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Updated 7 months ago, 05/09/2024
Overleveraging, net worth, cash flow and headache factor
I currently have 3 SFH rentals solely owned (1 in San Francisco Bay Area and 2 in Indianapolis metro area) and 1 apartment building in the Bay Area with co-investors). I have a lot of equity in the Bay Area house and the apartment building. SFH is currently negative cash flow because I'm renting out to family members, trying to get roommates in to bring it up to market rent. The apartment building cash flows the most out of all the properties.
Indy SFH#1 in Class A nice suburb with great schools has appreciated in 10 years (doubled in value) that I've owned it. However my cash flow has decreased from $400 a month (in 2019) to now $110 a month in January 2023 due to property tax increases. It's really $66 if you divide the annual HOA fee into monthly amounts. House was built in 2005 so haven't had too many expenses recently (replaced water heater 2017 and HVAC 2018), but it will need a new roof in a few years, I would guess.
Indy SFH#2 is a renovated home (built in 1920) bought 7 months ago in a Class C moving up to B area. It's supposed to cash flow $176 but I have only received 1 full month rent (minus the property management fee) due to repairs that tenant has called the PM company for. I'm in escrow on Indy SFH#3 - projected cash flow is negative - $100 or so with these interest rates. Hopefully I can raise the rent over the next few years.
Since these cash flow amounts are small, they would be wiped out by a major capital expense for the year. I have reserves but I feel like I have too much in real estate and should take a break and invest in more liquid forms (stocks and index funds). My net worth in RE is well over 50% (don't want to go into specific numbers on a public forum). I've heard different investors have net worth range from 20% to 98% in RE. My goal is to leave stressful W2 job within 5 years or scale down to working on part-time/contract basis. I feel like I'm starting to over leverage or take on too much risk. Is that part of the definition of over leverage, with rents barely covering my monthly expenses?
Also there's the headache factor with investing out of state especially older homes. My thoughts were to in the near future possibly sell the Indiana properties because of the ever increasing property taxes, 2.77% and 2.78% tax rate and 1031 to a SFH in a less expensive part of Northern California (90 min drive). Nevada or Arizona have much lower property taxes and better appreciation but I would be cash flow negative with those also (as long term rentals) and again it's out of state. Or just sell them and take the capital gains hit but then I lose the rental income and tax write offs.
Am I missing something but how am I going to leave my W2 job or go part-time if I'm barely cash flowing especially on these Indiana properties? Even if I bought 10 more Indy properties all my net rental income won't add up to my W2 income (after taxes). I do my own taxes so I can see my taxable income reduced every time I add a property into the tax return form. They're passive losses but I'm tracking my hours to see if I qualify for Real Estate Professional Status. This RE investing combined with a W2 job is stressing me out. Thoughts?
Sorry for the essay but I'm frustrated.
If we use the linear thinking and try to see how I will replace w2 with real-estate income it is very hard to make sense. RE like most other investments almost always makes wealth on compounding (directly or indirectly). For such wealth building, your strategy is more important than how much you make from each investment on day 1. So having a proper scalable strategy, getting your numbers correct, and ability to stick to it in spite of short term pain is what makes you wealthy over 10-15 years. If you analyze any of the common strategies like BRRR, or sell and buy larger etc they have compounding as the corner stone. More important than appreciation, managing risk is more important especially when you start out. As Warren Buffet says, no one wants to get rich slowly, but that is the most common kind of wealth building.
Thank you for sharing realistic expectations for new investors like myself.
Max
@Becca F. you should create a plan with a passive income goal in mind. How much money do you need to generate in order to work part time?
It seems that the leverage has gotten to you. If I were you I would create a plan to either delever myself or pay it off completely.
You should prepay your indy properties and then do a recast in order to lower your monthly payment and increase cash flow. This may seem like a short term fix. Then use the cash flow your getting from all the properties to start paying them one by one.
I have used a mobile app called Clarem https://apps.apple.com/us/app/clarem/id6477621387 to help me with a plan to build up my portfolio and pay it down. This maybe what you need.
If you lose focus it can be very frustrating. I own 5 properties 2 already fully paid in cash, which increased my cashflow significantly. I might use the equity in those to purchase a few more and then again pay them off. This is the game
Quote from @Jay Hinrichs:
Quote from @Alan F.:
Quote from @Becca F.:
I currently have 3 SFH rentals solely owned (1 in San Francisco Bay Area and 2 in Indianapolis metro area) and 1 apartment building in the Bay Area with co-investors). I have a lot of equity in the Bay Area house and the apartment building. SFH is currently negative cash flow because I'm renting out to family members, trying to get roommates in to bring it up to market rent. The apartment building cash flows the most out of all the properties.
Indy SFH#1 in Class A nice suburb with great schools has appreciated in 10 years (doubled in value) that I've owned it. However my cash flow has decreased from $400 a month (in 2019) to now $110 a month in January 2023 due to property tax increases. It's really $66 if you divide the annual HOA fee into monthly amounts. House was built in 2005 so haven't had too many expenses recently (replaced water heater 2017 and HVAC 2018), but it will need a new roof in a few years, I would guess.
Indy SFH#2 is a renovated home (built in 1920) bought 7 months ago in a Class C moving up to B area. It's supposed to cash flow $176 but I have only received 1 full month rent (minus the property management fee) due to repairs that tenant has called the PM company for. I'm in escrow on Indy SFH#3 - projected cash flow is negative - $100 or so with these interest rates. Hopefully I can raise the rent over the next few years.
Since these cash flow amounts are small, they would be wiped out by a major capital expense for the year. I have reserves but I feel like I have too much in real estate and should take a break and invest in more liquid forms (stocks and index funds). My net worth in RE is well over 50% (don't want to go into specific numbers on a public forum). I've heard different investors have net worth range from 20% to 98% in RE. My goal is to leave stressful W2 job within 5 years or scale down to working on part-time/contract basis. I feel like I'm starting to over leverage or take on too much risk. Is that part of the definition of over leverage, with rents barely covering my monthly expenses?
Also there's the headache factor with investing out of state especially older homes. My thoughts were to in the near future possibly sell the Indiana properties because of the ever increasing property taxes, 2.77% and 2.78% tax rate and 1031 to a SFH in a less expensive part of Northern California (90 min drive). Nevada or Arizona have much lower property taxes and better appreciation but I would be cash flow negative with those also (as long term rentals) and again it's out of state. Or just sell them and take the capital gains hit but then I lose the rental income and tax write offs.
Am I missing something but how am I going to leave my W2 job or go part-time if I'm barely cash flowing especially on these Indiana properties? Even if I bought 10 more Indy properties all my net rental income won't add up to my W2 income (after taxes). I do my own taxes so I can see my taxable income reduced every time I add a property into the tax return form. They're passive losses but I'm tracking my hours to see if I qualify for Real Estate Professional Status. This RE investing combined with a W2 job is stressing me out. Thoughts?
Sorry for the essay but I'm frustrated.
We hear this on BP all the time about leaving w2. I agree with Chris. You're ver fortunate to have a w2, you have lending available, many self employed don't. Its really hard to get leverage as a IC or small business. Plus you get medical insurance, vacation etc.
I have to have a lot of cash on hand to flip, last year I dropped $70k on out of coverage surgery. Covered California super sucks, private insurance is extremely expensive & CA fines you at end of year for any lapse in coverage.
Employees have no idea how lucky they are, especially here in CA.
My workers comp and payroll taxes are almost 18%!
I look forward to the day I get w2 employment.
Been a business owner 31 yrs, be careful what you wish for ;)
my wife and I are on medicare and with medicare and our supplimental we are still over 2k a month in health insurance.. My daughter who has 22 years at Intel I think she told me at 30 years she can retire and gets lifetime health benefits.. Only way to live on rent is to pay cash and or be extremely frugal mid western rust belt type area were primary housing is very low and all other things including gas, insurance etc are much lower than us west coast folks.
Nevada though to me is a smart choice to try to live on RE prop tax's some of the lowest in the country NO income tax utls are low . etc etc. But to live on just rental income and no other sources you just need to do the math.. with levearge its takes a boat load of Real estate . And your going to find it hard to get the associated debt you would need to qualify for the loans unless your using DSCR rent then you need a lot of cash since U need the debt coverage ratios..
I think its only been this BP dream that goes on about living on rents.. thats not a common thought out of these circles. of course investing in real estate getting it paid for and APPRECIATION is were wealth is created.. So really depends on your monthly needs to live the life you would find enjoyable without bringing in some sort of income other than rental income.. Most of us that are in this full time have some rentals but its not our major income source we maybe RE brokers or Mortgage Brokers or GC's and house flippers or like Chris fund manager etc etc.. granted we are self employed but we work and work hard.
PS I have never thought of my self as having a JOB I have been selling real estate since I was 18 and have done all sorts of different things in Real Estate my wife and I look at it as a LIFESTYLE not a JOB. But if i had it to do all over again growing up in Cupertino CA in the 60s I would have figured out software and computers far better than I did would be like some of my peers that truly retired many years ago. But hey we are still hear and enjoy all that we do.
Quote from @Cillian Kelly:
@Becca F. you should create a plan with a passive income goal in mind. How much money do you need to generate in order to work part time?
It seems that the leverage has gotten to you. If I were you I would create a plan to either delever myself or pay it off completely.
You should prepay your indy properties and then do a recast in order to lower your monthly payment and increase cash flow. This may seem like a short term fix. Then use the cash flow your getting from all the properties to start paying them one by one.
I have used a mobile app called Clarem https://apps.apple.com/us/app/clarem/id6477621387 to help me with a plan to build up my portfolio and pay it down. This maybe what you need.
If you lose focus it can be very frustrating. I own 5 properties 2 already fully paid in cash, which increased my cashflow significantly. I might use the equity in those to purchase a few more and then again pay them off. This is the game
Thank you. I'll look at that app. I have one property that has no mortgage and one with lots of equity. As far as the 3 Indy properties, I'm not sure if I will keep them for a long time. The Class A SFH has a good amount of equity and low interest rate but property taxes have increased a lot. I have 2 Class C Indy homes, both with the highest interest rates, since I closed on them in 2023. Isn't there a fee for recasting a loan?
Considering doing a 1031 exchange of the 3 Indy properties in the next 1 to 3 years to one property in Northern California or Nevada or to a DST. I'm still researching the DST since there are fees and I'm not sure about having money tied up in something I can't really control.
I don't plan on buying anymore properties and staying liquid. I did start paying an extra principal payment on two properties (the ones with the highest interest rates) then other investors told me not to do that so I stopped. I left that money in HYSA, deposited it in retirement accounts or brokerage accounts (mostly stocks, index funds, a few REITs)
Definitely try to do a recast on the property with a lot of equity down or any property you have prepaid. You can also make one lump sum prepayment and then recast. A recast is usually free or will cost a few hundred dollars. Bear in mind, a recast is different from refinancing. I do a recast pretty much annually. I have one property, where I started with $1500 monthly payment and now 8 years later I am down to $500 monthly payment (I have also tried to pay down the principal when I can). A recast is basically reamortizing your mortgage while keeping your term the same. For example, if you took a 30 year mortgage for $300k but over the last year you have prepaid some principal and now your balance is $250k. Your bank will reamortize the mortgage with a starting balance of $250k, same interest rate and 29 years. This will lower your monthly bill.
If you don't plan on buying any other real estate, you should consider de-levering yourself and paying off the debt. This will not only give you peace of mind, but also the math is generally in your favor esp with the high interest mortgages. This way you can receive a nice cashflow and generate passive income, which is likely why you are on this journey. Stocks are volatile and you get taxed on any capital gains. Also, good to have some stocks for the potential upside, but not only...
Hi Becca,
I am also an investor from SF bay area. I invest, rehab, and manage my own properties out of state, so I can totally understand your frustration.
Instead of SFH and LTR, I start to shift to 2-4 units multi family properties and rent each unit out as MTR. The cash flow from MTR is definitely much better than LTR excluding the headache from dealing with trouble tenants. You can also try furnished LTR which might produce higher cash flow than a non-furnished ones especially for SFH in Class A area. You can always check out rent from the furnished finder to see if there are MTR demand in Indianapolis area. Maybe you will be able to use the positive cash flow to balance out the negative cash flow SFH that you rent out to your family in the City.
Beside REI, you can also diversify your investment in some index funds...and others. W2 jobs offer 401K and employer's match, HSA, paid vacation, paid sick hours, low cost health insurance, cellphone bills, dry clean, employee meal, discount on things and much more. Unless you are able to cover those bills by yourself, it might be better to find another job if your current job costs you so much stress IMO.
Happy investing & best luck on your next move!
Quote from @Becca F.:
I currently have 3 SFH rentals solely owned (1 in San Francisco Bay Area and 2 in Indianapolis metro area) and 1 apartment building in the Bay Area with co-investors). I have a lot of equity in the Bay Area house and the apartment building. SFH is currently negative cash flow because I'm renting out to family members, trying to get roommates in to bring it up to market rent. The apartment building cash flows the most out of all the properties.
Indy SFH#1 in Class A nice suburb with great schools has appreciated in 10 years (doubled in value) that I've owned it. However my cash flow has decreased from $400 a month (in 2019) to now $110 a month in January 2023 due to property tax increases. It's really $66 if you divide the annual HOA fee into monthly amounts. House was built in 2005 so haven't had too many expenses recently (replaced water heater 2017 and HVAC 2018), but it will need a new roof in a few years, I would guess.
Indy SFH#2 is a renovated home (built in 1920) bought 7 months ago in a Class C moving up to B area. It's supposed to cash flow $176 but I have only received 1 full month rent (minus the property management fee) due to repairs that tenant has called the PM company for. I'm in escrow on Indy SFH#3 - projected cash flow is negative - $100 or so with these interest rates. Hopefully I can raise the rent over the next few years.
Since these cash flow amounts are small, they would be wiped out by a major capital expense for the year. I have reserves but I feel like I have too much in real estate and should take a break and invest in more liquid forms (stocks and index funds). My net worth in RE is well over 50% (don't want to go into specific numbers on a public forum). I've heard different investors have net worth range from 20% to 98% in RE. My goal is to leave stressful W2 job within 5 years or scale down to working on part-time/contract basis. I feel like I'm starting to over leverage or take on too much risk. Is that part of the definition of over leverage, with rents barely covering my monthly expenses?
Also there's the headache factor with investing out of state especially older homes. My thoughts were to in the near future possibly sell the Indiana properties because of the ever increasing property taxes, 2.77% and 2.78% tax rate and 1031 to a SFH in a less expensive part of Northern California (90 min drive). Nevada or Arizona have much lower property taxes and better appreciation but I would be cash flow negative with those also (as long term rentals) and again it's out of state. Or just sell them and take the capital gains hit but then I lose the rental income and tax write offs.
Am I missing something but how am I going to leave my W2 job or go part-time if I'm barely cash flowing especially on these Indiana properties? Even if I bought 10 more Indy properties all my net rental income won't add up to my W2 income (after taxes). I do my own taxes so I can see my taxable income reduced every time I add a property into the tax return form. They're passive losses but I'm tracking my hours to see if I qualify for Real Estate Professional Status. This RE investing combined with a W2 job is stressing me out. Thoughts?
Sorry for the essay but I'm frustrated.
Becca, your story sounds like mine. I started investing by buying out-of-state properties individually. I bought properties in an accessible, cash-flow market. They did great most months, but there were certainly headaches, and the minor cash flow from 6 units wasn't feeling like it was worth it to me.
I pivoted to a strategy that works much better for me, and I have a 10-year plan to "retire" from my day job with $100k+ passive cash flow - which keeps growing each year after that. It's possible!
Happy to chat 1:1. Otherwise, good luck and I'm rooting for you!