Am I Limiting My Wealth?

Question

Thank you all for taking the time to read and provide any advice on my situation.

I’m currently facing a decision with my two properties and would appreciate your guidance. Here’s the breakdown:

- Property 1: This property has approximately $40,000 in equity but is cash flow negative by about $1,000 per month.

- Property 2: This property has around $100,000 in equity and is cash flowing positively at about +$200 per month. I know it's currently under-rented and believe I can increase the rent to generate around +$500 in cash flow.

My questions are as follows:

1. For Property 1: Should I sell this property and transfer the equity into another investment, or should I explore ways to lower the monthly payment and break even or slightly positive on cash flow?

2. For Property 2: Should I hold onto this property, increase the rent to improve cash flow, and potentially pull out some equity for another deal? Or would it make more sense to sell and reallocate that equity into a different property that might provide better returns?

I’ve received some conflicting advice:

- My tax advisor suggested keeping the negative cash flow from Property 1, as it helps offset my current job income, which is around $240,000 annually.

- My mentor recommended that I sell both properties and put the funds to work elsewhere, potentially in more lucrative opportunities.

I feel like holding onto the negative cashflow is limiting my growth potential, but I'm trying to weigh the options carefully. Any tips or advice from those of you who have navigated similar situations would be immensely appreciated!

Thank you all in advance for your help!

Jason Wray · Answer

Fernando,

Sounds like your mentor might be correct in selling both properties.  I am not sure if this mentor advised you on buying either one but the first home #1 Sell it fast.  Do not listen to your tax advisor he is not giving you sound advice!  I have heard CPA's and Tax people give bad advice when it comes to real estate.  You do not need a negative cash flow deal to show a loss on your Schedule E.  If you had a good "investor friendly" CPA he/she would write off enough to give you the deductions you need to help counter your W2 or 1099 income.

Reason I say sell the first home is even with $40K in equity its not worth it to do a cash out refinance.  Usually for every $10K you add to the current mortgage it will raise the mortgage payment by $85.00 a month.  So if you are already negative, a cash out refinance will only dig you deeper.  You also have to figure when you say $40K are you saying $40K and be at a 75% LTV or just $40K?  You can only borrower 75% of the value of the home as an investment 80% is possible but the rates are not worth the increase.

Home #2 depending on how high you can raise the rents $100K in equity is a good chunk but again are you using a 75% Max LTV and saying there is $100K to pull out.  Again without running the numbers it's tough to give you a real answer based on Max LTV and future rents at the new loan amount and rate.

If you have owned the rentals for a couple of years you can always do a 1031 exchange and avoid taxes by putting the sale proceeds into another investment home.  If you are buying property in or around Vegas I would rethink your options.  There are other states you can buy in that offer a better purchase to cash flow ratio.  Spend less to make more and look at 2-4 unit multifamily homes - more doors more income.

If you have any questions feel free to reach out running the numbers is easy and it might be exactly wha you need to make the next move.

Basit Siddiqi · Answer

The equity that you mention, is that just the FMV less the loan balance or is that the appreciation on the property?If its appreciation, I think you did a good job assuming you held the properties for a few years.If its just FMV less loan balance, i would only sell if you are unhappy with your appreciation / cash flow.

Gino Barbaro · Answer

@Fernando Guzman

First thing is to pick an investment and stick with it.  If you're negative can flowing property is going to appreciate, then it may make sense to hold on.

A loss is still a loss, and I would not hold onto a deal because I'm getting a write-off. That 1000 can turn much bigger with vacancy and unexpected repairs. I would not want to run a business and lose money every month.

You have to sit down with a business/life coach and figure out what you want real estate to accomplish, how is it going to fitinot your life. If you don't have that figured out and your relationship with money, moving money around is not going to solve anything. Clarity will set you free.

Gino

Fernando Guzman · Answer

Thanks, Joe. My mentor has shared similar advice, and I'm seriously considering making the switch. It's time to align myself with a tax professional who not only understands my current situation but can also help me scale efficiently.

Joe Villeneuve · Answer

Listen to your Mentor, hire a different tax guy.

Fernando Guzman · Answer

Thanks so much for the solid advice! I completely agree that the negative cash flow on Property 1 could limit my growth, and selling to reallocate the equity makes sense if I can’t improve the cash flow.

For Property 2, increasing the rent and possibly doing a cash-out refi are good ideas. I appreciate your input—it’s really helping me think through the next steps.

Ashish Acharya · Answer

@Fernando Guzman

For Property 1, the $1,000 monthly negative cash flow could limit your growth, despite the tax benefits. Neg paper losses will save you taxes. Actual -ve cash flow doesn't make sense. If you can't improve cash flow through refinancing or rent increases, selling and reallocating the $40,000 equity into a better investment might be wiser.

For Property 2, increasing the rent to improve cash flow to $500 makes it a solid hold. You could also explore a cash-out refinance to fund another investment. While tax benefits are valuable, focusing on investments that provide both cash flow and appreciation will better maximize your wealth potential.*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Dave Foster · Answer

@Fernando Guzman, You know those properties well.  Now step back and look more closely at the macros of them and the market

1. Is there appreciation growth potential or has that capped.

2. Is there looming capital expense items that could eat up years of your cash flow.

3. what about other regions/types of property.

4. Can you multiply cash flow simply by changing the type or adding doors (from SF to MF).

5. What does your cash flow really mean?  Is that after allowances for repairs and vacancy?

You've got $140K of equity.  And you're losing almost $10K a year between the two of them - Yikes.  I'd sell my children if they cost me that much annually (wait they already do :)

Protect the equity with a 1031 exchange.  And maybe look at doing a consolidation exchange to use all of that equity to  buy something larger where you can start to get economies of scale. And look at something newer where capital expenses won't creep up and hit you.

And anyone telling you to lose $12K a year because you make $240K a year probably isn't the best fit.

Am I Limiting My Wealth?

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