Bad Cash Flow Investment, Should We Sell?
Q. We’re learning more about analyzing rental property on cash flows from some of your articles and wondering what in the world we were thinking on some of our purchases? A few of them are real dogs. Should we sell them, keep them and tough it out? What do you suggest? Bob M. Lake Tahoe, Nev.
A. You’re not alone! I too have felt the pain of the buyer’s remorse on a property or two. Luckily, that was years ago and it took me several years to figure out what a dog of a deal I’d purchased. So just like you, I’ll do a better and smarter job going forward.
There are a couple of things to consider, and I’m assuming you want to stay in the landlord business and continue to buy better properties.
How are the cash flows after taxes? Are they still bad, or not too short each month? If they aren’t too negative – and the properties are otherwise good properties – it probably makes sense to keep them. Down the road, 20 years from now, you won’t even remember these days. You’ll just be bragging to all your friends about the nice retirement cash flow stream you have from all the hard work you did buying and properly managing property. And you’ll be set for retirement.
If the property is very negative on equity, plus very negative on cash flows, it might make sense to try and short sale it. It’s a good time in the history of real estate ownership to short sale our dogs and take the hit to credit scores. This is because people aren’t getting too badly penalized by the banks for doing this; and it gives one a fresh start. Now if you otherwise earn a lot of money, like on salary, the bank may reject your short sale application. So make sure to work with an experienced short sale broker and/or negotiator. Good luck!
Hard Money Loans for Rentals
Q. I’m trying to buy a rental property and I have 25 percent for the down payment, but I can’t get bank financing due to past credit issues – which I’m clearing up. I went to a hard money lender and they want like 40 percent down and 12 percent interest on the loan. And that just doesn’t work for me. Are there any other options out there? Marvin M., Arlington, Texas
A. For now you are probably out of luck. You’ve got to work on your credit profile to secure long-term, low interest rate financing. Improving your credit takes time. However, that’s obviously the best way to go.
Hard money lenders want a lot of “skin” in the game so they require large down payments. This is because they often need to foreclose and they want to make sure after all the legal fees and unpaid mortgage payments that they get their money back. Especially with damaged credit, finding a reasonable hard money loan just isn’t going to be available.
One other option, dare I say this, is if maybe a family member has the ability to purchase the property with you, for you, or even the cash available to fund an entire 75 percent mortgage loan. This could work well, but it also could be a disaster if you fail to perform on the loan or deal. So think it through carefully, and if you do this make sure to do a proper written agreement, with legal assistance, to make sure you follow to the terms and contract.
And keep working on improving your finances so in a year or so you’ll be ready to go on your own.
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com