Not Cash Flowing in AZ — Looking for Insight from Experienced Investors

[William Miller]

Hey everyone  I wanted to throw this out there and hopefully get some honest feedback from folks who’ve been in the game longer than I have.

I have a rental in Arizona that I’ve held for a few years. Right now, the mortgage is around $1,479 and I’m renting it for $1,895. On the surface it looks like it cash flows, but when I factor in reserves (30% for vacancy, maintenance, management, etc.), I’m actually operating negative every month.

I’ve run the numbers a few different ways, and unless I’m missing something, it just doesn’t work long-term if I want to scale. I’m trying to follow the BRRRR method and build real wealth, not just hold onto properties that “look good” on paper.

The tenants are still in place and I’ve been debating whether to:

• Sell it and free up equity
• Try to raise rent (market may not support much more)
• Hold and hope for appreciation

I’d love to hear how others have navigated situations like this. Do you dump underperforming rentals to scale faster? Is there a better way to structure this so it performs?

Appreciate any real insight — just trying to do this right and surround myself with people actually doing it.

Thanks in advance.

– Will

[Dave Foster]

@William Miller, What @Allan C. said. The true indicator of your growth and performance is the IRR (Internal Rate of Return). This factors in not only cash flow (NOI) but also appreciation, depreciation, and amortization of the loan. It is possible to have little cash flow and still have a great overall return. You just don't see the money right away. It is also possible to have decent cash flow and a crappy return if the property is not appreciating or your interest rate is high enough that too much is interest and not enough principle.

If you decide to sell, depending on how much the property has appreciated and been depreciated, it might be worth looking into doing a 1031 exchange, like others have said.

A 1031 exchange allows you to defer all of the tax and depreciation recapture you would traditionally pay and reinvest it into another investment property/properties. Investors will use the 1031 to find properties with better performance potential in different areas.