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

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

Laura Williams
Member since 2008 · 7 posts · 10 votes

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?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y

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.

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  • Carrie Hiner
    Real Estate Agent · Austin, TX · Member since 2015 · 181 posts · 75 votes
    7y

    @Laura Williams this might work if you are off-setting the lose with appreciation. Please DM me if you’d like specific analysis of any Austin area properties.

    0Reply
  • Scott Starrett
    Rental Property Investor · New York City, NY · Member since 2016 · 49 posts · 36 votes
    7y

    @Laura Williams

    Would be happy to share what I’ve learned about syndication with you. Or share research about selected markets in the US. I’m from a private equity background and very numbers oriented.

    0Reply
  • Lewis Christman
    Financial Advisor · Macungie, PA · Member since 2017 · 68 posts · 26 votes
    7y

    In my opinion there needs to be balance.  The sell asap crowd I perceive as pure investors where you bought these as your home and just kept them.  From a pure investment perspective unless you're banking on appreciation (I prefer not to) they would be a sell.  From the flip side to have the income you do and only need to cover a base of 20K a year you could consider that extra savings granted other expenses will crop up.  You could do a middle of the road and decide to sell one or two and pay down if not pay off the third home.  Now it is all cash flow and should you want to be a pure investor use that for your next properties.  Personally with your income and dividends as long as you want to be in the real estate game I would keep them and look for opportunities to refi while available to get them closer to cashflowing today.

    0Reply
  • Austin Hughes
    Rental Property Investor · Lubbock, TX · Member since 2015 · 458 posts · 182 votes
    7y

    @Laura Williams

    I've turned real losers into good deals by owner financing. They pay a premium price, they pay a premium interest rate. You have no unexpected monthly maintenance or such, and the cash flow is almost always better.

    1Reply
  • Laura Williams
    OP
    Member since 2008 · 7 posts · 10 votes
    7y
    Originally posted by @Jeff Ronningen:

    @Laura Williams. The question to ask yourself is......if I had $1M (or whatever your equity is in these 3 properties) in hand today, what would I do with it? Would your first choice be to purchase 3 single family homes which collectively cash flow at a loss if $20K per year?

    Just gotta say this was one of my favorite answers on this thread. This is similar to a question we use in my business a lot, if we had to start our team from scratch today would we re-hire this person? Really makes you see past sunk cost fallacy.  

    2Reply
  • Ryan Scott Isacksen
    Property Manager · Castro Valley, CA · Member since 2016 · 212 posts · 110 votes
    7y

    I would suggest reading "The Wealthy Code" and taking a serious look at where the properties are.

    The SFH isn't an ideal rental and the community here knows that.

    Are these homes in a market that has large amounts of appreciation or volatility? 

    Are they valued much higher than when you purchased them?

    You should understand your market and plan to exit at a high point since cashflow isn't a big concern to you.  People typically have to develop cashflow in one way or another to support a greater appreciating asset that will likely cashflow a lot less.

    My personal home, purchased in 2013 for around $340k sold for around $610k in 2018 in the Bay Area.

    I have purchased some cash flowing properties, but have few expectations about that amount of equity change over time.  The income they produce will not be equivalent to that money gained from market appreciation.

    You have your personal income as that cashflow to support equity investments IF they are an appreciating asset.

    A Dave Lindahl quote I heard was, "Cashflow makes you rich, appreciation makes you wealthy."

    Figure out if they have the potential to grow significantly in the area they are in.  

    Raise the rents to support the building more if possible.

    Sell if you aren't expecting a lot of growth.

    2Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    7y
    Originally posted by @Earl Hatmaker:

    @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.

    That last sentence you wrote speaks volumes. Reducing the effective tax rate is important for those who are aiming for wealth preservation. That is something I think about just as much as creation of wealth.

    Herd mentality is all about plowing money into as many sub-$50k investment vehicles as possible to create $100s in cash flow, and telling everyone around you that you're a "real estate investor". That's just the overwhelming BP hustle. Pass. Just sounds like a giant never-ending headache.

    Also, I don't see many here waking up and saying, “I dream to live out in the sticks...so I can create wealth." Any time I hear someone talk like that I think about how they must have sold their soul, but at least they now have a barn silo out back filled with cash to go swimming like Scrooge McDuck. Good on them.

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    7y

    @Laura Williams

    FIRST, it's silly to talk about these properties as either cash flow or non-cash flow properties.

    Currently, they are negative cash flow because YOU have placed Mortgages on them.

    HOWEVER, if YOU paid off your Mortgages, they will all cash flow.

    If this is the case, WHAT actually cash flows? The Properties or YOU?!

    In my opinion, it's the INVESTOR that Cash Flows the Property. There is no such thing as a Cash Flowing Property because it's all about the Investor and what they do with it.

    SECOND......

    I have Rules on who can give me advice.

    1) If the person giving the advice is NOT Wealthier than I am (I don't think there will be more than a handful on here that might be) OR

    2) If the person giving advice does not have extensive experience in Real Estate Investing (I have been investing for 21 years) OR

    3) If the person giving advice do not invest in APPRECIATING MARKETS (I invest in Brooklyn, NY which will have somewhat similar returns as yours) OR

    4) If the person giving advice does NOT have or Does NOT understand HOW to calculate their over all Return using an Internal Rate of Return (IRR)

    NOTICE, I used OR so if ANY one of these rules answered YES, then the entire advice will NOT be worth it to me. 

    In my opinion, when it comes to someone talking about a calculation of Cash Flow in the one and only FIRST year as their only metric of gauging a Return on Investment, it FAILS completely.

    Take for instance, someone that decides to buy a property, invested $100k for down payment and Closing Costs and returns the first year $10k in Cash Flow.

    This would be a 10% Cash on Cash Return (CoCR).

    HOWEVER, because this calculation does not take into account a future SALE of the property, the overall Return can be BAD.

    Consider that, in this example, you buy this property in year 1. Then in year 2, you decide to sell.

    You will encounter CLOSING COSTs on the Sale.

    If the Closing Costs exceeds the $10k 1st year cash flow, your Return will be NEGATIVE.

    Therefore, a Cash on Cash Return is misleading.

    What you need is an overall return of which the Internal Rate of Return (IRR) is the most comprehensive.

    I'm not giving Advice on your current situation, but I'm trying to help you figure if a Public Forum where you have no personal knowledge of any of the advice from posters are good or relevant. You should not base a multi-million dollar decision on advice given on this board.

    What you should do is seek out professional who have VERIFIABLE experience, knowledge and credentials to offer such advice.

    2Reply
  • Account Closed
    Rental Property Investor · Jacksonville, Florida Area · Member since 2016 · 106 posts · 48 votes
    7y

    @Laura Williams California will always keep your taxes as high as they possibly can. I would sell the home in California, and do a 1031 exchange, for a multifamily property that has great cash flow and a good ROI.

    I would then put as much as I could towards the principal of the home with the highest interest rate.

    I would consider renting a room or rooms to roomates, or Airbnb a room at your house, to supercharge your progress.

    0Reply
  • Seth Bender
    Anaheim, CA · Member since 2016 · 38 posts · 13 votes
    7y

    I would focus on property # 2 because the expense vs rent margin is greatest since you have 15yr mortgage

    Consider selling, seller financing, refinancing it if you can’t sell it without taking too much of a loss. I wouldn’t be comfortable not only losing every month on rentals but also having the opportunity cost. You’d be happier having tenants pay you to live in your property not the other way around.

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @Laura Williams I would sell the homes personally, but I don't know your local market enough to know if there will be any major appreciation coming in the near future. If you think there will be, then hold on to them. 

    In addition to putting money in an index fund, you could also invest with a proven syndicator in larger deals since you are an accredited investor. I would imagine you could do better with some of the proven operators out there as a passive investor than you would do in the market. Most of them project 15% IRR even in this market.

    0Reply
  • Patrick Sang
    Member since 2019 · 1 post · 0 votes
    7y

    @Laura Williams

    I am from the DFW area and I have a woman you can call her name is Jen Levitch with Caldwell Banker.

    0Reply
  • Earl Hatmaker
    Specialist · Dayton, OH · Member since 2018 · 59 posts · 41 votes
    7y

    @Aaron Hunt where is the sticks? I live in Dayton, Ohio. I am 5 minutes from 75, that is a major interstate incase you were wondering. I am also 25 minutes away from Dayton International Airport, 5 minutes away from a large private airport, and 45 minutes away from Cincinnati's airport. So I think it safe to say I can be wherever you go just as fast maybe faster without traffic. I spend my money, well my companies spend money, I don't put it in any silo friend.  

    Also who said I am plowing sub 50k investment to get cashflow?  Any sub $50k investment I make will net profit over $100k within 12 months and I could hang onto the property for cashflow as well if you want to deal with all those headaches like you said. 

    But regardless of one way to invest, my focus is to own multiple doors under the same roof. Im talking about 100- 200 doors, but whatever the count of doors doesn't matter. All I am saying is I wouldn't make investment to take a loss and I know my investors wouldn't be happy throwing their earned money into a fund for no return.

    My last sentence is focused on anyone who still receives a pay check. You are making 500k a year at your job, losing 20k in real estate, you are using the loss on property for tax benefits. 

    I've never had a full time job except for when I was in college so unfortunately I never was able to do this.

    I do agree that the "hustle" on here is more "job" focused as most people are putting too much work in for such little gain. I am not looking to own SFH unless I get them for pennies on the dollar and can flip.

    I also roll my eyes about people wanting to build wealth by sitting on their capital. I also have 3 kids and its nice to be able to be with them as well, which wouldn't be possible if we didn't own our home without a mortgage. Just because I live in the midwest now doesn't mean I'm not well traveled.  I thought starting in my back yard would help with finding investors and I was right. 

    0Reply
  • Joey B.
    Member since 2018 · 4 posts · 1 vote
    7y

    I have to agree @Brandin Murray on this. Raise your rent or find a way to reduce expenses. Negotiate with PM, landscape etc. Tenants who are paying this amount for monthly rent presumably have more in reserve. Raise and reduce or sell!

    0Reply
  • Ozzy SmithPro Member
    Specialist · Dayton, OH · Member since 2014 · 352 posts · 265 votes
    7y

    @Aaron Hunt I don't know where you live, where you're from originally, or what you do for a living, but your ignorance is overwhelming!  

    Like @Earl Hatmaker said, we live in Dayton which is far from the sticks.  However what difference does it matter that you make $500K a year working at your job and where you live in comparison to where others live and how much they make if they are happy?  I personally wouldn't like living in a big city.  I have every opportunity for anything I could possibly want within a 30 minute drive and still have the privacy of owning several acres and don't have to see anyone if I don't want to.  My lifestyle is enjoyable bc of this fact where if I lived where you do most likely I couldn't do many of the things I enjoy doing.

    You act like $500K/yr is a lot of money (and to most people it is) but you are far from special.  I have personal family members who make that in a MONTH and live literally in the sticks (not a traffic signal for miles) bc that's where we are from and we never forget that or let money change us.

    You would be better served to take inventory of your personal happiness level than to criticize others of where they live... FYI I feel sorry for you and will add you to my prayers that you find happiness instead of being consumed with trying to bring others down to your level.

    Oh, and as far as what us "herd" invest in.... I'll put my ROI up against yours any day - FYI I'm 40 years old and I don't have to go to a job.... enjoy your work day (my bills are also paid before rent comes in and you are reading this at work as I type this in my PJ's from the "sticks" of Dayton)

    1Reply
  • Aaron Hunt
    All Over, USA · Member since 2017 · 689 posts · 756 votes
    7y

    Why we got “specialists” from Dayton, Ohio defending where they live based on distance to national highways and their extended “family” making $500k/month? 

    Need to go back and read my post that got the up-votes - for a reason. 

    Huge difference between SoCal/Austin vs the hood or boonies; and also betwen someone who earns in the Top 1% vs the US average household income which is 1/10th that amount. (Although, maybe the average BP’er makes slightly more than that.)

    0Reply
  • Rob Mcclellan
    Realtor · Rootstown, OH · Member since 2018 · 98 posts · 39 votes
    7y
    Originally posted by @Russell Brazil:

    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.

    I agree. I aslo think you are missing a big one and that is the write off that you have on your taxes against your regular wages which means it is not truly a $20k loss once you do your taxes. I would hold them unless you have a large amount of appreciation or  they become a burden.

    1Reply
  • Jennifer Joseph
    Rental Property Investor · Akron, OH · Member since 2017 · 22 posts · 12 votes
    7y

    I'd sell them and invest in something that will make cash flow, or cash flow and appreciation.

    0Reply
  • Jon Lanclos
    Real Estate Broker · Houston, TX · Member since 2017 · 64 posts · 27 votes
    7y

    @Laura Williams do you still lose money after depreciation and mortgage interest deduction? How much equity do you have in the properties? You make you money on the purchase. You could look into owner finance selling them - sometimes working the terms can net you more money - you would be the bank and not the landlord

    0Reply
  • Account Closed
    Investor · Columbus, OH · Member since 2016 · 139 posts · 136 votes
    7y

    For $2.6 million, you could buy a shopping center or a Walgreens building and NNN lease it for 5.5%-6% and not lift a finger.

    0Reply
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