Dear MarketWatch,
My husband bought a nightmare flip house, and after legal battles with the contractor, the house is almost complete. However, we are out almost $ 130,000 in expenses related to this home.
As we come to the end of this journey, he wants to turn the home into a short-term rental, and I want to be done and sell it. Put it behind us!
We think we can make at least $ 40,000 and up to $ 90,000 on it if we sell, if not more. Comps are all over the place in this crazy market.
If we short-term rent it, we will need to buy furniture and think we could net a minimum of $ 10,000 a year, with a max of $ 20,000.
I should add that the home is located on an island next to a major teaching university and in a beach town near Galveston, Texas.
Sincerely,
Frustrated Flipper
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Dear Flipper,
Don’t try this at home kids. That should be the tag line for every one of those shows on HGTV where married couples try their hands at flipping homes.
I myself have sat there, after watching the latest iteration of a program like “Flip or Flop,” and have though, “How hard can it be?” Unfortunately, it seems like you and your husband have learned the answer to that question in the most unfortunate way possible.
You yourself described the home as a flip — and my guess is that was why the two of you chose to buy it in the first place. Otherwise, you would have said from the get-go that you had planned to rent it out.
“Daniel Kahneman won a Nobel Prize in economics for demonstrating that people typically hate losses twice as much as they like the equivalent gain,” George Gagliardi, founder of Coromandel Wealth Management in Lexington, Mass., told me.
On the surface, this seems like the perfect example of this. It appears your husband is hoping to recoup the money you’ve lost on this project. My guess is that he’s thinking if you rent the home for a few years, you’ll earn a nice annual return, improving the odds of breaking even or even turning a profit.
It’s no different, in that sense, from the person who lost thousands of dollars playing the slot machines in Vegas then turning around and forking over yet more money to play poker in the hopes of leaving ahead.
And let’s be clear, renting out a home isn’t always a one-way street to turning a profit. “Owning a rental property is a whole different animal,” said Dennis Nolte, a financial advisor with Seacoast Investment Services in Winter Park, Fla.
Yes, by virtue of being in a popular vacation destination, you can probably count on a steady stream of visitors. But you’ll either need to hire a management company to handle the thankless chores of cleaning in between guests and dealing with any maintenance needs — or deal with it yourself.
“ ‘Owning a rental property is a whole different animal.’”
Being a landlord isn’t risk-free either — just ask the many property owners who offloaded the homes they owned in the wake of the pandemic. At the start of COVID-19, even Airbnb ABNB, -1.42% owners were hurting when tourism came to a screeching halt.
Another pandemic may not happen anytime soon, but let’s imagine a hurricane hits the Gulf Coast. After sinking so much money into this home, do you have much left over to cover the cost of storm damage? It already sounds like the cost of furnishing the home might be a burden.
We’re still in a seller’s market, although even that isn’t a guarantee given rising mortgage rates. These days, though, you can likely sell the home without much of a headache. If you wait, then you’ll be risking the chance that the housing market could hit a rough patch, and then you’ll have fewer options.
Whatever you ultimately choose to do — whether it’s taking the money and running, or playing the Airbnb game — be sure to consult with a trusted financial adviser. Either decision involves serious tax considerations that you should understand fully so you don’t face the wrath of Uncle Sam’s IRS on top of everything else.
Good luck with this decision.
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