashflow would remind me each month that I didn't do my DD correctly. However, if I know that there is some profit to be made in appreciation I could stand neg. CF for a short term(very short). I would now go over each and every number with a fine toothed spreadsheet and look for wiggle room. Also, are there any amenities that you could add that would boost rental rate?

Well, I bought it knowing the market rent would pay the mortgage. And THAT, ladies and gents, is all the due diligence I did. I am not a real estate investor, so I admit to buying solely on the traditional wisdom of wanting to be a property owner. I figured since I'm a caretaker with no rent bill, why not buy a cheap* piece of property too. I had the $35,000 saved in stocks, so it seemed like a no-brainer to my slowlane mind at the time.

*$175,000 is very literally the cheapest thing for a few hundred miles here.

This may be an expensive lesson. Did you have an exit strategy or timeline for this property? What day did you close? Your state may have a cooling off period that allows you to back out of the deal. In Texas I believe that window is 3 days on the funding.

The exit strategy is buy and hold.

I funded in January, so I'm pretty sure it's mine now.

Well the good news is your exit strategy is working!

How far off are the numbers from breakeven (i.e., how much are you losing each month)?

Do you expect rent appreciation in the coming months/years? In other words, is population growing? Is employment base expanding? Is there any immigration to your town? Any companies moving into town or expanding? If so, the place is likely to command higher rents in the coming years, and natural appreciation will drive the value up. If not, things could get worse; can you afford THAT?

Once you do a more thorough analysis of where rents, operating expenses, and property values will be in the coming months/years, you can analyze the various options you have (sell now, hold short-term, hold long-term, lease-option, etc) and see which one has the highest expected value for you.

I'm falling about $400/mo short of breakeven.

The thing is, yes, I do expect rents to go up and the population to explode. In the previous year, the value of the property of a neighbor DOUBLED.

But, if I were to assume modest appreciation, I'm betting on no cashflow.

Since I live rent-free, are the profitability calculations different?

Originally Posted by Runum

Well the good news is your exit strategy is working!

LOI! Thanks.

Like JScott says run several scenarios through the spreadsheets and see which one is least painful. Also, as your values rise you property taxes and insurance will rise.

I don't see a way to make this cashflow in the near future. I would think of this property as a lesson or an expensive hobby. What would be the cost in selling it? I would be surprised if you could not increase the rent by more than 1 percent a year. Sorry, I don't have a 'good way' to save the situation.

Mr. Pink

the 64k question is how soon will you be able to sell for a profit when you include all of your carrying costs as expenses...

Originally Posted by MrPink

I don't see a way to make this cashflow in the near future.

Originally Posted by randallg99

how soon will you be able to sell for a profit when you include all of your carrying costs as expenses?

Yeesh! I feel ya.

Oh, hey! On an unrelated note, anyone wanna rent a condo for 31% more than the market rent rates? I'll throw in a bottle of champagne.

Skyler, were you the one who was talking about turning your condo into a vacation rental?

While it may be a bit more work, something like that could be the only way for this property to make financial sense. $400/month is a pretty significant amount of money, so I'd do what I can to minimize it.

If you have some free time, maybe you can manage other local properties, too? You could clean them, get them rented, and maintain them.

...just some ideas.

Originally Posted by Yankees338

If you have some free time, maybe you can manage other local properties, too? You could clean them, get them rented, and maintain them.

...just some ideas.

I have included pricing for furnished vacation renting, but I'm scared of long vacancies in between.

As for extra work managing other properties, I don't really need the money or the work. I work 60-hour weeks at two traditional jobs, then I have chores for the caretaking, THEN I can work on my entrepreneurial/REI stuff.

Originally Posted by hakrjak

You said that when you bought it you knew the rent will cover the mortgage... Maybe that is still true if you keep your costs low? I wouldn't anticipate as many maint costs, etc on a condo as you would on an SFR, so I wouldn't worry a whole lot about extra expenses above and beyond the mortgage. Just a 10% property management fee or so if you are having it professionally managed. The tax write-offs from owning property will help contribute to your cashflow as well. I call that "Phantom Cashflow" because it appears on the back end, and is kind of impossible to ever really calculate in advance.

The rent covers the mortgage (plus $1.00). I'm also assuming a lot of costs, since I have no historic data. It is new construction, so maybe I can ease up on the pessimism...

Now, phantom cashflow is a concept I'm liking, and I wonder if I can write it into my calculations. Maybe my accountant can help me understand what to expect. Maybe my alligator isn't as mean as I was beginning to fear.

You guys are being really helpful. I was expecting a lot more chiding and ridicule. Rep+ for each of you!