I wanted to share a dilemma I’ve had with an expensive rental home I’ve kept. But before I start, a good place to begin is my overall philosophy on “expensive versus cheaper rental homes”:
Expensive rental homes are ideal and appreciate greatly (cha-ching!!) in rising real estate markets, yet are more expensive to maintain, cash flow every month, and pay the mortgage during vacancies. Cheaper rentals are the opposite; they don’t tend to go up in value much, but are much cheaper to fix up, maintain, and positive cash flow every month.
And without further ado, here’s my personal tale of dealing with my big, expensive rental home:
It is a really nice home! When the economy and real estate market were soaring, my paper net worth (cue laughter) was awesome! Comparable sales in the subdivision kept going up which made me look like a genius with my home investment (I bought a pre-foreclosure at a great discount).
As a property manager, I put this home up for rent-to-sell and rental to a number of tenants over the years. The cash flow more than covered the mortgage and I was pretty happy with myself. The tenants kept the home in relatively good condition so maintenance and upkeep was minimal. I was living the real estate high life as prices in the subdivision continued to go up, and up, and up!
However, there was always normal “wear and tear” on the property. And as the years rolled by and tenants moved-in and out, the minor damages started to add up. Then it came to a point when I realized that the home needed to be updated, as tenants and buyers started turning their noses at it when it went on the market. So I mentally knew it was probably time to pay the piper; unfortunately, the costs started disturbingly revealing themselves (new paint, new carpet, new appliances, etc.). For larger homes like this one, it became clear that real money ($10-$20K) would need to be expended. What wasn’t clear was where this money was supposed to come from.
In a down economy, the expensive home becomes a weight wrapped around your neck; it’s much like the old Mighty Mouse cartoons where every episode had someone (something?) locked in a weighted treasure, sinking to the bottom of the ocean (of financial ruin). It’s tough! The clear answer is to sell the home, but stomaching the “investment” of all of this money to fix it up, waiting months (minimum) before it is sold at a depressed price, while paying the (expensive) mortgage every month is certainly not ideal. It’s also a question of remaining solvent while this selling process drags on.
That’s life, right? Suck it up! But maybe there are some lessons to be learned from this experience when buying an expensive investment home:
1. Always buy at a significant discount (preferably in a down economy, like now)
2. Target to sell it in 1-5 years, or before a significant fix-up investment is required
3. Selling it should be the ultimate, short-term goal. First, try to flip it if it is feasible. If it’s not, try the rent-to-sell method of selling (placing a rent-to-own tenant into the property who is targeted to buy it in 1-3 years); sell it to them, or put it on the market when they move out.
4. Don’t be greedy. Making money instantly is better than losing money perpetually.
Buy low, sell high, and don’t get caught fixing up expensive homes! Keeping cheaper rental homes for long-term investments is less risky, less stressful, and easier on the wallet in the long-term; use expensive rentals for a short-term (1-5 years) bounce in income.
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
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