Posted by Dan Fletcher on August 12, 2006 at 19:56:44:
Thanks for your advice. I am going to try to keep the property, but if it won’t work and won’t cash flow then I will sell it. And I am definitely going to file an eviction on Monday morning. You are right about not letting emotions/pride stand in the way. I just have to do the right thing, not what feels right.
thanks again,
Dan Fletcher
Beginner real estate investor having problems - Posted by Dan Fletcher
Posted by Dan Fletcher on August 12, 2006 at 12:08:50:
My name is Dan and I am a landlord of a duplex that I bought two years ago. I am having some problems and am looking for some feedback on possible solutions.
I purchased a duplex two years ago through conventional financing. I put down 5% on a 2 year ARM and planned to refinance after 2 years The loan was for 69k. I currently owe about 66.5k. Everything was great in the beginning. The property was cash flowing because the tenants that were in the building paid on time every month and the income was $1100. I was able to make some improvements to the property each month. Windows, new carpet etc. Then after about 6 months one of the tenants moved out. I cleaned out the unit and painted and found some new tenants after about 1.5 months of vacancy. The tenants were great for a couple of months then they started paying late each month. They always paid within two weeks of being late so I charged them a late fee and everything was fine. Then the old tenants in the other unit moved out. Their unit was in much worse shape after they moved out. I put about 2k into updating the unit. New kitchen floor, repairs in the bathroom, etc. After about two months of vacancy I found a new tenant who paid a deposit and looked very promising. After about two months they stopped paying rent and I had to evict them. The unit was vacant for another two months during the eviction and process of finding another tenant. So after all was said and done I had missed out on about 6 months of rent from the two units combined. This really put a strain on me. A big part of my problem is that I was didn’t have the capital set aside for reserves in the beginning for unexpected problems like this. I became late many times on the mortgage payments and now the ARM has expired. My rate has skyrocketed to the point where there is no cash flow anymore. And my building that still needs repairs is not being repaired because I don’t have the money to do it. The tax bill is past due. The sanitation and water which are the utilities that I am responsible for are past due each month. The building actually went to foreclosure after the mortgage was three months overdue. I came up with $2k to stop the foreclosure process, but the mortgage company charged me $1200 in lawyer fees and put me on a repayment plan to pay it off. Combined with the new interest rate on the mortgage my monthly expenses are now $1350 and the building is only bringing in $1000 per month. Not to mention that the tenant that was paying rent a couple of weeks late each month is now 5 weeks late and I am going to have to evict him. I am stressing out big time and my family is paying the price for my stress. I come home in a bad mood every day. I have talked to an investor friend who recommended to me that if I ever do low-income rentals that I should definitely do Section 8. The problem is that I don’t think my building is up to code for section 8 and it might take a couple more thousand dollars to get it there. The comps on the property are $100k- $110k ARV. I just don’t think I can get any type of loan to get it to the ARV so that I could even sell it for that price.
Thanks for taking the time to read this and if you have any suggestions they I would really appreciate hearing them.
Sincerely,
Dan Fletcher
Re: Beginner real estate investor having problems - Posted by DP (ON)
Posted by DP (ON) on August 13, 2006 at 23:32:36:
Guess what, you’re a motivated seller!
The other responses told you what you can do about this situation. I’ll tell you what you should do so you can benefit from this in the future.
Take the time to WRITE DOWN everything you’re thinking and feeling. Make note of everyone you talk to about this situation and what their advice is, and anyone they might refer you to.
You can use this to get inside the minds of other motivated sellers and have a great idea of who they might turn to for help. Then you can use that to build a marketing and networking plan, so that people in situations just like yours start calling you to help them solve it.
Once you solve your problem with this property, you will have learned an enormous amount about what to do and what not to do in these situations. So you will be supremely qualified to help solve similar problems for other people, and you’ll get paid handsomely for it too.
Re: Beginner real estate investor having problems - Posted by Mark (SDCA)
Posted by Mark (SDCA) on August 12, 2006 at 19:30:21:
Welcome to the wonderful world of rental REI. Been there, done that. Some have the temperament for it. Some don’t. So don’t beat yourself up.
I wouldn’t shut the door on Section 8. Maybe the problems won’t be as bad as you think. But Section 8 is really tenant drivent. How are you finding your tenants? In your advertising, start adding Sec 8 ok. Or something like that. There are certainly problems with Section 8 but on time payment isn’t one of them.
Evict the tenant now. Waiting isn’t going to help. My absolute limit is 30 days. And that is only if the tenant has already contacted me. Otherwise, I have already filed. You CAN work with tenants but you can’t let them run over you.
If you are going to stay in RE, you MUST match the duration of your assets and liabilities. If you are going to keep a property for the long term then you need a fixed rate loan.
I agree with the other poster. You are going to need some kind of relief from the cash flow problems. A 2nd job is a possibility. Or look to taking on an investor and selling off some of your equity in exchange for helping with the cash flow problems.
Re: Beginner real estate investor having problems - Posted by Brian
Posted by Brian on August 12, 2006 at 12:27:24:
The number one thing is know that this situation will pass. Be nice to your family. I know it’s hard to not let this stuff bother you but your family is #1 and you have to remember that at all times.
The hardest lesson I learned besides the above is that you must evict IMMEDIATELY if the tenants are late. Do not let them go even one day ‘free’ without you filing an eviction. CASH FLOW is the #1 important thing. You can have all the quity in the world but it won’t pay the bills, cash flow will. Do not listen to their excuses, they are STEALING money from you if you let them stay without paying. You have paid for them to live there and looks at all the problems it has caused.
This is a reason I do not like ARM’s if you want to buy and hold. A lot of mortgage lenders pushed this kind of loan in the last year or two. I think this was very irresponsible on their part.
That being said, there’s nothing you can do about the past.
You have two options as I see it. #1-Try to keep the duplex #2-Get rid of it.
#1 - Can you get a second job to get caught up with the mortgage payments? Is there anything you can sell? Is a spare car, boat, big screen tv, etc worth keeping if you are losing your real estate investment.
#2 - If there is no way you can make the payments and get caught up, or if you do not want to or can not refinance the property and get a better payment it is time to get rid of it. You talk about the ARV. If you can not even make the mortgage payment why worry about the ARV? If you do not have the money to pay the mortgage payment, you are not going to have any money to fix up the property. Your best bet would be to sell it for what you owe on it. Leave your pride/feelings/emotions out of this decision. If that is what makes financial sense then do it. There is no point in dragging your family through an emotional crisis because you do not want to admit you need to sell the duplex.
Re: Beginner real estate investor having problems - Posted by Sgt.Sausage
Posted by Sgt.Sausage on August 14, 2006 at 16:50:34:
==>A lot of mortgage lenders pushed this kind of loan in the last year or two. I think this was very irresponsible on their part.
The irresponsibillity lies with the one who agrees to the terms, and then decides he doesn’t like them. The lender is doing nothing but offering another product. It is up to the borrower to either accept this product or move on to something else.
It’s even worse when the borrower is a “real estate investor” and should darned well know better.
To the OP – if you’re going to buy-and-hold, my advice, and the rule I live by, is to have in reserves a full year’s worth of all expenses – mortgage, insurance, taxes, water, electric etc. This money does not have to be cash, per se, (I keep mine in CDs) but it does have to be fairly liquid and easily accessible. In addition to 1 yr reserves, we keep 10K “emergency fund” for when a roof blows off or a water heater blows up or a tree falls down. The emergency fund is a one-time thing – we don’t keep 10K per unit (wish I had that kind of spare cash!) but a single 10K emergency fund that’s shared across all units.
Getting into long term “buy-and-hold” without reserves to ride out the bummers that both life and Mr. Murphy will throw at you is a recipe for disaster – as you’re quickly finding out.