G*d forbid something happens and there is a fire or other loss.

I can afford the loss.

You may just have to take the loss and move on.

If you reported a lot of expenses and showed a loss, then the loss will be treated as a liability in DTI calculation.

This is because they didn’t budget properly and rent wasn’t high enough to cover actual expenses (repairs and maintenance, cap ex, vacancy and loss, tenant damage and turnovers, etc don’t expect to have any money left over after all of these expenses are accounted for if the rent is less than $1,500/month). 

As you note exiting any RE that does not have some appreciation of a significant amount over say a 5 to 10 year hold generally speaking is going to lead to a loss at sale.

While you shouldn’t categorize all tenants and it’s the landlords responsibility to properly screen, the tenants who reside in better situated housing and pay higher rents are more financially responsible meaning lower rate of rent loss and will generally take better care of the property which combined will result in less time allocated towards management functions if self-performed or more favorable management fee structures if 3rd party management companies are utilized (which ties back to #1, as well).

They can claim business overhead expenses, and they must file 1099s.REPS determines whether the resulting losses can be applied against your W2 income or not.

Problem is only "RE pros" get to do it.There are 3 income classifications in the US - Active, Portfolio, and PassiveActive income is income derived from your job, or normal trade or business.Portfolio income is derived from bank instruments - stocks, bonds, etc.Passive income is income earned from investments.Active losses can wipe out both passive and portfolio income, but it doesn't work the other way around.Portfolio (capital) losses are limited to $3,000 annually.Passive losses can only be offset by passive gains.Real estate rental income by its nature is deemed passive per IRC Sec 469One way to get around it is to become a pro - spend more than 750 hours or 1/2 your time in real estate.But most folks aren't real estate pros.

The most likely scenario is that his renters will eventually do something that costs him a significant loss, despite cutting them a major break for so long.