Advice for talking newer landlords off the ledge?

Question

Landlord of 6 years here. I'm 31 and have 15 units. 13 in Chicago, one on Yuma, AZ and another in San Diego.

Cash flow has been rough as you all know with hikes in property taxes and insurance and half the units I own are with 7%ish interest rates and I bought those properties in the hopes that rates would go down soon (I now no longer think that) and with the hopes that rents would increase and deflate away the debt.

And these properties have been a ton of work, it's non stop.

Not complaining but to investors that have been in the market for many cycles, what do you tell yourself to keep yourself holding onto your properties rather than cashing out and putting your money into the S&P500 which has been red hot and is no work at all?

Greg Scott · Answer

As a landlord, if your properties are making money, it is a lot easier to deal with the headaches.

I'm not trying to rub it in, just point something out for others. These properties were bought like a stock. "This looks good. It should go up in value." Regarding cashflow, only buy if it makes sense as an investment the day you buy it.

Dan H. · Answer

I suspect you already recognize this but it appears you used aggressive underwriting (such as hoping rates would decrease, hope is not a plan).   When there is little return, there is less motivation generated by the return.

I purchase RE expecting to recover my investment in no more than 4 years.      This implies that there is significant motivation generated by the early returns and achieving the 4 year recovery of the investment.

Residential RE is currently challenging.  Especially buying rent ready, from mls, with market rate financing is challenging.

Residential RE is not passive especially self managed.   Sp500, syndications, reits, bonds, are all significantly more passive than self managed RE.   Residential RE is much more effort than most people realize.  IRS refers to it as passive income unless you qualify as REP or the STR exemption.   If you are self managing your RE it is not passive especially when you approach the point to being able to live off the RE cash flow.

I achieve a certain reward mentoring the young adults that are trying to get into RE.   I was much more optimistic before 2022, but I am clear with these protégés that RE is challenging at this time.

Time is typically forgiving with respect to RE.   recognizing this can make the work more palatable.

Good luck

Aaron Zimmerman · Answer

I try and zoom out and think in thirty years if the problems I'm facing today will water. The answer is probably not

Jonathan Klemm · Answer

Hey @Benjamin Sussman - Thats such a great - Deep question and something that I ask myself regularly in my current season of life.

I think everyone's answer is different, but I think the more we are able to scale, the less in the weeds we need to be (or at least should be).   For me, there will definitely be a time soon when I sell off some small properties to get larger ones.

I would never buy any that can not sustain themselves from a cash flow perspective in Chicago again.  It's almost a necessary evil when you are getting started, but once you have the ability to be a bit more massive, you should take it unless you are really ENJOYING what you are doing.

Shiloh Lundahl · Answer

@Benjamin Sussman what you are describing sounds like some unmet expectations and possibly a mismatch in investing strategies.

What led you to want to have rentals and how did you expect they would go? After answering these questions I will share some thoughts with you.

Michael Eskenasy · Answer

I think the useful question is not “How do I convince myself to keep holding?” It’s “If I had the equity in cash today, would I buy these same properties again at their current economics?” That gets you out of the trap of defending decisions just because you already made them. Some rentals deserve to be held through ugly periods. Others become mediocre assets and stay mediocre longer than people expected. The fact that real estate is supposed to be a long-term investment does not mean every property automatically earns a lifetime sentence.

I’d look at each property separately and ask what the actual cash flow is today after taxes, insurance, repairs, vacancy, management, and capital expenditures. Then look at how much equity is trapped in it, what return that equity is producing, how much work the property consumes, what the next five years of likely CapEx look like, and what you would realistically net if you sold after transaction costs and taxes. That gives you something much more useful than a generic “real estate versus S&P 500” comparison.

The real comparison is this specific property, with this mortgage, this tax bill, this insurance premium, these tenants, this equity position, and this workload versus whatever you could realistically do with the proceeds. One property may be an obvious hold. Another may be producing 2% on a large amount of equity while requiring constant attention. That one deserves a much harder conversation.

I also would not hold something solely because you expect rents to eventually rescue the deal. Maybe they will, but “rents will rise enough over time” is still a forecast. So is “rates will fall and I can refinance.” If the property works today and those things improve it later, great. If the property needs those things to happen in order to become good, that is a different investment thesis.

The 7% debt itself also is not automatically the problem. A property with 7% financing and excellent yield can still be a very good asset. A property with 3% financing and terrible operations can still be a poor use of equity. Cheap debt helps, but it does not absolve the underlying property from having to perform.

The part I think people underestimate is the “non stop” piece you mentioned. Time and attention are costs even when they do not appear on the P&L. A property that produces $5,000 a year and almost never needs you is not economically identical to another property producing the same $5,000 while generating tenant issues, maintenance calls, bookkeeping problems, and constant decisions. Once you have 15 units, I’d start measuring return on attention along with return on equity.

That may lead you to a middle answer rather than “hold everything” or “sell everything.” Keep the properties that are durable, operationally boring, and supported by debt that still makes sense. Sell the ones where the equity has become expensive dead weight or where the operating burden is wildly disproportionate to the return. Then redeploy selectively instead of treating the whole portfolio as one indivisible decision.

I also would not let a red-hot stock market bully you into changing strategy. The worst time to compare two asset classes is often after one of them has just had a great run and the other has been frustrating. That does not mean stocks are wrong. It means recent performance should not be the thing making the decision. The better comparison is prospective return, liquidity, risk, taxes, leverage, workload, and how each asset fits the life you actually want.

At 31 with 15 units, you may simply be hitting the stage where the job changes. Early on, the focus is acquiring properties. Later, the more important skill is deciding which properties have actually earned the right to stay in the portfolio.

Andrew Freed · Answer

@Benjamin Sussman - I agree that due to inflation, costs have gone up dramatically. Combined with external forces like high interest rates. Sounds like your properties are not too cash flow positive. You might want to attempt to target some of your expenses to see if you can change the trajectory of the cash flow. Be it, shop around insurance to find cheapest policy. Bring property management in house. Contest the property taxes to reduce the rate. These are some measures I would take to attempt to correct the situation your in. Nonetheless after adjusting for efficiencies, if your assets are still cash flow negative, it might make sense to cut your losses and toss it into a more passive investment. Unforuntately to be a good operator, you need to be more of an active investor vs passive. Whowever think residential real estate is passive has not owned real estate for too long.

Advice for talking newer landlords off the ledge?

Most Popular Reply