All Forum Posts by: Ryan Elam

@Ryan Elam I applaud you for (a) recognizing your problem (b) owning it (c) taking swift action to get informed. It seems a common-sense approach what your doing, but it's actually more rare an intelligence than you'd think. 

There is one VERY BIG problem in your analysis of options, and others are equally falling into it of think selling is a singular action. NO, selling is a world-of-options itself. This is very important here. 

You have a very valuable resource, CHEAP $. Your locked rates are excellent, don't throw that away. 

I see this a situation of a triage action, you should start at the simplest, least invasive least permanent actions, and as your successfully find non-viable paths (notice NOT failure, just success in finding what doesn't work lol) you move on in the list. 

So here is some highly effective creative potentials I have not heard that I myself have done many-many times: 

- Offer it as an "arbitrage" potential to someone who may be a more proficient operator. You lease it to them with sublet rights, at a net-0 point for yourself and than with a profit share for all gross revenues above that. Win-win. The thing is turn-key for such a person, and it's possible someone could do better at driving revenues than yourself on them. It's worth a crack at it, because it's so simple to try, try. 

- If pressed to sell, why do it at a lose? You have great rates, so, make use of that advantage. Start with a C4D seller financing sale. In such one get's paid an premium for the terms of finance. I commonly get 15% down and go as high as 117% of current market value price, depending on length of term (3yr, 5yr etc). And, could offer them at 6% which is still a great deal for a buy BUT it's added profit given your cost of $ is so much less. Thus, making $ on a sale where none would be made in a conventional sale. 

- There is a few actions left you could try on forcing STR profits yourself, I wouldn't go that direction, reason being the market is flooded and that's your primary issue, market saturation. But, could try forging relationships for corporate and transient tenancy if you want to try. I'd reach out to EVERY divorce attorney int he market and send a flyer on how your happy to do mid-term tenancy for their clients who find their life in "transition". And insurance carriers for those displaced. Corporate entities, etc etc..

The summary, I say GET CREATIVE, as creativity is what I see most lacking, and often it's most profitable to be honest. You don't have to sell at a loose, you don't, and I hope you don't. 

This sounds stressful. I’d cut bait and sell them. Even if you break even or lose a little. Hopefully the RE market for something like this is strong there for you. Trends for Airbnbs show much less revenue due to competition. And if the economy ever dips like it usually does every 8 years, you could be in for some hurt and stress. I’d sell now while the economy is on fire and everyone is spending money like there’s no tomorrow vacationing.

Quote from @John Carbone:

The poster doesn’t seem to have a cash flow problem with his income. I’m not sure he “needs” other real estate sources to plug the hole. I do agree there needs to be a lot of thought placed into this as he has a very low interest rate subsidy. Money is fungible though. He’s in a market strictly for STRs. That market seems to have been a hot spot for Californians to drive to during Covid when the California cities were locked down and since almost everyone in California has money, they went out to the desert and bid up real estate and flooded the market. Different world now, this type of market shift can easily result in 10-20 years to recover when something gets that out of whack, sort of like the oil well running dry in a Barron Texas town, everyone picks up and moves and never comes back. Can’t rule that out here 

>sort of like the oil well running dry in a Barron Texas town, everyone picks up and moves and never comes back. Can’t rule that out here

not only did JT RE prices increase, but there was a fair amount of development in JT area over the last few years.   This implies the supply has increased.  I fear it could be quite a few years before demand catches up with the current supply.   

I failed to understand the JT STR frenzy.  I go to JT once or twice a year (camping) but I never go between May and October due to the heat (average high in July is 100 degreses).  That is half a year that is undesired from my perspective.  That is a large off season.  

in addition there are a lot of desserts in Southern CA.  They all offer something.   I have seen better Joshua Tree forests in Death Valley than I have seen in JT (and I have been to most areas of JT).  

I fear FOMO created the JT STR frenzy which is not supportable by rents in this environment.  

I recommend OP sell property 2 even if the loss is substantial.  Property 1 may be worth trying to keep, but we invest for profit.   If it cannot be profitable, invest elsewhere.  There are still some syndicators producing good returns.   

good luck

Quote from @Ryan Elam:

Quote from @JD Martin:

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! 

 One other thing - you didn't post actual numbers unless I missed them - what are the monthly payments on each? What is the outstanding note on each? How much are the operating costs? How much are you grossing in rental income? What kind of W2 (or other income) do you have outside these rentals? ETC.

I don't think anyone's going to be able to give you any better advice without some specifics. You're going to get creamed just on the depreciation recapture that you used to offset your taxes (I assume from your W2). 

JD, good point! 

Here are some additional #s....

Avg monthly expenses prop #1: $3500
Avg monthly expenses prop #1: $5500

Avg monthly gross income prop #1: $2360
Avg monthly gross income prop #1: $3570

Outstanding note on property #1: ~$268k
Outstanding note on property #1: ~$417k 

I run a business and my taxable income is anywhere between $500k-$800k (I pay myself ~$300k).

 Without going back through all the posts it looks like house #2 is really where you took a bath here; higher cost, higher expenses, etc. I'm guessing things looked so promising on house 1 during the pandemic that you thought "hey, if 1 is good 2 is better" which is not at all unusual in real estate. Maybe you can split the difference by selling off #2, even at a loss which may help you salvage #1 and also limit your accelerated tax depreciation recapture. Again, I would get a sense of tax implications in order to think about timing. You should also get a sense of what time of year is ideal for your location. Most places are spring and summer but isn't Joshua Tree a very hot area temperature wise? 

Mostly you really want to consider all your options and really think through the implications. Many many years ago I lost a boatload of money on a new construction and if I had not been so hasty to sell I had other options that would have limited losses or made money given enough time. In RE time tense to erase or minimize most mistakes and most losses are realized from short term actions. You may have made a big mistake in when you bought, but you may compound that mistake by selling too hastily.

@Ryan Elam Your designs look really nice.  I would suggest posting these in the Short Term Rental Listing Advice group on Facebook to see if they have some good feedback for you.
Overall I'd say the photos are good but I'm not sure the cover photo has enough pop to it. Also, both properties have fire pits. I would suggest taking a photo of that at night with a fire going. I know that's a small thing but it's something that came to mind.

Looking at the NP Visitors Data it looks like you are in the slow season. Booking lead times have also decreased. With that in mind are you sure things look as bleak as you're seeing them or could this be a temporary dip? 

Do you have RankBreeze to know how you are ranking compared to other listings? Have you tried lowering your cleaning fees to see if that would help with bookings? I'm currently taking a small loss on my cleaning fees but lowering them helped me rank higher. 

@Ryan Elam

@Ryan Elam

Also, Joshua tree- one bedroom should 100% be a bunk room- do a search on air or vrbo for 6 persons v 4 like you have - you have effectively eliminated a lot of people by having sleeping for 6 v 4. 

this is 100% no brainer. provide a couple air mattresses as well- they can be in a closet and people will choose to use them or not. 

basically you will open a huge market for families because they are average 4-6 people. that is a huge mistake in my opinion.

when doing a random joshua tree search for different dates the rates simply from a 4 person to a 6 person range - 4 person $85-$115 per night. 6 person was $150-225

I would swap out a bunk room TOMORROW.

Quote from @Ryan Elam:

Quote from @JD Martin:

If you lose money, there's nothing to exchange - that only happens to defer capital gains. So it doesn't sound like the 1031 is even an option for you.

How long can you afford to hold the properties without losing them involuntarily? If it's indefinitely - i.e. you don't really need to rent them to afford to own them - then you could just take the loss (which should be smaller than you post given tax benefits depending on how you make your money and how much you make) and wait for the market to improve. 

If you can't hold on for long, then you probably have no other realistic option than sell and take your medicine, which is going to be pretty painful - you're going to have to recapture all that depreciation which means you'll have a hell of a tax bill at the end of all of this, outside of what you're losing. 

This is where the importance of having an exit strategy comes into play. That's not helpful for you now, I'm sure. 

I'm sorry I don't really have a better answer. Sometimes you do lose money on RE. I lost a bundle of money on my first construction project many years ago. 

Thank you for your reply! 

Thankfuly I can afford to keep them (almost indefinitely), however, I would prefer to not lose $2k - $5k a month. 

It's hard to say if the market will improve. It seems like the JT market for STRs is very oversaturated. Good point on the depreciation recapture. That is definitely a big concern. 

Is there particular way to calculate when it makes sense to sell vs keep in regards to the tax savings ($52k) vs the loss (~$50k/year)? 

 Do your taxes now. You'll have to make some assumptions on where some things end up at the end of the year but it can be really helpful in tailoring your strategy. I will usually do a dry run of my taxes in October or November, for example, to see if it would be better for me to pay my property taxes on my rentals before or after 12/31 (I have that option here) depending on if I need the deductions now or not. I also try to make decisions on rehabs, capital purchases like vehicles, etc that way. Tax strategy can be a huge part of making or spending money. Even for you, for example, it might be better timing to sell at a loss next year than this year depending on your income situation. You can also sometimes do things to change how you file your taxes and deduction like become a RE professional in a tax year. 

Are you self managing or using a PM?  

if using a PM, what is their take?  would self managing improve the cash flow enough to make a difference?

If self-managing, how are you setting rates?  Is your marketing on par with the professionally managed properties?   Did you use a professional photographer for the pictures? 

If you post a link to an OTA listing on each property, we can evaluate if that is part of issue.

Good luck

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! 

 One other thing - you didn't post actual numbers unless I missed them - what are the monthly payments on each? What is the outstanding note on each? How much are the operating costs? How much are you grossing in rental income? What kind of W2 (or other income) do you have outside these rentals? ETC.

I don't think anyone's going to be able to give you any better advice without some specifics. You're going to get creamed just on the depreciation recapture that you used to offset your taxes (I assume from your W2). 

Quote from @Sarah Kensinger:

 Your mortgages look good, in some ways it would be too bad to jump from a 3% interest rate up to 7%-8% 

DM me, I would love to get a closer look at your properties and see if you could try a few things yet before deciding to cut your losses and sell.

I think this is the key point.  You have great mortgages in place and even if you don´t take too big of a bath at closing, what asset is that money going to go into next? 

Post the listings here or DM and I think there has to be some improvements that you can do to boost revenue. There are a lot of people here who might be willing and able to help!