own 9 rental properties, what should i do next?

Member since 2018 · 18 posts · 3 votes

Over the last 5 years, I have acquired 9 rental properties in Phoenix, AZ. Homes cash flow approx. $450 per month each (some more, some less), and there's quite a bit of equity now since the market has risen. Amount owed, approx 1.3 m and they are worth approx 2.2 m. I don't have much liquid cash to keep acquiring. I can go the slow route and pick up maybe 1 home a year, or I could consider cash out refi and pick up another 9 or so properties, but the margins on my existing 9 would probably just cover maintenance and rent loss if i cashed out. What would you do in this scenario? I have tried my hand at flipping, but not with significant success. My first 2 homes netted me about 8k total.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

Totally depends on how these fit into your goals and what else you have going on.

Family, full time job, self-managing? Stressed or feeling free? Are opportunities for new property readily available anyway?

I'll just say congrats on having 9 houses and equity and cf. That's huge. We all don't need to stay to the grindstone and hunting and doing all the time.

Sometimes I look back and wish I only had 9 again. I have 4 open as of yesterday and that's barely 10%. I'll get through it pretty fast, but it's disrupting my nap schedule more than I like. More more more isn't always the answer.

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Victoria S.
Overland park, KS · Member since 2017 · 113 posts · 44 votes
7y
Originally posted by @Steve Vaughan:

Originally posted by @Suly B.:
@Ryan McCook talk to your accountant or CPA about cost segregation. It's an excellent tax savings strategy for buy and hold investors.
Only an excellent idea If you plan on leaving the property to your children when you pass away.
The long term cap gain tax rate is 0 up to $77k in income. 12% or so is avg.
Depreciation recapture is far less tax friendly when you sell. More like 25%. Converting what would be cap gain later to depreciation recapture is short-sighted for most.
Or one spouse is a high income earner and the tax benefit from cost segregation is huge.
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Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
7y
@Ryan McCook. Use your equity to purchase more properties.
Or sell some and invest in opportunity zones, or roll into a 1031 exchange
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
7y
@Alan Grobmeier Thanks for the reply! You sound very knowledgeable.
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Stone Jin
Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
7y
@Ryan McCook I think your situation describes a lot of investors who bought 5-9 years ago in Phoenix. We are sitting some significant equity and every month we look at the return on equity and it's like 3% 4%. I'm just going through the review process with my wife on our portfolio performance for 2018 for our taxes, and I noticed that the cash on cash return is fairly awesome and the additional principal pay down is such a nice bonus. Point 1 is just to sit back and enjoy the success. Many on this thread are telling you to go larger, some much larger. I find that to be more buying a job and headaches. I self manage my portfolio in Phoenix with minimal touch points. Generally only when people move out do I spend any significant time on it.
With that said, I'm still in acquisition mode, just not in Phoenix. We started buying in the midwest per the herd last year. The returns are better than I can get locally even with the cost of PM. I'm only buying in a market that I'm very familiar with, I'm not using turnkey providers, and I have boots on the ground. So far it is working, I made 2 offers this week and the numbers look like 70K purchase price 5-8k rehab rents for 1100-1200, those numbers are winning all day long.
In terms of financing, you should look at get a business line of credit with your portfolio. That way you can have access to cash when you need it.
Best of luck
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Victoria S.:

Originally posted by @Steve Vaughan:
Originally posted by @Suly B.:

@Ryan McCook talk to your accountant or CPA about cost segregation. It's an excellent tax savings strategy for buy and hold investors.
Only an excellent idea If you plan on leaving the property to your children when you pass away.
The long term cap gain tax rate is 0 up to $77k in income. 12% or so is avg.
Depreciation recapture is far less tax friendly when you sell. More like 25%. Converting what would be cap gain later to depreciation recapture is short-sighted for most.
Or one spouse is a high income earner and the tax benefit from cost segregation is huge.
There are limits on passive loss, unless you are a qualified real estate professional. There are tax benefits with cost segregation because you are accelerating depreciation on a portion of the structure, but generally it is not worth the effort for single family homes. The reason is cost of the study and added accounting efforts relative to benefit on smaller dollar purchases. One other thing to keep in mind if holding properties long term is that taking more depreciation early, limits the amount in the future. So if you are holding the property long term, it will increase your tax bill down the road. So it is important to understand your long term strategy. One final consideration is the possibility of IRS questioning what you are doing. You want a proper cost segregation study and CPA experienced in the process.
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Suly B.
Rental Property Investor · Denver, CO · Member since 2018 · 81 posts · 62 votes
7y
@Joe Splitrock This is what I got out of Ryan’s post. He has 9 cash flowing rental properties and he’s considering two different options at the moment. I simply mentioned a 3rd option which can reduce his taxable income and increase his cash flow. Joe, if you’re under the impression that you can’t cost segregate “after the fact” you’re missing out on a great opportunity even for yourself. The truth is you can do cost segregation anytime during your ownership and "catch-up" the accelerated depreciation you would have gotten if you did cost segregation in year one. To do this though, the law requires you to file a Form 3115 Change in Accounting Method. Also, there are cost-effective solutions for properties with a basis as low as 200k.
To your success,
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Sherwin Gonzales
Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
7y
@Ryan McCook congrats on your success in acquiring 9 properties 5 years!
I would first figure out what your goals are? Do want to keep managing these 9 properties or want to scale bigger?
I personally would 1031x into one or two commercial multifamily properties and manage just one or two roofs instead of 9. Reap the benefits of multifamily!
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
Originally posted by @Suly B.:

@Joe Splitrock This is what I got out of Ryan’s post. He has 9 cash flowing rental properties and he’s considering two different options at the moment. I simply mentioned a 3rd option which can reduce his taxable income and increase his cash flow. Joe, if you’re under the impression that you can’t cost segregate “after the fact” you’re missing out on a great opportunity even for yourself. The truth is you can do cost segregation anytime during your ownership and "catch-up" the accelerated depreciation you would have gotten if you did cost segregation in year one. To do this though, the law requires you to file a Form 3115 Change in Accounting Method. Also, there are cost-effective solutions for properties with a basis as low as 200k.
To your success,
I just think in this situation it is not good advice. He stated that he owns 9 single family homes purchased for $1.3M so that works out to $144K per home. Assuming 20% land value, he is depreciating $115K over 27.5 years. Filing Form 3115 is complex and subject to IRS review which potentially includes review of the cost segregation study. I question how much could be accelerated and if it is worth the cost. The segregation study and CPA effort is pretty expensive, then add to that the IRS risks. Following straight line gives you the same expenses, just over a longer period.
We can agree to disagree, but even you stated "there are cost-effective solutions for properties with a basis as low as 200k" and these properties have depreciated value of near half that.
I think cost segregation is a great strategy in some cases, just not this one.
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Joey Yang
Member since 2019 · 1 post · 0 votes
7y
Hi,
Not sure how risky or difficult this is to pull off, but if you put 50k down for a 1 mil loan at a 4.8% mortgage rate (you have pretty good wiggle room to go higher) and buy a property at 7% cap, the cap on your down payment will equal to 20%, bringing in another 10k per year. Hope this idea isn't too outlandish, just thought of it Last night for an investment my father could try, but he thought it was too risky because he didn't want to put any properties on the line.
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Ryan McCook
OP
Member since 2018 · 18 posts · 3 votes
6y
@Bryan Rogers Just curious if you ever ended up selling you 13 and getting an apartment?
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