Quote from @Ryan Elam:
Hey guys,
I made a mistake and am looking for some advice.
My wife and I bought 2 properties in the Joshua Tree area - one in 2021 and one in 2022. And while the first one started out great, there has been a huge slowdown this year and we are losing quite a bit of money each month.
Here is a breakdown of the situation:
- 2022 = $18k net profit
- 2023 = -$26k loss between both properties so far (will likely lose between $35k - $50k in 2023)
- Tax Savings via Bonus Depreciation = $52k in tax savings combined ($20k from property #1 in 2021 & $32k from property #2 in 2022)
- Property #1 purchased for $350k + $85k in renos + furnishings = $435k total (2nd home mortgage - 30 yr fixed at 2.9%)
- Property #2 purchased for $475k + $83k in renos + furnishings = $558k total (2nd home mortgage - 30 yr fixed at 3.4%)
- Opened a HELOC ($90k) on property #1 to help pay for property #2.
We are getting appraisals done on each property next week to determine the current market value of each to see if it might make sense to sell. If I had to guess we'd make a slight profit ($30k - $50k) on property #1 and a loss on property #2 ($50k - $70k).
While we don't want to sell, it only seems like the market is getting worse and it's causing a lot of stress to manage these properties at a loss each month.
I've been thinking about potentially doing a 1031 exchange for 1 or both properties, but not sure where we would buy that would be cashflow positive and not thrilled about taking on a much higher interest rate.
I feel like I'm out of my depth and with my limited RE investing knowledge, I would really appreciate any advice anyone is able to offer.
Thank you!
This is a situation that is becoming very common nowadays. You have acknowledged the situation you are in though which is always a very difficult step to take with the acceptance phase.
do people live in Joshua tree or is everything a rental? I’m not familiar with that area, but if it’s pretty much just a rental market then an appraisal may not do any good since it’s looking at up to last years numbers, and a lot of the STR markets have not adjusted to the new normal of rental revenues. Sellers are still holding out for 10 percent drops in values from last year despite revenues dropping up to 30-40 percent and interest rates doubling.
you have low mortgages, so that’s a good thing. There are people in your situation with 7-9 percent mortgages hemorrhaging even more money each month. you need to do a real analysis on this. Find data going back to 2018-2019 and see how much places were renting for to see what a non recession floor should be like.
most importantly can you afford to lose the money you are losing each month on this? How about if you lose more money each month with further economic deteriorations resulting in even lower revenues.
if you can afford it and if there is a strong case that this slow down temporary in your market then do your best to fight through this. The loses will carry forward so eventually you should recoup if you can weather the storm….and honestly it’s possible it could take 5-10 years.
nobody will blame you for taking loses and selling. Never let a tax bill impact your decision making process. Rents can drop even further from here, and honestly I think if your losing money right now it’s not a good sign as we technically are not in a recession yet.
Ultimately figure out what you can afford and make the best decision for yourself regardless of what anyone on here says.
