Total loss: $26,482 (sad trombone) 😭
Tax Bill: Capital Gains and Depreciation Recapture Tax will be owed on $150,632
Those of you who have been following us for a while have certainly heard my grumbling about my money-pit beachfront condo on the Gulf Coast; the good news is that after 3 different realtors and 18 months on the market, we FINALLY got it sold! 🙌
On the downside, I’m probably the ONLY investor who bought a property during the covid crash in 2020, rode the market up with the huge price surge and STILL LOST MONEY. 🤦♀️
I thought it would be interesting to do a post-mortem to show what went wrong and share some lessons learned. This was our first foray into Short-Term Rentals, and when we bought the condo back in 2020 as part of a 1031 exchange, we were buying it also as a vacation home for our family. Little did we know how much this would come in handy as everything began to shut down in a worldwide pandemic! We spent many weeks at the condo, renovating and letting our kids enjoy the sand and water when there was nowhere else to travel to.
Sounds amazing, right? Well, things started to go awry pretty quickly. Shortly after we purchased the property, we started to be hit with HOA assessments due to rot in the exterior wall of the building – by the time we sold the place we had paid almost $22,000 in assessments. Also due to the rot repairs, the building was unexpectedly closed to rentals for almost a year, which was a huge amount of lost income for us.
We also discovered some fine print in the HOA contract which stipulated that all rentals had to be managed by a specific property management company—conveniently owned by a fellow condo owner and HOA board member. This property manager would also take a non-negotiable 35% cut of the revenue.
Additionally, the PM was charging renters a $99 damage waiver fee but would not let an owner make a claim against the damages unless the renter THEMSELVES had reported it. (We learned this the hard way when all of our new wall décor was stolen and our new $1200 sofabed was destroyed a month after we finished our renovations.) Lots and lots of wear and tear on these beach properties, and the PM was the only one profiting.
Then the insurance and tax increases started to hit. By the time we sold the condo, the HOA fees had doubled to $1005/month mostly due to insurance, and the taxes also almost doubled to $8000/year. So even WITHOUT a mortgage, we couldn’t turn a profit on the rental income.
Since we bought the property with cash from our 1031 exchange, our original realtor neglected to tell us that we were buying a ‘non-warrantable’ condo – since it was classified as a ‘condotel’, it didn’t qualify for traditional financing. We were oblivious at purchase, but BOY did it make a difference when we were trying to sell! That’s one of the main reasons we ended up having to drop the price by over $200k to get it sold.
Long story short, here’s how the numbers turned out:
Purchase price: $199,000 in 2020
2020 profit/loss: -$25,856
2021 profit/loss: -$19,223
2022 profit/loss: -$16,324
2023 profit/loss: -$13,447
2024 profit/loss: -$2,729 (partial year)
2024 sales price: $268,000
2024 selling fees: -$17,902
TOTAL LOSS: $26,482 ☹️
And for the cherry on top, even though we have a loss, we also owe capital gains and depreciation recapture tax on a gain of $150,632 due to the reduced cost basis from the 1031 exchange and the depreciation we took on the condo from 2020-2024. Double whammy!
Lessons Learned:
1) Avoid condos as investment properties – too much uncertainty around assessments, HOA fee increases, and HOA restrictions. Also especially avoid non-warrantable condos – they are too hard to resell due to the financing restrictions.
2) Avoid short term rentals that cannot be self-managed – if we had been allowed to manage the unit ourselves (or even choose our own property manager), we may have been able to turn a profit.
3) Be prepared for major insurance hikes if buying beachfront (or disaster-prone) property.
4) Be prepared for beach properties (and condo-tel) properties to incur considerably more damage than most short-term rentals. People come to the beach to party, and many times will treat your nice condo as just a nameless corporate hotel room to be destroyed.
I probably wouldn’t buy the beach condo again, but it wasn’t all bad – we LOVED going down there, and it really kept us afloat as a family when the world was caving in due to the pandemic. And it certainly was a REALLY GOOD learning experience of what NOT TO DO! 🤣
Caitlin and I have had our fair share of ‘learning experiences’ in the real estate world, and we want to use them to help you avoid making your own $26,000+ mistakes. Our Curious to Confident Real Estate course is available now, or if you’d like one-on-one support talking through deals, looking at real estate syndications, or reviewing your overall portfolio, we are offering a limited-time 4-session Elevate and Invest Coaching Package. Don't make your own $26,000 mistake! 💰
We also have a new FREE custom real estate deal calculator on our website to run quick numbers on potential investments – check it out here!
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