STR Predicament - Please Help!

[Ryan Elam]

Hey guys, 

I made a mistake and am looking for some advice. 

My wife and I bought 2 properties in the Joshua Tree area - one in 2021 and one in 2022. And while the first one started out great, there has been a huge slowdown this year and we are losing quite a bit of money each month. 

Here is a breakdown of the situation: 

- 2022 = $18k net profit 
- 2023 = -$26k loss between both properties so far (will likely lose between $35k - $50k in 2023)
- Tax Savings via Bonus Depreciation = $52k in tax savings combined ($20k from property #1 in 2021 & $32k from property #2 in 2022)

- Property #1 purchased for $350k + $85k in renos + furnishings = $435k total (2nd home mortgage - 30 yr fixed at 2.9%)
- Property #2 purchased for $475k + $83k in renos + furnishings = $558k total (2nd home mortgage - 30 yr fixed at 3.4%)

- Opened a HELOC ($90k) on property #1 to help pay for property #2.

We are getting appraisals done on each property next week to determine the current market value of each to see if it might make sense to sell. If I had to guess we'd make a slight profit ($30k - $50k) on property #1 and a loss on property #2 ($50k - $70k). 

While we don't want to sell, it only seems like the market is getting worse and it's causing a lot of stress to manage these properties at a loss each month. 

I've been thinking about potentially doing a 1031 exchange for 1 or both properties, but not sure where we would buy that would be cashflow positive and not thrilled about taking on a much higher interest rate. 

I feel like I'm out of my depth and with my limited RE investing knowledge, I would really appreciate any advice anyone is able to offer. 

Thank you! 

[JD Martin]

If you lose money, there's nothing to exchange - that only happens to defer capital gains. So it doesn't sound like the 1031 is even an option for you.

How long can you afford to hold the properties without losing them involuntarily? If it's indefinitely - i.e. you don't really need to rent them to afford to own them - then you could just take the loss (which should be smaller than you post given tax benefits depending on how you make your money and how much you make) and wait for the market to improve. 

If you can't hold on for long, then you probably have no other realistic option than sell and take your medicine, which is going to be pretty painful - you're going to have to recapture all that depreciation which means you'll have a hell of a tax bill at the end of all of this, outside of what you're losing. 

This is where the importance of having an exit strategy comes into play. That's not helpful for you now, I'm sure. 

I'm sorry I don't really have a better answer. Sometimes you do lose money on RE. I lost a bundle of money on my first construction project many years ago.