All Forum Posts by: Ryan Elam

Maybe a little more insight into the two properties will be helpful for others to give you some more useful advice. You are looking at 100k+ difference in profitability between the two, so what are the primary differences between them that is attributing to this? Obviously, the larger mortgage payment on the more expensive asset accounts for some of this, but I assume there is more to it based on the profit discrepancy. What are the biggest differences, and can the success of Prop. 1 be in any way replicated in Prop 2?

So, the positives are that you are locked into sub 3.5% mortgages on both which allows you to be solely focused on raising revenue and not having to worry too much about getting creative on the financing side. As mentioned above, 1031ng is not an option for you and if you can ride this out for a bit here are some potential ideas on the revenue side.

You could tap your existing client base and reach out to every 5 star review that you have gotten on Prop 1 and let them know something like... ¨since you enjoyed your last stay with us in Joshua Tree, I wanted to reach out to you and let you know that we recently launched our second project in JT and we are excited to say it's even better than Prop 1. Thanks to the popularity of Prop 1, and guests like yourself, we have been able to grow and offer even more amenities. We would like to extend an open invitation to our past guest to come and experience xxx and because of your prior stay we are offering xyz incentive!¨ Probably want to polish that up a bit but you get the idea.

This might be too obvious but are there marketing opportunities that haven´t been explored? Before selling I would make absolute certain that I am getting in front of every potential client possible. What OTA´s are you listed on?

Additional revenue streams on site? I am not super familiar with Joshua Tree, but can you offer any additional items for rent, pre arrival services, in home services etc. for a fee that will increase revenue?

Again, I am not super knowledgeable on the market, but is there any LTR market? I have had to make the pivot to long term a few times and while it is not ideal, if it puts a band aid on the loss it can be worth it. Even breaking even or losing a few hundred dollars/month will feel like a win, reduce stress and workload.

I have seen MUCH worse predicaments and seen investors be able to rebound out of it. Send me a PM if you want to go over some of the particulars on the two properties and potential strategies to boost revenue. Cheers.

Really appreciate your ideas!

The reason property #1 was profitable in year 1 was more so due to the timing of the market. At that point in time the JT STR market was flourishing and now it's not.

Here are the Airbnb links to both properties to give you an idea:

- Property #1: https://www.airbnb.com/rooms/8...
- Property #2: https://www.airbnb.com/rooms/7...

I like your idea of remarketing to past clients. We've captured a lot of past client emails using Stayfi so we plan on implementing an email marketing plan that could help us bring in more customers.

Another problem I failed to mention in my original post though is that the market has dropped so much that even if we are at 80%-90% occupancy rates the ADR we can charge based on where the market is won't allow us to profit or even breakeven most months. So more customers stops the bleeding, but not entirely.

The JT market is not a LTR market unfortunately.

Thanks again for your help!

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Quote from @John Carbone:

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.

Appreciate your reply!

Yes, finding data from 2018-2019 would make sense. I have AIRDNA but it only goes back to July 2018. Do you know of any other resources that provide similar data that might go back further by chance?

I can afford to lose $ each month, but with no end in sight it feels a very stressful and daunting. It also feels like things will only continue to worsen.

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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)?

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Thanks for response, @Robert Muzyka! I got the HELOC at PenFed.

I also have a mortgage on the property. The house should continue to cash flow even with the mortgage and HELOC payments.

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Hi there,

I have a HELOC with a balance of $82k that is under a 0.99% promo rate until the end of August. In September, the HELOC goes to the prime rate.

What I'm trying to decide is if I should prioritize paying this down before the promo rate ends next week or not. I have the $ to do so, but I also would like to stay pretty liquid over in case a deal comes up. Which I guess I could just use the HELOC again for.

Anyways, any thoughts on this would be greatly appreciated.

Thank you!

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Quote from @Alex Hunt:

From my perspective as a lender, the lower rate option of the the HELOC is not a bad option. What I would also recommend looking into would be a fix and flip program- if you wanted the renovation budget to be included in the loan, with 80-90% of the purchase price depending on experience.

Other option to look at would be using the first investment property for a cashout refinance if there's equity and use that as the downpayment a 30 year fixed with 20% down to get the next location

Thanks for the recommendations, Alex!

I've considered a cash out refinance, but opted for the HELOC instead due to cheaper costs & the fact that the refi would bring my mortgage rate up quite a bit since my current rate on my first property is 2.95%. However, I've not considered the fix and flip program. Is this used for buy and hold properties as well? I have no intention of flipping the property.

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Quote from @Michael Weigum:

Hi @Ryan Elam

I like the idea of a HELOC. I bought my first deal with a HELOC I have on my house in Denver. For me, I knew I was going to sell the house within a year or two, so the thought of an interest rate hike on the HELOC didn't bother me too much. You have to ask yourself how long you want that HELOC to be out there. When do you want to pay it off and what are the chances of the interest rate going up and how fast.

When I run the numbers for myself and other investors, this is how I calculate it.

GRI $40,000 minus

Debt (mortgage payment assuming 30 year note as you described) $23,408.64 minus

HOA ? minus

Taxes/Insurance ? minus

Management (assume 10%) $4000.00 minus

Equals Net = $12,591.36 Minus any HOA, Taxes, Insurance - divide that 50/50 with investor - Best case to you would be $6,295.50 per year. By my calculations that would be a 7% rate of return on your $90,000 investment. Is this a good deal? For me it wouldn't be. 7% rate of return on a STR is not very good. This is all based on the numbers you provided. If I missed something let me know. I love crunching numbers and analyzing deals.

Hi Michael,

Thank you so much for your response!

Apologies, I should've been more clear, the GRI (gross rental income?) is actually $103,800 and the annual net profit is $40k after all expenses (including mortgage, taxes, insurance, management, op ex, etc).

How did you come to your debt figure of $23,408.64?

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Hi all,

I would love some expert advice on an STR deal I'm analyzing.

This will be my 2nd STR property and I just qualified for a $90k HELOC (3.75%) on my first STR property.

Here are the details of the 2nd STR deal I'm analyzing:

Purchase Price: $475k
Loan: 10% down @ 4.125%
Total investment (downpayment, closing costs, rehab, furnishings, etc): $150k
Annual Expected Cashflow: $40k
Partner Equity/Cash Flow Split: 70% for me & 30% for investor (50/50 split on cash flow until investors investment is paid back in full)

My investor will be bringing $65k to the deal which will cover downpayment + closing costs ($60k) and $5k additional for rehab expenses and I will be responsible for $90k (as well as setting up the property, and running the STR operations).

I know that the overall year 1 CoC return at 27% is solid, but what I'm wondering is...

1. Does it make sense to use the HELOC to cover my portion of the investment? I have the cash, but would prefer to leverage the HELOC and save my cash for other opportunities.

2. If I did use the HELOC, how would I calculate my CoC return?

3. Does this seem like a good deal for me?

Thank you so much in advance for any feedback and advice.

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All Forum Posts by: Ryan Elam

Ryan Elam has started 5 posts and replied 39 times.

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Ryan Elam has started 5 posts and replied 39 times.

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