First Tenant..Operating at a loss.

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First Tenant..Operating at a loss.

Bruno Mauro
Member since 2020 · 15 posts · 6 votes

Hey all,

I bought my first property a 2BR/2BA In April of last year (before I found BP or how to calculate cash-flowing properties), been living in it until about  a month and a half ago. I'm moving out of the country at the end of the year to study abroad, and found a property management company to take care of things.

Got a tenant in place already, here's the breakdown:

Rental Property Cost Breakdown

Mortgage/Insurance/Taxes/Escrow: 1215.35

Property Management: 137.5

HOA Fees: 366.56

Total Cost: 1719.41

Rental Income: 1650

Loss:69.41

This isn't even calculating maintenance costs...

In the second year, if my tenant renews I get a 35% discount on my management fees.

What is my best course of action at this point?

I know I can deduct passive rental property losses form my active income (I make less than 100k)

Some other info:

-I have about $15k in reserves

-Next year I won't be working in the States, or for an American company, but I will be receiving a W-2, but can offset those taxes due to the following:

  • "The Foreign Earned Income Exclusion, which allows you to exclude $105,900 from your foreign earned income on your 2019 US taxes and $107,600 on your 2020 US taxes
  • The Foreign Tax Credit allows you to offset, dollar-for-dollar, the taxes you paid in your host country with your US taxes
  • A Foreign Housing Exclusion which allows an additional exclusion from income on US taxes for certain amounts paid for household expenses that occur as a consequence of living abroad"

-I'm a single guy with no family, so my lifestyle is pretty flexible.

If you need any more info, please just ask! 

Thanks.

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Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
5y

What would it sell for?  After costs I expect you lose money too?  You will still be at a loss next year or perhaps break even but no capex.  The thing that might make it worth keeping is if it is appreciating and rents are increasing or if you will you return to this area in a few years and live there. 

The only way to make more money is decrease cost or increase income. I don't think you can decrease mortgage by refinancing cheaper because you now have an owner occupied loan. I don't see you being able to increase rent by airbnb in an HOA even if it is suitable location so your option is to raise rent at renewal.


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  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    5y

    @Bruno Mauro sounds like you've already set your course for the monthly losses.

    If the tenant renews hopefully your PMC will increase the rent to reduce your loss.

    Other than that, don't see any way to improve your situation.

    [email protected]248-209-6824
    Logical Property Management4.9458 Reviews
    WebsiteView Page
    0Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    5y

    What would it sell for?  After costs I expect you lose money too?  You will still be at a loss next year or perhaps break even but no capex.  The thing that might make it worth keeping is if it is appreciating and rents are increasing or if you will you return to this area in a few years and live there. 

    The only way to make more money is decrease cost or increase income. I don't think you can decrease mortgage by refinancing cheaper because you now have an owner occupied loan. I don't see you being able to increase rent by airbnb in an HOA even if it is suitable location so your option is to raise rent at renewal.


    4Reply
  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    5y

    Are you able to refinance the mortgage to a lower rate?

    Is the total payment high because you put a low % down (you mentioned this was previously a primary residence).

    Is this house in a market that has the potential to appreciate?

    2Reply
  • Boris Mordkovich
    Investor · Member since 2019 · 59 posts · 150 votes
    5y

    Hey @Bruno Mauro,

    There is not a ton that you can do in this case, but if I was in the same shoes and wanted to boost my income from a property with minimal additional effort, I'd do this.

    If the tenant leaves, I would furnish the unit and then promote it as a furnished rental for 6-12+ month terms. It does depend on the market, but if you're in an urban environment, you can typically get a pretty good premium on a) furnished rentals and b) shorter lease terms (e.g. 6 months).

    It's not necessarily going to make you rich, but it could be the difference between running it at a loss vs. making a small profit every month.

    Hope this helps!

    1Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    5y

    @Bruno Mauro

    Sometimes walking away of the "opportunity" is a good thing.  So, if you are constantly loosing, or if you will most likely will, better chances are (at least for me) to move-on (sell or do the best you can).  Try to look it positively, you learned some Real Estate Investing.  Keep learning and very soon you will be able to make better decisions.  

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    Negative cash flow is not always a bad thing. Where is this property? How much is it worth and how much did you put down? If you have a very small down payment (less than 20%) its not surprising that its negative cash flow. You can think of it has paying the downpayment in installments. You are also paying down the mortgage to a certain extent and so your actual return is probably close to zero. But if you already put down 20% and the property is not expected to appreciate then maybe just sell. Especially if you are living away from the US.

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    I would stick it out and hope the tenant renews.  At renewal, the PM should also increase the rent a bit.  Even with a 35% decrease in the PM's fees and a small rent increase, you'd still be close to breaking even...til the next year.

    You bought this as your own home and guessing once you move back to the country you will either sell or move back in.  So think of this as a short term problem and meanwhile they are paying your expenses.  Some areas do not cash flow well and your home may be in one of those areas.

    Should you want to buy another rental, the high HOA fees and PM are things to look out for. Also when you look for a rental, you look at it differently than for your own home.

    0Reply
  • Zachary Ray
    Investor · Tampa, FL · Member since 2017 · 589 posts · 251 votes
    5y

    You have the option to sell and find more cash flowing properties. 

    0Reply
  • Zachary RymarcsukPro Member
    Rental Property Investor · Durham, NC · Member since 2020 · 52 posts · 44 votes
    5y

    @Bruno Mauro, as a couple others have mentioned, if it is an area that expects appreciation, then operating at a slight loss now may be offset by mortgage pay down and appreciation.  If you are not going to feel strained due to that $69.41/mo loss over the next year, I think it is better to hold onto it...again, provided you expect decent appreciation.  As others have mentioned, there is potential for the rent to go up as well, depending on the rental market, so it may very well become a positive cash flow property within the next year or two.

    Out of curiosity, how old is the home and how much do you expect maintenance, repairs, and capex to cost over the next few years?  You had said that you're not factoring in those costs, which can be a big hit to the books.  If it is older and going to need a good deal of work, maybe it's best to sell.

    3Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    If you have a good amount of equity in the condo just sell it and dump the money in something cashflow positive. 

    0Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y
    Originally posted by @Zachary Rymarcsuk:

    @Bruno Mauro, as a couple others have mentioned, if it is an area that expects appreciation, then operating at a slight loss now may be offset by mortgage pay down and appreciation.  If you are not going to feel strained due to that $69.41/mo loss over the next year, I think it is better to hold onto it...again, provided you expect decent appreciation.  As others have mentioned, there is potential for the rent to go up as well, depending on the rental market, so it may very well become a positive cash flow property within the next year or two.

    Out of curiosity, how old is the home and how much do you expect maintenance, repairs, and capex to cost over the next few years?  You had said that you're not factoring in those costs, which can be a big hit to the books.  If it is older and going to need a good deal of work, maybe it's best to sell.

     So I just replaced the countertops, replaced all flooring while I'm there. I expect maintenance to be minimal. It has appreciated about 10k since I bought it last April. It's from 1986. And I would def not be strained from the 69/month

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    5y

    @Bruno Mauro

    That reduction in Mgmt fees is like $48. Ugly. Unless you live in California, or someplace that has huge upside on appreciation, sell the property. It's your HOA's that are killing you. And you can't change those.

    You’ll be out of the country studying. You’ll need to focus on your studies, not on if you’ll need hundreds or thousands of dollars for maintenance and capex.

    1Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y
    Originally posted by @Anthony Wick:

    @Bruno Mauro

    That reduction in Mgmt fees is like $48. Ugly. Unless you live in California, or someplace that has huge upside on appreciation, sell the property. It's your HOA's that are killing you. And you can't change those.

    You’ll be out of the country studying. You’ll need to focus on your studies, not on if you’ll need hundreds or thousands of dollars for maintenance and capex.

     Right, but the money loss I would experience by selling from fees would be SIGNIFCANTLY more than if I kept the property for a bit before selling, and having my tenant build equity for me.

    id be losing about 10k on the high side if I sell today, and it would take me years to reach that amount of loss if I rent it.

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    5y

    @Bruno Mauro

    Ok. $10k loss is the bar right now then. So you need

    to evaluate the high cost items like hvac, roof, plumbing, etc. I spent $10k this summer on AC units alone (duplexes). You also need to be concerned about the HOA and high cost items that may have you be charged a lump sum fee for repairs.

    And you have not stated where this property is located. Midwest, and little depreciation? Los Angeles and $50k appreciation per year?

    As always, run the numbers on each property. May analyze over the course of 1 year, 5 years, etc. What are your long term prospects and plans? How long are you willing to subsidize this property in the name

    of possible appreciation?

    0Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Bruno Mauro look into possibly doing: furnished corporate rental. rent by room, student housing or Vacation Rental depending on HOA and area. If you can solve this problem and make your current property profitable, you may find a profitable niche in the process. Additionally, you can self manage even from a distance if you take the time to learn how. The most time consuming part is placing a new tenant. You could place a new tenant yourself or simply pay someone to place a new tenant ($500?) and do everything else. It's really not that hard to self manage. All the best!

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    5y

    This is why I'd keep it.  I was in a similar situation to you (many years ago) and I kept the property.  In my case the market had gone down, but I was in no rush to sell and the rent covered my immediate expenses (condo fees, mortgage, insurance, taxes, etc). It was in good shape and I had a good person taking care of it and a long term tenant.  I didn't need much in terms of repairs.  Now I kept it 20 years and sold it for almost 3 times what I paid for it ($250K) and my mortgage was paid off by that point.

    1Reply
  • Jon Schwartz
    Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
    5y
    Originally posted by @Bruno Mauro:

    Hey all,

    I bought my first property a 2BR/2BA In April of last year (before I found BP or how to calculate cash-flowing properties), been living in it until about  a month and a half ago. I'm moving out of the country at the end of the year to study abroad, and found a property management company to take care of things.

    Got a tenant in place already, here's the breakdown:

    Rental Property Cost Breakdown

    Mortgage/Insurance/Taxes/Escrow: 1215.35

    Property Management: 137.5

    HOA Fees: 366.56

    Total Cost: 1719.41

    Rental Income: 1650

    Loss:69.41

    This isn't even calculating maintenance costs...

    In the second year, if my tenant renews I get a 35% discount on my management fees.

    What is my best course of action at this point?

    I know I can deduct passive rental property losses form my active income (I make less than 100k)

    Some other info:

    -I have about $15k in reserves

    -Next year I won't be working in the States, or for an American company, but I will be receiving a W-2, but can offset those taxes due to the following:

    • "The Foreign Earned Income Exclusion, which allows you to exclude $105,900 from your foreign earned income on your 2019 US taxes and $107,600 on your 2020 US taxes
    • The Foreign Tax Credit allows you to offset, dollar-for-dollar, the taxes you paid in your host country with your US taxes
    • A Foreign Housing Exclusion which allows an additional exclusion from income on US taxes for certain amounts paid for household expenses that occur as a consequence of living abroad"

    -I'm a single guy with no family, so my lifestyle is pretty flexible.

    If you need any more info, please just ask! 

    Thanks.

    Bruno,

    I think you've left out the most important piece of information: where's this condo?

    If you're in a stable, low-appreciation, Midwest market -- keep it. I'm sure your principal paydown is more than $70/month, so your net worth is growing each month you own. The only risk is a big assessment hitting you before you sell.

    If you're in a trendy part of an appreciation market, definitely keep it! You'll be in the black from principal paydown plus benefitting from your market's appreciation.

    If you're in a tired part of a C-class neighborhood, maybe sell. But even then, if a sale costs $10K and holding costs $60/month out-of-pocket, you should probably still hold.

    Also, this might be less expensive alternative to property management for you: www.hemlane.com

    (I'm not connected with Hemlane, just a fan of their product.)

    Best,

    Jon

    1Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y
    Originally posted by @Jon Schwartz:
    Originally posted by @Bruno Mauro:

    Hey all,

    I bought my first property a 2BR/2BA In April of last year (before I found BP or how to calculate cash-flowing properties), been living in it until about  a month and a half ago. I'm moving out of the country at the end of the year to study abroad, and found a property management company to take care of things.

    Got a tenant in place already, here's the breakdown:

    Rental Property Cost Breakdown

    Mortgage/Insurance/Taxes/Escrow: 1215.35

    Property Management: 137.5

    HOA Fees: 366.56

    Total Cost: 1719.41

    Rental Income: 1650

    Loss:69.41

    This isn't even calculating maintenance costs...

    In the second year, if my tenant renews I get a 35% discount on my management fees.

    What is my best course of action at this point?

    I know I can deduct passive rental property losses form my active income (I make less than 100k)

    Some other info:

    -I have about $15k in reserves

    -Next year I won't be working in the States, or for an American company, but I will be receiving a W-2, but can offset those taxes due to the following:

    • "The Foreign Earned Income Exclusion, which allows you to exclude $105,900 from your foreign earned income on your 2019 US taxes and $107,600 on your 2020 US taxes
    • The Foreign Tax Credit allows you to offset, dollar-for-dollar, the taxes you paid in your host country with your US taxes
    • A Foreign Housing Exclusion which allows an additional exclusion from income on US taxes for certain amounts paid for household expenses that occur as a consequence of living abroad"

    -I'm a single guy with no family, so my lifestyle is pretty flexible.

    If you need any more info, please just ask! 

    Thanks.

    Bruno,

    I think you've left out the most important piece of information: where's this condo?

    If you're in a stable, low-appreciation, Midwest market -- keep it. I'm sure your principal paydown is more than $70/month, so your net worth is growing each month you own. The only risk is a big assessment hitting you before you sell.

    If you're in a trendy part of an appreciation market, definitely keep it! You'll be in the black from principal paydown plus benefitting from your market's appreciation.

    If you're in a tired part of a C-class neighborhood, maybe sell. But even then, if a sale costs $10K and holding costs $60/month out-of-pocket, you should probably still hold.

    Also, this might be less expensive alternative to property management for you: www.hemlane.com

    (I'm not connected with Hemlane, just a fan of their product.)

    Best,

    Jon

    Jon,

    yes I am in the Midwest. Suburbs north of Chicago. We just opened a whole foods and Amazon warehouse down the street, so things will probably appreciate

    1Reply
  • Colleen F.Pro Member
    Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
    5y

    @Bruno Mauro if it were a single family home I think you would have much more exposure to capex items. I am assuming it is a condo in a decent size complex not something like a triplex converted to condos. If you have mostly updated yes an appliance could go or a water heater but you don't have a roof or other major repairs. That said make sure you keep your ears open for major costs the HOA will pass on as an assessment. Also make sure when you move out that you change your insurance policy to

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    5y

    For a primary res, -$69 or even -$169 (more realistic) isn't horrible if there's appreciation potential.

    With the depreciation deduction (extra large with $0 land value condo) and principal paydown every month,  you should be in the black.  You also wont have a roof, exterior or grounds to worry about. 

    What's it worth and what's your mortgage interest rate? 

    1Reply
  • Jon Schwartz
    Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
    5y

    @Bruno Mauro, keep it!

    1Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y
    Originally posted by @Steve Vaughan:

    For a primary res, -$69 or even -$169 (more realistic) isn't horrible if there's appreciation potential.

    With the depreciation deduction (extra large with $0 land value condo) and principal paydown every month,  you should be in the black.  You also wont have a roof, exterior or grounds to worry about. 

    What's it worth and what's your mortgage interest rate? 

     Last Average Value was 150k without appraisal, and I've done about 5k of renovations to it. 

    Interest is 4.0% flat (VA Home Loan)

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    5y

    @Bruno Mauro oh my god keep it. I’m not even sure why you need a pm when there is an boa ? Phones and computers work, get the rent virtually. Set up a retainer relationship with a handyman if u must but I don’t think this should be as hard as you think. And if u aren’t out of the country forever just ride it out

    1Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y

    Hey all!

    Think I've come to a decision:

    Going to keep the unit, I can afford subsidizing the cost since I'm currently paying down 250$/month in Principal renting out the unit, and with depreciation since technically I don't own any land, I should be at least breaking even. I'm very flexible and will change course if necessary, but I see myself keeping the property for the foreseeable future.

    1Reply
  • Bruno Mauro
    OP
    Member since 2020 · 15 posts · 6 votes
    5y
    Originally posted by @Jonathan R McLaughlin:

    @Bruno Mauro oh my god keep it. I’m not even sure why you need a pm when there is an boa ? Phones and computers work, get the rent virtually. Set up a retainer relationship with a handyman if u must but I don’t think this should be as hard as you think. And if u aren’t out of the country forever just ride it out

     Yeah I'll be out of the country for less than a year. I just decided to go with a PM cause I was willing to pay for a bit more peace of mind my first go around. We'll see how things fare a year from now.

    1Reply
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