A nurse with an investment question

[Alexis Kennedy]

Hello BP Members, I was referred to this website by a physician that I work with, who invests in real estate a lot. He tells me there are some very bright people here who can quickly answer my question. '

So here goes. In 2005, my starry-eyed parents (seeing great real estates gains in their area) decided to jump head first into real estate investing. They had little experience. They bought two rental homes in Merced, Ca at the time we all now know as The Bubble. The homes were purchased for about $230,000 each. On a recent visit to their home, they had a turnover in tenants, and I saw that they were (are) getting $950/month for rent on one place.

From my small perspective (and please let me know what I don't understand), i'm seeing about a 4 percent return before their expenses!!!!(I can easily get 6 to 7 percent on mutual funds without being a landlord with all the overhead, but that's another story). I doubt that after property taxes, expenses and interest on the debt that they are making anything. I want to help them, as I can see they are in some kind of a brain lock. They admit that they aren't thrill with the way things have turned out , but they don't want to throw in the towel. Merced is seeing a lot of foreclosures, and I can't imagine that the market is going to turn around that quickly. Furthermore, today they could not get what they paid those houses.

My question (i'm only a nurse--not a CPA)--Is there some kind of tax advantage or something that I don't understand, that could be making this investment at all feasible? I am afraid that by the time these homes start appreciating again, that they will have gone backwards too long to recover their losses.

I hope I gave you enough information to evaluate this. Maybe this is too much to ask at this point(given that no one can forsee future market conditions in their area), but would you more experienced investors have a strong idea of what you would do in this case? I'm thinking they might want to sell and take the loss now or they will continue to lose.

Thank you for any response. I want to gather hard data before having The Talk with my folks.

NN