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

122 Replies

@Laura Williams IMO, while there are additional benefits of principal reduction, income tax savings and long term appreciation of assets, your REI should STILL be cashflow +. I'm with the others on a 1031 sale (happy to recommend an AWESOME Exchange Intermediary if needed)

Hi @Laura Williams ,

As others have said, you're in the capital growth game with these properties. Your negative cashflow will decrease annually as rents rise, and the debt on the property will slowly be chipped away by paydown and inflation.  You're in a good spot.

The key will be to hold them over the next cycle.

@Laura Williams thank you for posting this as it got many of these experts discussing the benefits of cash flow and appreciation, and it sounds like you have a better idea what you need and want to do to ensure you're successful with your investments going forward. 

@Laura Williams I think you answered your own question with your last 2 posts. There are many people here who will argue that appreciation is the icing on the cake, etc, etc, etc. However, in your situation holding these cash flow bleeding assets might be the right choice. First it is clear that the immediate financial impact to you of loosing money is not significant. Just because it would be for others does not make it a bad thing in your situation. 

Secondly your properties are in GREAT locations. Both Venice and Austin are in great appreciating areas. Apple just announced a new campus in North Austin 5k to 15k more jobs! That is a way from your holdings, but it will still have a positive affect on Austin as a whole.

Third you have clearly stated that this is not your main gig. What others would do to put food on the table has nothing to do with your decision. You have already said you want to go back to Venice some day. If that is the case, holding your current property will protect against future high property taxes via Prop 13. When you decide to go back to CA you might want to off load the Texas properties so you don't get hit hard on property taxes AND income taxes, but until then you could ride the appreciation wave that is hitting Austin.

In the end, you are doing this as a side gig and you have a ton of income flowing in from your W2. Just do you, and don't worry about maximizing every penny.

At your rate of traditional income it's surprising to hear that you would be ok with losing 20k per year unless you desperately needed write offs. I agree with many others here that if you can sell and purchase properties that make you money you can still acquire writes offs from those as well. Even a 1031 exchange would be better than selling. Another item to factor is when the property becomes vacant in between residents, repairs, insurance costs change act. Good luck. 

@Laura Williams

Sell them yesterday.

Based on your stated annual income of $500K and the fact that you’ve purchased at least 4 different residences, I assume your net worth is in the millions, maybe tens of millions, and I assume you’ve got at least $1M equity in these properties.

So you’ve got $1M sitting in real estate “earning” negative $20K cash flow per year. Not good. There’s opportunity cost of what that money could be earning. You could probably double your dividend income.

What about if a tenant is injured on the property and sues? Are you properly insured and are your assets protected? Lawyers are motivated when they see deep pockets.

What if you have a fire or other disaster which is a partial loss (as happened to me)? Are you prepared to be a project manager for several months to oversee a large renovation project to recover the value of your property?

What about in a few years when these valuable homes look dated? When you need to paint? When the kitchen needs remodeling? When the driveway needs to be resurfaced? When the landscaping needs to be redone?

What if we experience a reversal of property values just half as bad as 2008-2011?

A nice problem to have

One thing to consider.... cost opportunity?

If you sold up today could you make more money from reinvesting ? and continue growing capital and increase cashflow

No right or wrong .... its about whether you want to be an active investor, rather than passive 

Just aggressively pay these down if you have that much disposable income. Other option would be to sell them. I don’t know your tax situation, but given your stated level of income, it may actually benefit you to take an annual loss on these. You’d have to speak with your accountant.

@Laura Williams - Congratulations on being such a winner at the game of life. Four thoughts for your consideration -

1. Can you make more money on auto pilot than you are making? (Ie with a cleaner helper or specialized pm given your time is so valuable)? I own a 400k 5 br 3 ba house in northern Virginia. My neighbors rent their same-model houses for $2500/mo and I rent for about 4200/mo because I rent furnished bedrooms separately but on YEAR leases to 5 professionals and furnished the common area inexpensively. If I bought my house in my neighborhood today, I’d expect my mortgage to be like $2500/mo = break even or negative cash flow. I don’t expect much appreciation in my area because of the abundant nearby new condo construction. I don’t perceive much more work between the professionals on year leases and a family on a year lease. Or in your Venice ca house, could you Airbnb it with a professional manager?

2. If you sold everything and earned 7% in index funds annually, compounded, you’ll double your money every 10.2 years. Statistically real estate keeps up with inflation or 1-3% gains (unless strong market demand and limited properties like Venice Ca or Palo Alto). 3% means you double your money every 24 years. Companies like Altria (cigarettes) yield 7% in annual dividends today. My friend sold his 1.5m mansion in NOVA in 2006 and bought a 400k townhouse and put the rest in stocks. 13 years later, the mansion is worth 1.2-1.5m and his stocks are now worth triple. The rent on the mansion would have yielded monthly negative cash flow without appreciation.

3. Tax Offsets - If you hold onto the properties (or buy others) as rentals, you can accelerate depreciation (100k kitchen cabinets, etc.) over 5 years for “personal property” and reap significant upfront tax benefits/savings offsetting your current primary income taxes and use a 1031 later to sell and buy another rental property.

4. Many commercial real estate or business investments are likely to yield 7-10% ROI whereas personal residences are usually much lower like 0-4%. What other businesses like a boutique hotel or software company could you invest in? What about buying (or "looking for") an Airbnb-ready home in areas you like to vacation so you can deduct the travel for you and your family? Use investments to maximize your tax deductions to live the life you love.

Good luck. Let us know how it goes.

Are you factoring in the appreciation into your analysis?  If they are appreciating at 1% a year you are covering the cash loss....  Even figuring that in, I would say there are better investments out there, sell them all and 1031 into a 50 plex or something. 

Looks like you bought your Venice house 4+ years ago.  Depending on its condition, it is probably worth 2.3m+ these days. You also expressed that you potentially want to live there again in the future. Due to Prop13 you are locked into a property tax assessment at 1.6m. Keep it for retirement.  This house will probably be worth $4m+ (my guess of course) 20 years from now. 

I would keep the Venice house and liquidate one or two of the Austin properties. Probably only would sell house #3 since #2 is on a 15 year mortgage.

@Laura Williams this is how we go broke. Thinking that 500k plus a year warrants losing 20k per year. Its a loss! You should never invest in real estate and keep taking an L. What happens if and when you have vacancies? God forbid...what if you cant make 500k+ a year because of a life event? What if....

Your 'investment' should be + not a -. Knowing is half the battle. Sell, 1031 exchange respect your money, do right...invest in something with positive cashflow. Appreciation is great but investing mainly on appreciation is gambling. Thats what i do on the poker tables in vegas!

I hope you sell, reinvest your profits wisely and keep it + going forward...with all due respect!

Happy Investing!

@Laura Williams I would agree with @Arlen Chou response, to be a REI You really have to spend time to learn and understand the various metrics. Thanks for creating a great discussion for us here. At the end of the Day it's all about your priorities and what makes sense to you. You are currently in great position to ride it out. Happy Investing!!

@Laura Williams

Sometimes the right move is do nothing, or keep doing what you have been doing. 

Congratulation being so successful in such a age. 

I mean If you want to invest in apartment, I guess you have the means you don’t have to sell any of your holdings. Second , you are making over half mil a year. I don’t know how you make it, but concentrate on that. 

I hope at least half the people that keep posting that shes losing $20k never read the original post but do understand the idea of principle pay down and that OF COURSE SHE'S NOT LOSING $20K PER YEAR. I thought I made that clear 2 pages of posts ago with my example. So hopefully they'll convince the other half to quit saying she is. Anyone giving advice that doesn't know the difference between cash flow and profit should stop it. Most of us should wish we had her problem.

Hopefully this will make some difference but I expect page 4 to still be full of posts about how losing $20k per year is dumb no matter how much you make.

You deserved better help Laura if you truly wanted advice. Sorry. But I assume, as I said before, you'll be ok. :-)

@Jay Hinrichs

That’s why I leveraged and picked up a few shiny Class A homes in Summerlin while still relatively broke/in training.

Now with my inflated income, I could literally put locks on all the doors and it wouldn’t affect my life day to day.

In fact, my direct deposits from my property management team don’t even hit my account till the 10th of the month. All my bills/mortgages are well paid by then. Always nice to see when it does.

I just tell myself it takes 10 days for my money to travel 2,400 miles where I now live!

@Bill Brandt

Too much broke mentality in here. Really. It shows.

These are actual HOMES in SoCal and Austin not some cash flow beater rentals in Detroit, B’more, or middle of nowhere middle of US. Yeah, I’m knockin the hustle.

Completely different ballgame that OP is playing in then the vast majority of investors on BP...ever will. OP is an accredited investor by definition.

There’s a reason guys like Russ and Jay are saying, “It’s okay. You’ll be alright in the end...” whereas the herd is all clamoring about “losing” $20k/year. For some perspective, OP makes >$1369/day she is alive.

Originally posted by @Sam Hopkins :
@Laura Williams you’re paying $20k a year for $163k a year. That seems good to me. Where else does someone hand you $163k and you hand them $20k?

Can't think of it that way, @Sam Hopkins.  Remember, the 20k is after the 163k rental income has been exhausted to pay for these properties.  

Originally posted by @Joe Villeneuve :

Let's do the math.

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

 In 30 years his tenants will have bought these homes and with a 500k annual salary he will save almost that much in tax shelter. And of course there's 30 years of appreciation...

Now on the other hand, if he were to sell, he would immediately lose about 9% of the selling price to closing costs. 

I'm personally not interested in investments that don't cash flow but given his circumstances and the fact that he can't go back in time, I think keeping these homes may be the best thing to do.

Originally posted by @Scott D Burrows :

@Laura Williams

I agree with @Jay Hinrichs Hinrichs . If you have any passive interest in real estate at all, I would advise syndication ( basically you fund part of a large investment, typically in Multi-Family, with a certain rate of return and portions of the profits). 

1031 out of properties is fine, but if someone doesn't have experience or want to take the time to analyze deals and ensure that their numbers are right on the smaller deals, it will be difficult in the larger deals as well, although not impossible. If you are 100% confident in your analysis abilities go this route, otherwise stay away from this option. 

Selling them all is a little naive as well. What happens to the profits from these and also what happens to all of this profit, it would impact your income in a very negative way, especially considering your current tax bracket (this would be a way to take 30% losses on $1MM+). In other words, some are saying to guarantee a 30% loss (on the taxed income) by selling or a $300K loss, GUARANTEED LOSS, with little respect to what you actually owe on the homes. Again, I don't think this is the right way to go. 

I would highly recommend working with Jay and find out ways that you could syndicate larger, passive real estate investments and determine a strategy to at least break even on the properties, with possibly selling one or two properties OVER TIME, NOT at once. Keeping one would probably help you out during tax time anyways, especially since at the tax bracket you are in, makes more sense to have some passive losses to offset your high-tier income. 

In conclusion, here are my recommendations: 

  1. Syndicate large, multi-family real-estate deals (talk to Jay about how to do this, he knows his stuff).
  2. Find your biggest "loss-vehicle" and eliminate it, either by selling or correcting/minimizing issues through some additional investment if needed.
  3. Sell off house by house over a period of about five years, to minimize any one years impact on your taxes.
  4. If you have someone that you TRUST, consider 1031 process. If you don't, stay away from this, just because you can sell and trade up, tax-free, doesn't mean that it will benefit you- might just benefit the person facilitating the transaction or fees that they can charge, commissions, etc. BE CAREFUL. 

Anyways, good luck and if you need anything or want to brainstorm, feel free to reach out! 

Good Luck!


 Scott I am not a syndicator or syndication expert.. but thanks for the compliment. there are some that are on this site though Like @Brian Burke   and @Ivan Barratt   who I know personally..  I was just suggesting that for a passive income stream without bailing totally on real estate.

@Aaron Hunt so if you had apartments all over the country and each was losing 20k or all together your net profit was -20k that’d be ok for you?

Knock the hustle all you want but when “us” people in the Midwest can match your income and our cost of living is a fraction of your cost who is creating real wealth?

You can keep 3 doors for 2 million. I'll gladly take 25 doors that cash flow, where I can FORCE appreciation and my tenants (op) will pay my mortgage and at the end of the day sell for a profit or hold with smaller appreciation than the coast... What's wrong this vs losing money to hold liable real estate (SFH)

If you make 500k a year and loose 20k a year investing in real estate, your not an investor. You’re more than likely just taking tax benefits.

@Laura Williams   I've bought and sold over 900 properties, so i know a little about real estate, and i wrote a book on real estate.  My first response would be to sell, and reinvest the money in a profitable real estate.  NOT all real estate is investment quality, Not all real estate is investment worthy or quality.  If I knew more details about each property, I might have a different response, but I agree with @Joe Villeneuve that your other income is irrelavent, your investments should stand on their own.

@Laura Williams what is your combined principal gain per month or per year? You may be -$20k in cash flow but gaining back $15k in principal pay downs? So then your net gain would only be -$5k.

Have you figured out which property is the ‘worst’ on a monthly basis? And this isn’t just the cash flow, as you mentioned property 2 Shaw a 15 year note. To me it’s likely property 3.

Another key factor is have you lived in any of these for a combined 2 of the last 5 years so if you sold it you could do a primary residence exclusion on al capital gains if any.

I had a similar situation in Denver where a 3,400 square foot (previous) primary residence was losing slight monthly cash flow of a couple hundred bucks per month. There's a sweet spot that you can find in terms of max rent per square footage. A huge house will bring in slightly more rent than a big house but pound per pound the smallest house will often bring in the most rent per dollar in value. My strategy was to sell that as I had lots of equity in the house and use those funds to purchase multiple smaller property values in another city with lower cost of living. I also liked the idea of being invested in a lower cost of living market to diversify some risk. It's of course more properties to manage but something to consider. If you sold one of the properties that is losing $600/month and replaced that with two properties that gain $200/mo each then you go from losing $20k to only losing $8k/year in cash flow and now you have a total of 4 mortgages that are gaining principal each month so you might be close to breaking even in IRR each month/year.

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