Overleveraging, net worth, cash flow and headache factor

[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. 

[Carlos Ptriawan]

Quote from @Peter W.:

I see two issues. I don’t think you have conviction in your macro views/investment thesis or your strategy. The other issue is I think your expectations are too high (but I addressed that in an earlier post).   It’s not clear why you chose Indy which has you second guessing that choice.

Buy local real estate (within 15 minutes of where I live). Currently targeting single family homes. 0 cash flow is okay because I will eventually be able to refinance into significantly lower rates at which point the property will cash flow.

Wish everyone wrote in BP like these. Thumbs up!

[Becca F.]

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

[Carlos Ptriawan]

Quote from @Becca F.:

Quote from @Account Closed:

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

Indy SFH#1 has pretty good return with 6.5% YoY, that's double than inflation. Once property is rising in meteoritic wave like this, property tax is always going up as expected (but we don't account it in initial underwriting). So your problem is very similar to the issue that all multifamily operator experienced :

once the cap rate getting lower and appreciation increases, property tax also increases, which depress CoC and reduce NoI.
So How the multifamily guy doing it is just sell the property once they have decent size of appreciation and move to different project. This is one way of looking at how to manage asset The other approach is to never sell (many also similar). 

This is why most apartment operator sell asset before the 7th year.  Sometimes even on the 2nd/3rd year.

In your case of holding 10 years, the return is pretty good !
So what I'm doing in your case is two thing, either sell it now or sell it later, if 2025 the appreciation is less than 4% I would just sell. You should bank your effort from the appreciation, not from cash flow.

I would only hold property forever for unit that I want to live there sometime in the future.

[V.G Jason]

Quote from @Peter W.:

I see two issues. I don’t think you have conviction in your macro views/investment thesis or your strategy. The other issue is I think your expectations are too high (but I addressed that in an earlier post).   It’s not clear why you chose Indy which has you second guessing that choice. You bought house number 3 because you were worried interest rates were going to drop and housing prices would rise, but now that you bought you’re anxious about the property. But if you had conviction interest rates would fall you wouldn’t mind the slightly negative cash flow because you will be able to refinance within 12 months to bring that cash flow positive.

My investment thesis

Permabull America: America will continue to be one of the best if not the best place to live work and invest. Any setbacks in the economy are temporary.

Real estate will continue to be one of the best places to store wealth. It will be one of the best places for Americans to access cheap debt.

Interest rates (for treasuries) will in the long run be at or below inflation/gdp growth. (High interest rates are temporary) we may not see 3% mortgages again, but I bet we see under 5% on primary residences more often than not over the next 15 years.

The mega corporations have consolidated power in the near term. This means wealth will disproportionately flow to them.

Tier 1 cities will continue to see disproportionate growth compared to the rest of the country.

Investing in real estate locally means a creates advantages (reduces risk of buying lemons and operational efficiency)

This has led to my current strategy:

Target ~40-50% of assets in stock market and 50-60 in real estate. Use real estate to access low cost debt to increase my overall returns.

Stocks are primarily index funds with additional exposure to the mega corporations (most notably Microsoft and google)

Buy local real estate (within 15 minutes of where I live). Currently targeting single family homes. 0 cash flow is okay because I will eventually be able to refinance into significantly lower rates at which point the property will cash flow.

Over the next five years buy 5-8 properties (1- 1.5/yr) to get asset allocation in line with what was suggested above. Refine tactics in terms of neighborhood characteristics, property type and management style).

because I have strong convictions in both the thesis and strategy I am better able to deal with hiccups and stressors and less likely to make fear based mistakes.

 I agree with most, but two things i disagree.

Right now best investment is buying hard asset with lower LTV in primo area, like residential Nashville, etc., that is likely discounted due to current conditions. If you cannot do that, then second best investment is buying the debt. Third best investment is buying S&P or general america large cap index. Fourth best investment hard asset with all appreciation-based characteristics surrounding it at 20-25% downpayment and keep cash reserves deep for the turbulence. That way if your conviction is wrong, the 20-25% equity is at risk and not more. And if you're right, you're gaining massive upside past year 8 where equity paydown is tapped.

If you're able to do all four your cash flow from best investment + debt notes will be more than your cash loss in fourth best investment + subsidize your s&p investment monthly or annually. You have to be able to be liquid If you do just 4th best, you will need to strand a lot of cash to manage. That alone is going to be a net loss. So if you do just #4, make sure your cash is in some rolling balance that accrues the 4-5% HYSA or tbill or fixed income to mitigate the loss spread of your debt servicing rate + negative cash flow versus your apy. 

[Jay Hinrichs]

Quote from @Becca F.:

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

that all works until your condenser is stolen right ? 

[Sam Yin]

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. 

 Do not give up. Keep at it. You got this. I applaud you for being in the game already.

The responses have been very honest and realistic... for many. You can be the outlier, but it will require you to be strategic. Just as @Henry Clark stated, set your goal, set a timeline, work backward and see if your current holdings are even in line with the strategy to meet your goal.

This may mean that you need to liquidate them and start over or adjust them to fit. Based on the current numbers you elude to, those are not what I would consider great, or even good deals, for you. It combines your current situation/responsibilities and the return on those investments. Most times, if not all, you have the most control over an investment when you can be there in person. That level of control includes the ability to control its appreciation for you to be able to extract and reinvest or grow your net worth. That net worth or extracted equity is what you need to grow and be able to leave your W2. It is that simple. But you may need to review your current holding and fill in the holes so that your ship is tight and can weather storms for you to leave a W2 long-term.
The above is regardless of whether you want to do SFR, MFR, Officers, Land, development, or Shopping centers. It has to do with the most efficient use of time and money.

For example, if you are currently in the Bay Area and want to keep up that lifestyle, then you need to be even more aggressive. Let us say you make $200K/yr, have a few kids, and your W2 gives you insurance, a 401K, 357b, or an IRA with some employer match. Well, you effectively have a job that is worth closer to $300K/yr. Thus, figure out what asset type you are willing to put energy towards that will get you to $300K in the number of years you wish to leave your W2. Be realistic, but set the goal high. Work that math backward. Go back in and see if there are any adjustments on your part that you can make to get you there faster, or make it more tolerable financially until you get there.

This may mean cutting back on current luxuries, like subscriptions, coffees, and similar common leisure. remember, it is temporary... or it can be permanent, up to you. Can you bring your portfolio closer to save on frequent flights to maintain better control/save time? Even a property 60 to 100 miles away is better than most OOS. believe me, there are just as good deals here in CA as there are in any state in the US. That is because CA is huge and the majority of the land here is tertiary markets that many overlook. People will tell you that they can get SFRs for 100K OOS. They are here in CA as well, AND it is closer so you have better control. That "control" includes keeping a direct eye, picking up after tenants to increase curb appeal or giving you a better sense of when to increase rents based on the neighborhood evolution, or when to trade for that matter. you do not have that when it is too far from where you are. 

Obviously, if your life situation does not allow you to be too aggressive, then the formula will need to be adjusted. Either get more risky, lengthen the timeline, get partners, etc... One thing is clear, it is not easy to leave a high paying W2 through REI, commonly. However, it is more than possible, it has been done by many on here. Some call them exceptions, others say it is because of timing or luck or the right cycle. I rather believe it is 80% hard work and dedication.

There is so much more to write. But the final part is whether you will be passing this on to your heirs. if so, they should have direct and constant contact now for better assimilation into REI. or else your REI portfolio will be a statistic after you are gone. Then, if some children finally see the light, they will start from scratch and the tragic cycle starts all over. but it can likely be overcome with closer assets that cost less to be on-site regularly.

This is only an opinion to consider. Others may have differing opinions. I did those things and I was able to leave my W2. I reassessed my few SFRs and sold them all to start over with a different strategy based on the timeline I wanted to achieve. It is ALL in CA. I did not listen tot he naysayers and cut folks out of my life that was a drag, friends/family. I did neglect my kids and my wife to a large degree, compared to what they were used to. AND they were my "Why." It was temporary, just a year or so. Worth every moment of neglect!!! No regrets. And you can do it too!

There are a lot of resources online and on this forum. Keep up your health to keep up your energy and pour it all into REI if that is what you truly want. You got this.

[Leslie Pappas]

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. 

Hi Becca, great post and love the way you're thinking. I've helped many real estate investors move their money out of California. There plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. I can't speak specifically to the Indy markets but there is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.

A very good source of local analysis is rereport.com

[Jim G.]

Just curious and want to learn from you. 
Are you using DSCR loan after the 4th or 5th property ? what's your typical DSCR rate and what year is the acquisition after the first ten ?

I avoid DSCR by paying off cheap properties in OOS while consolidating into few larger ones in Bay Area.

[Becca F.]

Quote from @Jay Hinrichs:

Quote from @Becca F.:

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

that all works until your condenser is stolen right ? 

I just closed in Indy SFH#3 and this one has a cage around the AC unit. :) I have my PM Company on this property now.

Just an aside, prior to buying Indy #2 earlier this year, I looked at other inexpensive markets with 2 turnkey companies in one in Memphis and one who covers Cleveland, St. Louis and Detroit. The numbers look great on paper but no one tells you about the cap ex expenses, repairs, higher turnover of Class C properties, stolen AC units, etc. I started adding up the monthly payments of the 3 Indy properties and the 3 rents (projected rent on SFH#3 since it hasn't been rented out yet) and I could buy something in Northern California within driving distance or something in an appreciating state Nevada or Arizona with lower property taxes in NV and AZ. With long term rentals and interest rates it would still be cash flow negative but may need to look at other options, MTR or STR (to traveling business people, not people vacationing).

I'm doing some re-assessment. I'm not saying investing in the Midwest is bad. It's landlord friendly and low barrier of entry with low purchase prices but with all my CA equity it might not be the best strategy for long term wealth building for me. 

[Carlos Ptriawan]

Quote from @Becca F.:

Quote from @Jay Hinrichs:

Quote from @Becca F.:

I'm doing some re-assessment. I'm not saying investing in the Midwest is bad. It's landlord friendly and low barrier of entry with low purchase prices but with all my CA equity it might not be the best strategy for long term wealth building for me. 

 one hundred percent correct....

time to re-assess and follow your data-driven objective and experience.

[Becca F.]

Quote from @Sam Yin:

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. 

 Do not give up. Keep at it. You got this. I applaud you for being in the game already.

The responses have been very honest and realistic... for many. You can be the outlier, but it will require you to be strategic. Just as @Henry Clark stated, set your goal, set a timeline, work backward and see if your current holdings are even in line with the strategy to meet your goal.

This may mean that you need to liquidate them and start over or adjust them to fit. Based on the current numbers you elude to, those are not what I would consider great, or even good deals, for you. It combines your current situation/responsibilities and the return on those investments. Most times, if not all, you have the most control over an investment when you can be there in person. That level of control includes the ability to control its appreciation for you to be able to extract and reinvest or grow your net worth. That net worth or extracted equity is what you need to grow and be able to leave your W2. It is that simple. But you may need to review your current holding and fill in the holes so that your ship is tight and can weather storms for you to leave a W2 long-term.
The above is regardless of whether you want to do SFR, MFR, Officers, Land, development, or Shopping centers. It has to do with the most efficient use of time and money.

For example, if you are currently in the Bay Area and want to keep up that lifestyle, then you need to be even more aggressive. Let us say you make $200K/yr, have a few kids, and your W2 gives you insurance, a 401K, 357b, or an IRA with some employer match. Well, you effectively have a job that is worth closer to $300K/yr. Thus, figure out what asset type you are willing to put energy towards that will get you to $300K in the number of years you wish to leave your W2. Be realistic, but set the goal high. Work that math backward. Go back in and see if there are any adjustments on your part that you can make to get you there faster, or make it more tolerable financially until you get there.

This may mean cutting back on current luxuries, like subscriptions, coffees, and similar common leisure. remember, it is temporary... or it can be permanent, up to you. Can you bring your portfolio closer to save on frequent flights to maintain better control/save time? Even a property 60 to 100 miles away is better than most OOS. believe me, there are just as good deals here in CA as there are in any state in the US. That is because CA is huge and the majority of the land here is tertiary markets that many overlook. People will tell you that they can get SFRs for 100K OOS. They are here in CA as well, AND it is closer so you have better control. That "control" includes keeping a direct eye, picking up after tenants to increase curb appeal or giving you a better sense of when to increase rents based on the neighborhood evolution, or when to trade for that matter. you do not have that when it is too far from where you are. 

Obviously, if your life situation does not allow you to be too aggressive, then the formula will need to be adjusted. Either get more risky, lengthen the timeline, get partners, etc... One thing is clear, it is not easy to leave a high paying W2 through REI, commonly. However, it is more than possible, it has been done by many on here. Some call them exceptions, others say it is because of timing or luck or the right cycle. I rather believe it is 80% hard work and dedication.

There is so much more to write. But the final part is whether you will be passing this on to your heirs. if so, they should have direct and constant contact now for better assimilation into REI. or else your REI portfolio will be a statistic after you are gone. Then, if some children finally see the light, they will start from scratch and the tragic cycle starts all over. but it can likely be overcome with closer assets that cost less to be on-site regularly.

This is only an opinion to consider. Others may have differing opinions. I did those things and I was able to leave my W2. I reassessed my few SFRs and sold them all to start over with a different strategy based on the timeline I wanted to achieve. It is ALL in CA. I did not listen tot he naysayers and cut folks out of my life that was a drag, friends/family. I did neglect my kids and my wife to a large degree, compared to what they were used to. AND they were my "Why." It was temporary, just a year or so. Worth every moment of neglect!!! No regrets. And you can do it too!

There are a lot of resources online and on this forum. Keep up your health to keep up your energy and pour it all into REI if that is what you truly want. You got this.

 Sam I always appreciate your insight. My kids are old enough to know that mom is a RE investor and I've specifically told them "don't sell off the properties when I die and buy a Ferrari or take expensive vacations." This is typed in my estate plan to them. The Bay Area apartment building I co-own with family members is from my grandparents - this is generational wealth being passed down and my kids know about this. 

The problem is the pushback from other family members who talk to my kids and think I'm crazy to buy real estate and their opinion is to be mortgage free and "just sell all your properties and take the cash and invest in stocks/index funds and your IRA". I understand their perspective, it's just easier to click on a button and buy index funds or pay a financial advisor and then you're completely a passive investor. Then my tax liability goes way up and capital gains tax on the Bay Area SFH will be huge if I got out of RE.

I'm going to guess my kids wouldn't want to deal with 3 Indy properties and it would be easier to condense those down to one CA property so I'm re-evaluating my portfolio for the future. Since I just closed on IndySFH#3, it wouldn't make sense to try to sell that immediately. I'm getting more feedback from other CA investors and Indy investors. 

I'm also open to moving out of California when I retire from my W2 job - Nevada is a consideration but the median home prices across the country have gone way up in the past 4 years so I don't want a huge mortgage on a primary home when I'm retiring. 

[V.G Jason]

Quote from @Becca F.:

I'm going to guess my kids wouldn't want to deal with 3 Indy properties and it would be easier to condense those down to one CA property so I'm re-evaluating my portfolio for the future. Since I just closed on IndySFH#3, it wouldn't make sense to try to sell that immediately. I'm getting more feedback from other CA investors and Indy investors. 

I'm also open to moving out of California when I retire from my W2 job - Nevada is a consideration but the median home prices across the country have gone way up in the past 4 years so I don't want a huge mortgage on a primary home when I'm retiring. 

 So the original message will be echoed by lots of people who bought H2 22' fwd in a matter of 5 years. They will have a hard time with the volatility of the investment and like the other fellow said conviction(and proper reserves) will be how you weather it. The one's without it will sell to HNW or institutional. The difficulty of owning, keeping, maintaining and having your head above water is why those aforementioned types remain predatory & are fully in front of this.

In regards to what you said above, you clearly state your desires. Why don't you pursue that?

Take your two original indiana properties sell them and 1031 them into a STR in a city like where you could see yourself retire. You'll have a significantly less mortgage, great(er) tax benefits, higher cash flow and likely less capex(2 properties vs 1). When the time comes to retire, the STR turns into your retirement house. You sell the 3rd Indiana property and pay down remainder of retirement house or evaluate opportunities then. Keep the bay area properties though for family pass through.

[Bonnie Low]

It sounds like you bought them for appreciation but are frustrated by the lack of cash flow. It is very, very hard to get both right now, especially with the higher interest rates you bought the second property at rising property tax (which you have zero control over) and having pulled cash out of the first property. So maybe your strategy needs to be revisited? Are you committed to holding for an extended length of time to realize the appreciation? Or are you trying to set yourself up for cash flow now so you can prove to yourself that there are income options available to you besides your W2? If it's the latter, it sounds like your strategies aren't working for you. You have a potentially lucrative bay area property that is under-rented. And you have two midwest properties that are generating next to nothing. I don't know what your tax implications would be of selling the midwest properties, but again, unless you're just willing to sit on them and wait for your appreciation, it doesn't seem they're going to generate cash flow as-is. Have you considered converting either property to an STR or MTR? While STRs might be off the table if your city prohibits them, MTR could potentially produce about 2x long term rents with the right property. Just something to think about.

[Carlos Ptriawan]

Quote from @Bonnie Low:

It sounds like you bought them for appreciation but are frustrated by the lack of cash flow. It is very, very hard to get both right now, especially with the higher interest rates you bought the second property at rising property tax (which you have zero control over) and having pulled cash out of the first property. So maybe your strategy needs to be revisited? Are you committed to holding for an extended length of time to realize the appreciation? Or are you trying to set yourself up for cash flow now so you can prove to yourself that there are income options available to you besides your W2? If it's the latter, it sounds like your strategies aren't working for you. You have a potentially lucrative bay area property that is under-rented. And you have two midwest properties that are generating next to nothing. I don't know what your tax implications would be of selling the midwest properties, but again, unless you're just willing to sit on them and wait for your appreciation, it doesn't seem they're going to generate cash flow as-is. Have you considered converting either property to an STR or MTR? While STRs might be off the table if your city prohibits them, MTR could potentially produce about 2x long term rents with the right property. Just something to think about.

This makes me want to create new class for investor, really , maybe I can charge $250 for an investment class and how to understand appreciation/ cash flow at different market environment. There's no randomness in investment, everything is almost predictable in high degree of accuracy.

Since interest rate has been rising for 400bps, it's expected now that the general return for equity investment would reduce for 200bps and debt investment increases by 200-400 bps.

This is why folks like Jay also mentioned to start investing at debt rather than equity, as most investment (either as debt or equity)in next 5 years or so would generate almost similar return which is 8-12% IRR. In other word, don't expect the retun for next 5 years would be the same to previous 5 years. This is especially truer for new equity rental being purchased in 2023.

This chart from KKR is making things are very easy to be understood.

[Becca F.]

Quote from @Bonnie Low:

It sounds like you bought them for appreciation but are frustrated by the lack of cash flow. It is very, very hard to get both right now, especially with the higher interest rates you bought the second property at rising property tax (which you have zero control over) and having pulled cash out of the first property. So maybe your strategy needs to be revisited? Are you committed to holding for an extended length of time to realize the appreciation? Or are you trying to set yourself up for cash flow now so you can prove to yourself that there are income options available to you besides your W2? If it's the latter, it sounds like your strategies aren't working for you. You have a potentially lucrative bay area property that is under-rented. And you have two midwest properties that are generating next to nothing. I don't know what your tax implications would be of selling the midwest properties, but again, unless you're just willing to sit on them and wait for your appreciation, it doesn't seem they're going to generate cash flow as-is. Have you considered converting either property to an STR or MTR? While STRs might be off the table if your city prohibits them, MTR could potentially produce about 2x long term rents with the right property. Just something to think about.

Thanks for the feedback. For Indy SFH#1 it's in a nice suburb with great school district. It wouldn't be the best for MTR since traveling RNs or corporate people wouldn't drive all the way up there (it's on the border of farm land until farmers sell off land to developers building SFH or MFH) - it's not near downtown Indianapolis. Also HOA says no STRs at all.

With Indy SFH#2, MTR could be possible but PM companies charge 15% PM monthly management fee and I have to pay for all utilities and internet/WiFI and furnish it. This one is barely cash flowing, will talk to PM about why tenant is calling in for all these repairs. LTR management fee is 10% standard with PMCs in Indy. They may go to 9% if they manage multiple properties - SFH#1 has a different PM.

Both SFH#1 and SFH#2 leases expire this summer, July 31 and June 30. Both have paid rent, never late, highly qualified renters. SFH#1 tenant is on year 3 of lease now. I've raised rent ($90 on last lease) but I can't raise the rent $200 to $300 on a lease renewal to compensate for the property tax increases - that is excessive. I'm in the market rate range so it's not severely under rent.

Indy SFH#3 just closed on, MTR possible. Indiana University Health is building a new hospital downtown so that could be a potential market, travel RNs. I was planning to LTR this one, take the -$100 to -$120 a month cash flow and hopefully raise rent and refinance later. I have 7.625% conventional loan 30 year fixed. Winter time is a difficult time to rent or people to move with snow and ice unless they really have to move. House needs minor repairs and cleaning and new roof before it's truly rent ready so maybe looking at Feb/March before it can be rented out.

To throw another curveball, talked to someone else (RE agent in Sacramento and Bay Area agents) who suggested 1031 the Bay Area SFH to buy multi-unit (2 to 4 unit) or smaller apartment building in California to cash flow more than $2000 a month (Sacramento, Stockton, Central Valley) but my property tax will skyrocket since I'd be paying on current assessed value - I have reasonable property taxes because of Prop. 13. This one would require lots of financial analysis before I sell off a Bay Area SFH.

[Vadim F.]

Quote from @Becca F.:

Quote from @Jay Hinrichs:

Quote from @Becca F.:

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

that all works until your condenser is stolen right ? 

I just closed in Indy SFH#3 and this one has a cage around the AC unit. :) I have my PM Company on this property now.

Just an aside, prior to buying Indy #2 earlier this year, I looked at other inexpensive markets with 2 turnkey companies in one in Memphis and one who covers Cleveland, St. Louis and Detroit. The numbers look great on paper but no one tells you about the cap ex expenses, repairs, higher turnover of Class C properties, stolen AC units, etc. I started adding up the monthly payments of the 3 Indy properties and the 3 rents (projected rent on SFH#3 since it hasn't been rented out yet) and I could buy something in Northern California within driving distance or something in an appreciating state Nevada or Arizona with lower property taxes in NV and AZ. With long term rentals and interest rates it would still be cash flow negative but may need to look at other options, MTR or STR (to traveling business people, not people vacationing).

I'm doing some re-assessment. I'm not saying investing in the Midwest is bad. It's landlord friendly and low barrier of entry with low purchase prices but with all my CA equity it might not be the best strategy for long term wealth building for me. 

 @Becca F. you mention you looked into other midwest markets that offer turnkey properties, can I ask why you want turnkey? Cleveland being a market I invest in, you can find a 3/4br SFH for 60-70k in an OK area on the east side, put in 15-20k into reno work and rent it out Sec 8 for $1200-1400mo. That will give you a NET 13-14% CoC return and possibility to either defer refi or cash-out refi and re-use those funds for more projects. If you go turnkey, you don't know what kind of work they did and you''ll get an 6-8% CoC return if you're lucky.

[Carlos Ptriawan]

Quote from @Becca F.:

Quote from @Bonnie Low:

It sounds like you bought them for appreciation but are frustrated by the lack of cash flow. It is very, very hard to get both right now, especially with the higher interest rates you bought the second property at rising property tax (which you have zero control over) and having pulled cash out of the first property. So maybe your strategy needs to be revisited? Are you committed to holding for an extended length of time to realize the appreciation? Or are you trying to set yourself up for cash flow now so you can prove to yourself that there are income options available to you besides your W2? If it's the latter, it sounds like your strategies aren't working for you. You have a potentially lucrative bay area property that is under-rented. And you have two midwest properties that are generating next to nothing. I don't know what your tax implications would be of selling the midwest properties, but again, unless you're just willing to sit on them and wait for your appreciation, it doesn't seem they're going to generate cash flow as-is. Have you considered converting either property to an STR or MTR? While STRs might be off the table if your city prohibits them, MTR could potentially produce about 2x long term rents with the right property. Just something to think about.

Thanks for the feedback. For Indy SFH#1 it's in a nice suburb with great school district. It wouldn't be the best for MTR since traveling RNs or corporate people wouldn't drive all the way up there (it's on the border of farm land until farmers sell off land to developers building SFH or MFH) - it's not near downtown Indianapolis. Also HOA says no STRs at all.

With Indy SFH#2, MTR could be possible but PM companies charge 15% PM monthly management fee and I have to pay for all utilities and internet/WiFI and furnish it. This one is barely cash flowing, will talk to PM about why tenant is calling in for all these repairs. LTR management fee is 10% standard with PMCs in Indy. They may go to 9% if they manage multiple properties - SFH#1 has a different PM.

Both SFH#1 and SFH#2 leases expire this summer, July 31 and June 30. Both have paid rent, never late, highly qualified renters. SFH#1 tenant is on year 3 of lease now. I've raised rent ($90 on last lease) but I can't raise the rent $200 to $300 on a lease renewal to compensate for the property tax increases - that is excessive. I'm in the market rate range so it's not severely under rent.

Indy SFH#3 just closed on, MTR possible. Indiana University Health is building a new hospital downtown so that could be a potential market, travel RNs. I was planning to LTR this one, take the -$100 to -$120 a month cash flow and hopefully raise rent and refinance later. I have 7.625% conventional loan 30 year fixed. Winter time is a difficult time to rent or people to move with snow and ice unless they really have to move. House needs minor repairs and cleaning and new roof before it's truly rent ready so maybe looking at Feb/March before it can be rented out.

To throw another curveball, talked to someone else (RE agent in Sacramento and Bay Area agents) who suggested 1031 the Bay Area SFH to buy multi-unit (2 to 4 unit) or smaller apartment building in California to cash flow more than $2000 a month (Sacramento, Stockton, Central Valley) but my property tax will skyrocket since I'd be paying on current assessed value - I have reasonable property taxes because of Prop. 13. This one would require lots of financial analysis before I sell off a Bay Area SFH.

 It seems you are going to lose money left and right following random realtor advice

[Bonnie Low]

Quote from @Becca F.:

Quote from @Bonnie Low:

It sounds like you bought them for appreciation but are frustrated by the lack of cash flow. It is very, very hard to get both right now, especially with the higher interest rates you bought the second property at rising property tax (which you have zero control over) and having pulled cash out of the first property. So maybe your strategy needs to be revisited? Are you committed to holding for an extended length of time to realize the appreciation? Or are you trying to set yourself up for cash flow now so you can prove to yourself that there are income options available to you besides your W2? If it's the latter, it sounds like your strategies aren't working for you. You have a potentially lucrative bay area property that is under-rented. And you have two midwest properties that are generating next to nothing. I don't know what your tax implications would be of selling the midwest properties, but again, unless you're just willing to sit on them and wait for your appreciation, it doesn't seem they're going to generate cash flow as-is. Have you considered converting either property to an STR or MTR? While STRs might be off the table if your city prohibits them, MTR could potentially produce about 2x long term rents with the right property. Just something to think about.

Thanks for the feedback. For Indy SFH#1 it's in a nice suburb with great school district. It wouldn't be the best for MTR since traveling RNs or corporate people wouldn't drive all the way up there (it's on the border of farm land until farmers sell off land to developers building SFH or MFH) - it's not near downtown Indianapolis. Also HOA says no STRs at all.

With Indy SFH#2, MTR could be possible but PM companies charge 15% PM monthly management fee and I have to pay for all utilities and internet/WiFI and furnish it. This one is barely cash flowing, will talk to PM about why tenant is calling in for all these repairs. LTR management fee is 10% standard with PMCs in Indy. They may go to 9% if they manage multiple properties - SFH#1 has a different PM.

Both SFH#1 and SFH#2 leases expire this summer, July 31 and June 30. Both have paid rent, never late, highly qualified renters. SFH#1 tenant is on year 3 of lease now. I've raised rent ($90 on last lease) but I can't raise the rent $200 to $300 on a lease renewal to compensate for the property tax increases - that is excessive. I'm in the market rate range so it's not severely under rent.

Indy SFH#3 just closed on, MTR possible. Indiana University Health is building a new hospital downtown so that could be a potential market, travel RNs. I was planning to LTR this one, take the -$100 to -$120 a month cash flow and hopefully raise rent and refinance later. I have 7.625% conventional loan 30 year fixed. Winter time is a difficult time to rent or people to move with snow and ice unless they really have to move. House needs minor repairs and cleaning and new roof before it's truly rent ready so maybe looking at Feb/March before it can be rented out.

To throw another curveball, talked to someone else (RE agent in Sacramento and Bay Area agents) who suggested 1031 the Bay Area SFH to buy multi-unit (2 to 4 unit) or smaller apartment building in California to cash flow more than $2000 a month (Sacramento, Stockton, Central Valley) but my property tax will skyrocket since I'd be paying on current assessed value - I have reasonable property taxes because of Prop. 13. This one would require lots of financial analysis before I sell off a Bay Area SFH.

I would just encourage you to think more broadly about guest types for midterm rentals. They are historically associated with travel nurses, but guests looking for midterms are much broader. Everything from travel nurses, to academics, to relocations to insurance placements and everything in between. You mentioned one unit that's a little further out but in a nice subdivision in a good school district. Depending on the size of the house, this could have potential for the insurance placement strategy, which tends to be one of the most lucrative strategies for midterms. 3, 4 and 5+ bedrooms are typically in demand and especially if they're pet friendly properties. There is also call for smaller places for insurance rentals - just more competition from some of the corporate housing companies. You'd have to incur the cost of furnishing an MTR, though, and you may not be wanting to put more money in to your Indy properties right now. On a related note, you really can manage a midterm rental from afar. You'll need to treat it much like you would an STR in that you'll need a cleaner and a handyman and someone to restock it for you, but it's absolutely doable. However, if you don't have the time and aren't inclined to take that on, you're probably looking at a minimum of 15% for MTR management and 20-25% is common.

[Becca F.]

Quote from @Vadim F.:

Quote from @Becca F.:

Quote from @Jay Hinrichs:

Quote from @Becca F.:

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

that all works until your condenser is stolen right ? 

I just closed in Indy SFH#3 and this one has a cage around the AC unit. :) I have my PM Company on this property now.

Just an aside, prior to buying Indy #2 earlier this year, I looked at other inexpensive markets with 2 turnkey companies in one in Memphis and one who covers Cleveland, St. Louis and Detroit. The numbers look great on paper but no one tells you about the cap ex expenses, repairs, higher turnover of Class C properties, stolen AC units, etc. I started adding up the monthly payments of the 3 Indy properties and the 3 rents (projected rent on SFH#3 since it hasn't been rented out yet) and I could buy something in Northern California within driving distance or something in an appreciating state Nevada or Arizona with lower property taxes in NV and AZ. With long term rentals and interest rates it would still be cash flow negative but may need to look at other options, MTR or STR (to traveling business people, not people vacationing).

I'm doing some re-assessment. I'm not saying investing in the Midwest is bad. It's landlord friendly and low barrier of entry with low purchase prices but with all my CA equity it might not be the best strategy for long term wealth building for me. 

 @Becca F. you mention you looked into other midwest markets that offer turnkey properties, can I ask why you want turnkey? Cleveland being a market I invest in, you can find a 3/4br SFH for 60-70k in an OK area on the east side, put in 15-20k into reno work and rent it out Sec 8 for $1200-1400mo. That will give you a NET 13-14% CoC return and possibility to either defer refi or cash-out refi and re-use those funds for more projects. If you go turnkey, you don't know what kind of work they did and you''ll get an 6-8% CoC return if you're lucky.

I attempted 6 offers in Indy intending to BRRRR. The ARVs weren't high enough, seller accepted someone's cash offer, etc. It was too much stress and time consuming with my W2 job trying to get the numbers right with rehab costs while I'm 2000 miles away and I can't even walk the property. My friends and family saw how stressed I was trying to BRRRR OOS. That's not a good ROI to me if my blood pressure is going up.

I know the seller got the equity with buying a renovated home, which I was ok with for Indy SFH#2. With the house I just closed on, it does have potential to value add in the future with turning the office into a bedroom by adding a closet (making it a 3 bedroom instead of just 2 bedroom) and building a detached garage.

I'm going to take a break from making offers and re-assess everything. I think as RE investors the mindset is to keep looking for properties. Sometimes it's good to pause, let the money sit in HYSA or index funds and re-evaluate.

[Carlos Ptriawan]

Quote from @Becca F.:

Quote from @Vadim F.:

Quote from @Becca F.:

Quote from @Jay Hinrichs:

Quote from @Becca F.:

Quote from @Account Closed:

Hi Becca,

If you don't mind a question : What was the driver to purchase the Indy SFR's that are cash flow negative? Too good to pass up?

If you can ride it out for 5 years (60 months at $200 month negative cash flow x 2 properties = $24k cost to hold on!) you'll increase rents and an opportunity to refi at a lower rate. Is it worth spending the extra $24k to you to keep these in your portfolio for 5 years?

The only reason I'd suggest holding on a bit longer with your Indy SFR's is you already paid the transaction costs to get into those deals. You'd have to pay those transaction costs again when you sell, plus hopefully incur some capital gains (profits!). If you can let your appreciation tree grow a bit your returns will be better should you choose to sell down the road.

If you can rework the numbers (raise rent a little each year) and get to net positive, the appreciation will come.  Getting the debt service covered is vital each month.  

Working a W2 position, investing in Real Estate and being a mom is lot!  I respect the pressure you're putting on yourself, but take a step back and look at what you've managed to accomplish.  You have a real estate portfolio that will allow you make some great choices for you, your family and kids future.

It sounds like your plan to have your SF area SFR cash flow at $2k per month is the biggest bucks for the bang (of the hammer). If you put that plan into effect will the cash flow off set your Indy properties monthly loss until rates drop a bit or you're able to raise rents?

I don't envy having family as tenants. That makes each decision more difficult and tends to change your lens from RE investor to "giving my family a good deal." While noble, it allows you to not fully maximize your returns of your REI portfolio.

What you've achieved is amazing, so drink that in.

 Great points about the transaction costs! Reading the BP forums, many people have recommended the Midwest for those of us living in California. Indiana is landlord friendly and the price points are affordable especially for new investors but is it the best strategy for what I'm trying to achieve? The monthly payments are much lower than buying in California, Nevada or Arizona if the house were to sit vacant. Cash flow is very difficult to come by now with current interest rates. So if hit 3 out of 4 - appreciation, principal pay down and tax benefits that was acceptable to me. 

To give more context, Indy SFH#1 I bought it for $140,000 in 2013 and it's now worth around $285,000, in a nice suburb. My interest rate is 3.875% and I did a $50,000 cash out refinance on it during the pandemic to help pay for renovations to the California SFH rental. I guess if I just did a rate and term refinance maybe I would be a little more cash flow positive.

On Indy SFH#2 purchased in March 2023 for $130,000 with 20% down at 6.99%. I used a rental property calculator and factored in 20 year hold, with 3% appreciation and 3% increase (rent increase, property tax, insurance, repairs, etc). I didn't put in capital expenses in this calculator since this was a renovated home - I keep a large reserve for each property. I put in $1300 annual to account for repairs the first year. The Internal Rate of Return is just under 12% and cap rate and 6.52%. I don't go too much by cap rates since I've heard that it's less accurate for SFHs. At Year 5 the cash flow increases significantly and Cash on Cash return is 4% and CoC is 10% at Year 11. This is a Class C potentially moving up to B area (according to the locals) so as homes are renovated, higher income tenants or primary home owners move in so that was the appreciation part. I also got feedback from two local Indy investors before submitting any offers.

Thanks for your positive words! 

that all works until your condenser is stolen right ? 

I just closed in Indy SFH#3 and this one has a cage around the AC unit. :) I have my PM Company on this property now.

Just an aside, prior to buying Indy #2 earlier this year, I looked at other inexpensive markets with 2 turnkey companies in one in Memphis and one who covers Cleveland, St. Louis and Detroit. The numbers look great on paper but no one tells you about the cap ex expenses, repairs, higher turnover of Class C properties, stolen AC units, etc. I started adding up the monthly payments of the 3 Indy properties and the 3 rents (projected rent on SFH#3 since it hasn't been rented out yet) and I could buy something in Northern California within driving distance or something in an appreciating state Nevada or Arizona with lower property taxes in NV and AZ. With long term rentals and interest rates it would still be cash flow negative but may need to look at other options, MTR or STR (to traveling business people, not people vacationing).

I'm doing some re-assessment. I'm not saying investing in the Midwest is bad. It's landlord friendly and low barrier of entry with low purchase prices but with all my CA equity it might not be the best strategy for long term wealth building for me. 

 @Becca F. you mention you looked into other midwest markets that offer turnkey properties, can I ask why you want turnkey? Cleveland being a market I invest in, you can find a 3/4br SFH for 60-70k in an OK area on the east side, put in 15-20k into reno work and rent it out Sec 8 for $1200-1400mo. That will give you a NET 13-14% CoC return and possibility to either defer refi or cash-out refi and re-use those funds for more projects. If you go turnkey, you don't know what kind of work they did and you''ll get an 6-8% CoC return if you're lucky.

I attempted 6 offers in Indy intending to BRRRR. The ARVs weren't high enough, seller accepted someone's cash offer, etc. It was too much stress and time consuming with my W2 job trying to get the numbers right with rehab costs while I'm 2000 miles away and I can't even walk the property. My friends and family saw how stressed I was trying to BRRRR OOS. That's not a good ROI to me if my blood pressure is going up.

I know the seller got the equity with buying a renovated home, which I was ok with for Indy 

I'm going to take a break from making offers and re-assess everything. I think as RE investors the mindset is to keep looking for properties. Sometimes it's good to pause, let the money sit in HYSA or index funds and re-evaluate.

 Good decision

[David M.]

@Becca F.

As a RE investor, yes you should be looking for good deals.  however, as an investor you should be diversifying and / or looking for the best area to invest.  In this environment, there are plenty of opportunities in other markets.  Real estate can be a good market to generate wealth.  There is plenty of "reasons" to "sell" you on it.  That goes with any investing market / area.  Opportunities are plenty in bonds / debt, for example.

Good luck.

[Alan F.]

Quote from @David M.:

@Becca F.

As a RE investor, yes you should be looking for good deals.  however, as an investor you should be diversifying and / or looking for the best area to invest.  In this environment, there are plenty of opportunities in other markets.  Real estate can be a good market to generate wealth.  There is plenty of "reasons" to "sell" you on it.  That goes with any investing market / area.  Opportunities are plenty in bonds / debt, for example.

Good luck.

 Great comment, I'm still keeping an eye out for underporming businesses to buy. Investing is investing ;)

[Allan C.]

@Becca F. Since you live in CA I suggest putting funds in 4 week Tbills instead of HYSA. You get nearly the same liquidity if you ladder your Tbills and you save 10% state tax.

[Linda West]

Quote from @Allan C.:

@Becca F. Since you live in CA I suggest putting funds in 4 week Tbills instead of HYSA. You get nearly the same liquidity if you ladder your Tbills and you save 10% state tax.

 I hadn't thought of that!  Would this require review/pruning/reinvesting every month?? Please tell me more,

[David M.]

@Linda West

The 4week Tbills would mature every 4 weeks so you'd have to rebuy.  There are many of other options.  Just open a brokerage account and the default money market account should give you 5%+.  Its like a bank account that actually pays interest.

With the "potential" of the rates dropping later in 2024, you may want to lock in longer maturity securities if you want to actually use treasuries.  Still, The brokerage account's interest is the really the best way to go for liquidity and getting today's rates while your cash is sitting around.

Its not real estate, but happy to chat.  Just send me a message.  Good luck.