I lose $20k/year - help me w/ my strategy!

122 Replies

Sooo I have three houses that are all former primary residences that are now rentals. None of the homes were bought with the intention to rent them out, so the sale price and mortgages weren't optimized to be rentals. The homes are in California and Texas and have very high property taxes. 

Basically the math breaks down to:

Home 1: 
6,800 in rent
6,928.40 in expenses

-128.4/mo

Home 2:

2325 in rent
3,206.57 in expenses

-881.57 / mo

(this one has a 15 year mortgage, so if we refi-ed to a 30 year expenses would of course be much lower)

Home 3

 4,500 in rent

5,164 expenses

- 664 / mo

This all adds up to a loss of $1,673.97/month or $20,087.64/year.

I can easily afford the loss. I make $500k+/year (with a healthy amount invested/saved every year.)

 I also make $30k/year in dividend income from my investments which I could use to cover the loss on the houses. 

So I'm of two minds in how to think of this. On the one hand, I'm getting three homes with a current valuation of $3m combined for 20k/year. That doesn't sound so bad. And since they all have fixed rate mortgages (theoretically! hopefully!) rents will continue to rise while my payments will stay the same. And one day of course I'll have the mortgages paid off and still be collecting rent.

BUT on the other hand . . . they are all money losers right now! I could sell some or all of the homes (they're all fairly recent, so no breathtaking appreciation, but no losses either) and just invest the money in index funds instead.

So . . . what do you think of my situation? What would you do?

@Laura Williams

I would probably sell them off and invest in properties that are profitable. You will have repairs and updates that will need to get done over time with the properties as well.

Sell them all. I don't care what you make personally, that should never have an impact on your REI decision making. You are losing money. Sell.

Want to look at it another way? Your REI is robbing your personal income blind.

@Laura Williams because they were purchased as primary residences and not investment properties, please sell them immediately. It is better to lose the cheese and get out of the trap. Even if you have to write a check to get out of these, it is worth it to stop the bleeding. 

Keep them all. Its a minor loss considering it looks like about a $2.6 million portfolio Im guessing. Debt reduction, rent growth, asset price growth should more than offset the minor loss.

@Laura Williams , I think about this type of situation all the time.  In my mind I call this Hobby Real Estate investing.  Your life doesn't depend on it.  Your not going to starve, be homeless or go bankrupt because of your real estate investments.  I would liken your situation to someone with alot of disposable income who likes to do _____________.  In your case its buy a home live in it for a while and then move to another and rent it out.  The numbers aren't nice to look at but you still not losing in the end because if you decided to sell all of them you would make a profit.  

If I were you I would do the following:

1. Look at your current properties to see if you are charging too little for rent.  

2. See how much profit you would make by selling all the properties off.

3. Start searching for better real estate investments where you could be making money instead of losing.  I think this is where the Hobby Real Estate investor gets lost because this takes "Work" "Hustle" "Drive" "Want" and "Need".

From the situation you are in Financially you have the means to be very successful in real estate.  Its the other attributes that I can speak to because I don't know what that is.

Just my thoughts. 

Let's do the math.

$20k/year, over a 30 year period = $600k loss.

@Laura Williams

Laura, you should also figure out how much debt you are paying off each year. I bet it’s more than $20k so you can still make money now, and even more once they are paid off. Because of a 15 year loan I have a rental I plan to retire in that cashflows -$10k/year on its own, but it “makes” $20k a year by paying off a total of $30k per year. If they’re making money and the negative cash flow is 4% of your gross income, who cares? If they were cashflowing positive $20k how would that affect your life? I bet not at all.

That said, if any of these houses have a lot of appreciation and you’ve lived in it 2 of the last 5 years I would sell that one and take the tax free gains that will go away in the future. There are all kinds of 1031 exchange options but unless you want to invest out of state (or at least out of California) I don’t know what good options you have. 

i think you should consider raising rents if possible so you are at least breaking even every month. 

I also agree that with the folks above who are telling you to reevaluate all three of these houses and consider selling one or more of them especially if your unable to raise rents or reduce your expenses thru refinancing or cost savings. 

@Laura Williams you have options here which is a great problem to have!  There have been a few comments to hold the properties and others to sell the properties.

As @Joe Villeneuve mentioned they are all loosing money so why keep them?  Losing $20k a year is not a small amount even if you are making $500k+/year.

My recommendation is to at least sell one or two, preferably those that will most likely not appreciate much further in the next few years.  

Do a 1031 exchange into property that is either cash flowing or will have strong appreciation in the near future.  There are numerous markets in both California and Texas that you can buy assets that are both cash flowing and appreciating.

You don't necessarily have to purchase retail/residential property with the 1031 exchange but you can do commercial which includes; NNN and hotels.

@Joe Villeneuve that's not all the math, let's keep going.

1. Equity pay down = 2.7 mil (estimate)

2. Long term appreciation = 3 mil (conservative over next 25 years)

3. Rental income appreciation = eliminates operating in red in 8 years (estimate)

4. Tax benefits

Unless your actually going to sell these, spend the net proceeds, appropriate time, and energy to buy "better" cash flowing properties, keep what you have. Your obviously doing well, this is a forced savings account creating a lot of wealth.

If any of these properties qualifies for the primary residence cap gains exemption, I'd sell and take the cap gain before it is lost.  

I'd also consider investing in something that generates a significant positive NOI to offset the current and carryover passive losses.

And finally, if you don't already have one, I'd invest in a HNW tax accountant/attorney. I suspect it would be $ well spent.

Originally posted by @Justin R. :

@Joe Villeneuve that's not all the math, let's keep going.

1. Equity pay down = 2.7 mil (estimate)

2. Long term appreciation = 3 mil (conservative over next 25 years)

3. Rental income appreciation = eliminates operating in red in 8 years (estimate)

4. Tax benefits

Unless your actually going to sell these, spend the net proceeds, appropriate time, and energy to buy "better" cash flowing properties, keep what you have. Your obviously doing well, this is a forced savings account creating a lot of wealth.

 OK, as you say, let's add ALL the math into this:

1 - Added costs for CAPEX at 5% per year for next 25 years = $200k (estimate)
2 - Losses from reinvestment of negative cash flow and CAPEX, compounded at a conservative 5% per year for next 25 years =  $11.7 M (estimate)
3 - Lost Rental income from reinvested losses
4 - Lost Tax benefits from new assets acquired using reinvested negative CF and CAPEX

@Laura Williams

I would sell the properties and acquire a property that will get you a better rate of return. 

I would to sell the property that still qualifies for section 121 exclusion(exclude $250,000 of gain($500,000 if MFJ) if living in the property for 2 out of the last 5 years).

You may also want to consider selling a property via section 1031 exchange.

@Laura Williams sell them off, take your profits and invest in actively or passively invest in apartments.

Why take the loss unless it helps off set something from your income!?

Calculate the IRR and compare it to investment alternatives. That's what members are doing above, with back of the napkin information. Absent this analysis, there is no current strategy.

Be sure to check out the capital gain exclusion on the sale of a primary residence and make sure that you take advantage of it.  It can take many years of real estate profits to make up for the loss of the exclusion on an appreciated primary residence.

Originally posted by @Joe Villeneuve :

Let's do the math.

$20k/year, over a 30 year period = $600k loss.

Your story problem here assumes that all the parameters remain static over the 30 year period.  Rents will go up over time.

I suspect this is likely a short-term financing discussion.

Ah I see your later posts, with the rest of the assumptions.  Yep.

I would imagine that one of the three properties, say the one in CA, does not cash flow and will not likely cash flow in the future, then it might make sense to go ahead and sell off that one, and reinvest elsewhere.

Never accept negitive cashflow . There are too many investment vehicles out there. If you are taking $ from your stock/bond portfolio to pay for a loss in your R/E portfolio, what is going to happen if the market corrects soon? Just my 2 cents...

Do what I did. Sell while CA is high and 1031 exchange it into money making real estate.

@Joe Villeneuve 600k in loss not counting capitol gains of how many millions...

these are always fun discussions..  you have the cash flow is the only metric camp and U have the camp that says your tenant is paying down a prime asset.

I suspect your drama factor renting that quality of asset is next to nothing.. you move into lower end rentals and you may not like it.. like you said index fund might be more akin to these.

but the tax free gain is a nice one I have used it in CA and Oregon many times.. and its a life changer.. no amount of low end rentals cash flow will equal a nice 500k tax free event from a CA or WEst or high end east coast primary residence.

unless you own lots of rentals  :) 

Texas would worry me the most.. unless its really really a prime location.  CA you have tax's that are stable .. Texas they can rise like a Mother.. 

 @Laura Williams

What do you do if 2 out 3 tenants are not current with rent for months. Economists are talking about global recession everyday. The US home sales have been down and slower since last summer confirmed with national news today. People are thrilled if properties appreciate much if any.  Your 2019 taxes will go up also.

I am across from Apple Spaceship. Brand new modern estate ($2.9M, 3K sf+) can no longer get $5K rent to these $600K high tech geeks. They are scared if all these hiring freezes will turned to layoffs. 

My first order of business is minimize your loss by unloading properties not making the numbers.

I will put #1 or #3 up for sale. I assume you have a guaranteed income year after year. 

Any chance to pay down on loans and refinance? I'm not sure if that makes sense with the information given, but to me it sounds like you want to keep the properties, so in what creative ways can you turn the properties to break even or cash flow positive instead of assuming a 20K loss per year?

I am reading all the responses, thank you for taking the time and please keep them coming! Agree it's an interesting problem.

Some of you have mentioned re-investing into cash-flowing properties. The truth is at this time I don't have the interest/bandwidth to do that. So if I sell a property the proceeds would go into index funds, not real estate. 

Originally posted by @Laura Williams :

I am reading all the responses, thank you for taking the time and please keep them coming! Agree it's an interesting problem.

Some of you have mentioned re-investing into cash-flowing properties. The truth is at this time I don't have the interest/bandwidth to do that. So if I sell a property the proceeds would go into index funds, not real estate. 

 you could search out and find a very good syndicator for some cash flow and tax benefits.. you don't have to do it yourself. 

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