Am I doing this right?

Question

Hello all,

I'm weighing whether to keep a single-family rental I own in Illinois. My mortgage and landlord insurance come to $1,660 a month, and realistic market rent in the area is $1,700 to $1,800, so the property roughly covers itself.

Even with that thin margin, I'm leaning toward keeping it. The home is in a great neighborhood, which attracts highly qualified tenants and means I don't have to worry about the area or the neighbors. Tenants would pay down the mortgage while I benefit from the tax advantages of owning rental property. I can also afford to build a reserve in a high-yield savings account to cover repairs and other expenses as they come up.

This house is also part of a bigger plan. I intend to buy more properties in the same area within the next year, and once I own at least two more that are properly underwritten, I'll bring in a property manager to run the portfolio. Lastly, for the time being, while I have just this property in that area, I have a lot of personal connections in the area to self manage it.

Matthew Morrow · Answer

@Darrion Jackson I'd go in with eyes open on this one. At $1,660 against $1,700-1,800, there isn't much room left for repairs, capex, or taxes if they're not already in that number. One empty month could eat most of a year's margin. That doesn't mean sell. A great neighborhood and plans to buy more in the area are real reasons to hold. I'd just plan on it being a little negative after reserves and decide if the other reasons are worth that to you. Henry and JD laid it out well too.

Ashish Acharya · Answer

Darrion, I think the fact that you’re planning to buy more properties in the same area changes the conversation a little. If this property is going to be part of a larger portfolio, I’d look at how it fits into the overall strategy rather than judging it only on its monthly cash flow.

One thing I’d separate, though, is the tax benefit from the actual investment return. Depreciation can reduce taxable income, but I wouldn’t use the tax savings to justify holding a property that consistently loses money after realistic vacancy, repairs, and CapEx.

Since you’re in California and the rental is in Illinois, I’d also make sure you’re accounting for the state tax side and how the Illinois rental income and depreciation flow through your overall return.

If you’re likely to keep it, I’d run the numbers as if you were buying it today: what is the property worth, how much equity is tied up, what is the true after-tax return, and would that same capital produce a better return in the next property you’re planning to buy?

If the answer is still yes, then holding it may make perfect sense. The key is knowing why you're holding it rather than simply assuming the tax benefits make up for the thin cash flow.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

Vaibhav Puranik · Answer

It's also not a great time to sell. If possible hold on to it until the interest rates come down a bit.

Aaron Zimmerman · Answer

Where in Illinois is the property located? And what income do you have to support the property? You’d be losing at least a couple hundred each month.

Is there an option to do MTR or STR?

JD Martin · Answer

Well, it doesn't generally make sense to hold a property that doesn't make any money just because you can get synergy from it. You sound like you have other reasons you're interested in holding. What is the appreciation history and likelihood of further appreciation beyond inflation? Every year someone is there wearing out the house so that is an expense. Principal pay -down is actual cash in your pocket so that should be subtracted from you holding costs as you calculate the true return on the property. How much of your own actual cash is in the property is another factor. If you have nothing in it other than principal pay-down, and you are making any kind of cash flow on it - whether from actual cash or tax benefits or real appreciation etc - then you have an infinite ROI essentially that you need to balance against your level of risk. If it goes vacant, can you carry the asset without losing it?

Henry Lazerow · Answer

That is negative cash flow. You need assume a good $3k a year minimum towards capex reserves etc. Also vacancy and leasing fees. Maybe if you think the area will strongly appreciate could make sense to hold. I work in IL and rarely see houses make sense, to get the good ratios need 2-4 unit buildings.

Darrion Jackson · Answer

Great idea. I don't want to sell; I also don't want to have rose-colored glasses on when it comes to the property. I am highly likely to keep it since I will be buying really cheap properties in the area as well.

Am I doing this right?

Am I doing this right?

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