Do I have too much real estate ?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
hervens
Posts: 7
Joined: Tue Jan 30, 2018 2:11 pm

Do I have too much real estate ?

Post by hervens »

I was was going over my budget, and wanted to get some advice on whether or not I'm currently taking on too much risk.
I currently have 2 rental properties plus my primary residence, all 3 bought less than 4 years ago.
My question is whether or not I should sell one of the rentals in order to lower my risk and increase my cash position. I would prefer to avoid selling if possible

Profile
Male 32 years old with stay at home wife and 1 year old baby.
Wife currently has no plans on going back to work.

Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client.
Cash: 40k in savings account. (+20k from the wife's savings)
Other invested assets (mutual funds): 90k

Primary residence:
Mortgage: $395k, market value: 550k

Rental property 1:
Mortgage, 298k, market value: 525k
cash flow: -$100/month

Rental property 2:
Mortgage, 178k, market value: 330k
cash flow: -$400/month

Unfortunately, I'm loosing money on the 2 rental properties every month primarily because of the increase in interest rates.
However, they're both very well situated and have appreciated in value since I bought them.

What concerns me is that after having paid all my expenses, (car payment, mortgage, food, rental deficit, etc.) I'm only left with about $1700 per month that I can put towards savings. I don't want to put my family at risk if a bad luck were to happen, such as a job loss. I also don't want to miss out on the potential future value appreciation of the rentals if I were to sell

Having said all that, would it be best to sell any of the rentals, or continue to hold on as I've been doing ?
bombcar
Posts: 1519
Joined: Sun Aug 12, 2007 6:41 pm

Re: Do I have too much real estate ?

Post by bombcar »

We need a total financial picture.

Cash flow being negative is basically expected if you’re using leverage to build wealth in real estate.

At least you should read up a lot about being a landlord: https://johntreed.myshopify.com/collect ... investment has some very good books but I’d especially point you to this one: https://johntreed.myshopify.com/collect ... mize-yours

Because if your goal is increase in wealth via appreciation (and based on the numbers so far that seems what you’re riding on) then you should know all the options.

Interest rate changes affecting cash flow scares me silly, are those loans not fixed? If not, run flee sell do whatever you can to escape. Rental inversion will eat you alive.

If you have taxable gains in the property you could do a 1031 exchange to preserve that if you determine you want to continue being a landlord.
Last edited by bombcar on Sun Jun 09, 2024 4:10 pm, edited 1 time in total.
JJMrk
Posts: 5
Joined: Sat Jun 08, 2024 3:43 pm

Re: Do I have too much real estate ?

Post by JJMrk »

What’s your net worth? Any assets in retirement accounts? What are the interest rates on the 3 mortgages?

Do you have a written investor policy statement with a desired asset allocation?
Olemiss540
Posts: 2206
Joined: Fri Aug 18, 2017 8:46 pm

Re: Do I have too much real estate ?

Post by Olemiss540 »

No way am I holding a job I have to PAY every month to do. I would cash out of both personally and thank goodness they happened to appreciate.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
bombcar
Posts: 1519
Joined: Sun Aug 12, 2007 6:41 pm

Re: Do I have too much real estate ?

Post by bombcar »

Calculate what you’d make from a savings account with the proceeds from selling both, too. Could be upwards of $15,000 a year!
KlangFool
Posts: 32360
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do I have too much real estate ?

Post by KlangFool »

OP,

1) What is the mortgage payment of each property?

2) Is anyone of them an ARM?

3) Are they non-recourse loan?

"Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client."

4) This is overly optimistic. In a serious recession, you would have zero income.

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Normchad
Posts: 5990
Joined: Thu Mar 03, 2011 6:20 am

Re: Do I have too much real estate ?

Post by Normchad »

Olemiss540 wrote: Sun Jun 09, 2024 4:09 pm No way am I holding a job I have to PAY every month to do. I would cash out of both personally and thank goodness they happened to appreciate.
I think that’s a very good way to look at it. Personally,I looked into real estate investing, and decided it just wasn’t for me. That doesn’t mean it’s a bad idea. It’s just not a good idea for everybody.

I do know some people that do well with rentals. But they spend a lot of time on it too; isn’t passive. And it might just be the case that they happened to get lucky. If they tried the same thing in a different market it might have turned out badly.

In your case, not sure what I’d do. If interest rates are your problem, I imagine they will come down in the not too distant future. And that might make them break even for you, but it might also enable you to sell them for even more than you could today.

The thing that is appealing about real estate, I think, is the leverage and the favorable tax treatment. The downsides, you already know about. So,you have to decide for yourself what the right answer is. I don’t think you’ve done anything way outside the norm though.
BirdFood
Posts: 493
Joined: Sat Mar 23, 2024 12:15 pm

Re: Do I have too much real estate ?

Post by BirdFood »

It looks to me like your total savings are dangerously low, especially given that they are the only resources available for things going wrong with three humans, three properties, and two sets of tenants that could at any moment walk away or stop paying.

My totally unprofessional opinion is that, yes, it would be best to sell one of the rentals.
KlangFool
Posts: 32360
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do I have too much real estate ?

Post by KlangFool »

OP,

A) If you have no business and no renters in the coming recession, both the stock and housing market crash 50%, how long can you lasts? 3 months? 6 months?

B) Can you "Sleep Well At Night" (SWAN)?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
User avatar
cchrissyy
Posts: 2485
Joined: Fri May 05, 2017 10:35 pm
Location: SF bay area

Re: Do I have too much real estate ?

Post by cchrissyy »

there is absolutely nothing about your income, savings, and life situation that suggests you should take on the risk of rental properties.
i am confused how and why you got into this but i suggest you make a careful and clear plan to sell as soon as you reasonably can.
60-20-20 us-intl-bond
Topic Author
hervens
Posts: 7
Joined: Tue Jan 30, 2018 2:11 pm

Re: Do I have too much real estate ?

Post by hervens »

JJMrk wrote: Sun Jun 09, 2024 4:08 pm What’s your net worth? Any assets in retirement accounts? What are the interest rates on the 3 mortgages?

Do you have a written investor policy statement with a desired asset allocation?
Net worth is the equity of my real estate investments + the liquid accounts I would assume.
(525000−298000)+(330000−178000)+(550000−395000) + 90000+ 40000= $664 000
About $45k is in a retirement account.
To be frank, I'm actually surprised to see that number, I didn't think I was worth that much, but I guess most of it is non liquid and I would have to deduct expenses such as capital gains taxes and other closing fees.

Interest rates on the 3 properties.
Primary residence: 50% of the mortgage is variable, and the other half fixed at about 2.5%.
Rental property 1: interest rate 6.9%
Rental property 2: interest rate 5.5%

cchrissyy wrote: Sun Jun 09, 2024 5:53 pm there is absolutely nothing about your income, savings, and life situation that suggests you should take on the risk of rental properties.
i am confused how and why you got into this but i suggest you make a careful and clear plan to sell as soon as you reasonably can.
It was the allure of becoming wealthy through real estate investing. Books such as rich dad poor dad, and other real estate investment gurus bought me into it. I did have some success as my properties did gain value, but not sure if continuing in this direction is the right thing to do as my cash position is very low and starting to worry me a little bit.
KlangFool wrote: Sun Jun 09, 2024 4:15 pm OP,

1) What is the mortgage payment of each property?

2) Is anyone of them an ARM?

3) Are they non-recourse loan?

"Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client."

4) This is overly optimistic. In a serious recession, you would have zero income.

KlangFool
primary residence: ~2450, rental 1: 2157, rental 2: 1167
Rental 2 is a condo, so there's also condo fees. Rental 1 is an older 3 unit apartment building with 3 tenants and requires more maintenance.
2 - all fixed except for my primary residence.
3 - rental 1 is non recourse if I recall correctly

I also forgot to mention the 2 rentals are in the same LLC that I conduct my IT Business in. My reason for doing this was to use money I'd saved up in the corporation to buy the real estate.
User avatar
Sandtrap
Posts: 19898
Joined: Sat Nov 26, 2016 5:32 pm
Location: Hawaii No Ka Oi - white sandy beaches, N. Arizona 1 mile high.

Re: Do I have too much real estate ?

Post by Sandtrap »

hervens wrote: Sun Jun 09, 2024 4:03 pm I was was going over my budget, and wanted to get some advice on whether or not I'm currently taking on too much risk.
I currently have 2 rental properties plus my primary residence, all 3 bought less than 4 years ago.
My question is whether or not I should sell one of the rentals in order to lower my risk and increase my cash position. I would prefer to avoid selling if possible

Profile
Male 32 years old with stay at home wife and 1 year old baby.
Wife currently has no plans on going back to work.

Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client.
Cash: 40k in savings account. (+20k from the wife's savings)
Other invested assets (mutual funds): 90k

Primary residence:
Mortgage: $395k, market value: 550k

Rental property 1:
Mortgage, 298k, market value: 525k
cash flow: -$100/month

Rental property 2:
Mortgage, 178k, market value: 330k
cash flow: -$400/month

Unfortunately, I'm loosing money on the 2 rental properties every month primarily because of the increase in interest rates.
However, they're both very well situated and have appreciated in value since I bought them.

What concerns me is that after having paid all my expenses, (car payment, mortgage, food, rental deficit, etc.) I'm only left with about $1700 per month that I can put towards savings. I don't want to put my family at risk if a bad luck were to happen, such as a job loss. I also don't want to miss out on the potential future value appreciation of the rentals if I were to sell

Having said all that, would it be best to sell any of the rentals, or continue to hold on as I've been doing ?
Residential R/E Income Property is a "business" and when run as such, can be lucrative.
Each property must have positive "net" cash flow, ideally at a 6-10 percent CAP rate.
(Do not depend on calculate property value appreciation in profit and loss, etc. It makes no sense to operate a business at a loss because the property under the business location that is owned is rising in value).
Right now, with the mortgage/loans, you have negative cash flow.

From a business owners perspective, irrespective of your personal finances, etc, etc, etc.
Sell.

j :D
Wiki Bogleheads Wiki: Everything You Need to Know
User avatar
Watty
Posts: 29263
Joined: Wed Oct 10, 2007 3:55 pm

Re: Do I have too much real estate ?

Post by Watty »

Sometimes when people post something but leave out important information that is a red flag that they are at least subconsciously trying to get people to tell them what they want to hear.

Unless I missed it you never mentioned what rentals are actually renting for.

That might make it a lot easier to see if the property is likely a good rental or not.

I am not a real estate investing guru but when you have almost 50% equity in a rental and don't have positive cash flow that would scare me. The situation may be even worse if you are not building up reserves so you will be in a bind the next time you have a large expense like a new roof or a bad tenant.

If I was in your situation I would be taking a hard look at selling rental #1 because it has the most home equity and then possibly using the freed up home equity to pay off;
a) rental #2 mortgage
b) your home mortgage
c) your car loans

Which to pick depends on the interest rates and tax details.

It you would not have enough to completely pay off rental #2 or your home mortgage then you can likely recast your mortgage(google this) to lower your monthly payments. That would greatly improve your cash flow(however you define it) and make your life a lot more comfortable and allow you to save more in traditional non-real estate investments.

Part of my reasoning is that having money issues and tight money can be hard on a marriage and money is one of the leading causes of marriage problems. With a new baby your time is also limited and dealing with two rentals takes a lot of time.

There were not a lot of details but rental 1 does not really jump out at me as being a great rental either so if you sold both rentals you would have a lot of cash and be in a really good position for someone who is only 32 years old.

With having your own LLC you might also be able to put around $50K into retirement savings each year to get into a lower tax bracket but you would need a lot of freed up cash flow to be able to do that.
Sam_957
Posts: 175
Joined: Tue Oct 27, 2020 7:04 pm
Location: USA

Re: Do I have too much real estate ?

Post by Sam_957 »

You complained about interest rates increases, but then say they are fixed rate mortgages. “ 2 - all fixed except for my primary residence. ”. Did you buy them with high rates and they’ve been cash flow negative from the start?
My other vehicle is an index fund.
JJMrk
Posts: 5
Joined: Sat Jun 08, 2024 3:43 pm

Re: Do I have too much real estate ?

Post by JJMrk »

You could consider harvesting the equity in one of the properties by selling, putting it into the mortgage of the other property, and re-casting the mortgage. Run the numbers first- but it might create positive cash flow.

However- why did you buy these with negative cash flow? Suggests they are not great rental properties by the numbers to start with. I’d consider doing some more nuts and bolts reading on how to analyze a rental property before making a decision. But I would do something in the next 30-60 days to get out of the negative cash flow position, which is not sustainable.
Topic Author
hervens
Posts: 7
Joined: Tue Jan 30, 2018 2:11 pm

Re: Do I have too much real estate ?

Post by hervens »

Sam_957 wrote: Sun Jun 09, 2024 9:11 pm You complained about interest rates increases, but then say they are fixed rate mortgages. “ 2 - all fixed except for my primary residence. ”. Did you buy them with high rates and they’ve been cash flow negative from the start?
The rentals were bought a few years back at a much lower rate, but the rate was renewed last year.
User avatar
cchrissyy
Posts: 2485
Joined: Fri May 05, 2017 10:35 pm
Location: SF bay area

Re: Do I have too much real estate ?

Post by cchrissyy »

hervens wrote: Sun Jun 09, 2024 9:19 pm
Sam_957 wrote: Sun Jun 09, 2024 9:11 pm You complained about interest rates increases, but then say they are fixed rate mortgages. “ 2 - all fixed except for my primary residence. ”. Did you buy them with high rates and they’ve been cash flow negative from the start?
The rentals were bought a few years back at a much lower rate, but the rate was renewed last year.
this is unusual. where are they?
60-20-20 us-intl-bond
User avatar
cchrissyy
Posts: 2485
Joined: Fri May 05, 2017 10:35 pm
Location: SF bay area

Re: Do I have too much real estate ?

Post by cchrissyy »

hervens wrote: Sun Jun 09, 2024 7:27 pm
cchrissyy wrote: Sun Jun 09, 2024 5:53 pm there is absolutely nothing about your income, savings, and life situation that suggests you should take on the risk of rental properties.
i am confused how and why you got into this but i suggest you make a careful and clear plan to sell as soon as you reasonably can.
It was the allure of becoming wealthy through real estate investing. Books such as rich dad poor dad, and other real estate investment gurus bought me into it. I did have some success as my properties did gain value, but not sure if continuing in this direction is the right thing to do as my cash position is very low and starting to worry me a little bit.
OP, I read a lot of books like that when i was young but you need to know the environment is different now, and that RDPD author is a straight-up scammer. so you can take it for inspiration but should not take it as real advice.

I am a landlord, pretty successful but still conflicted about it, and one important thing is i did not buy at today's higher rates and high prices, i never had a monthly loss, and i have plenty of resources to weather the expenses and risks that come up. you are at the wrong stage of life for this. get your money out of these properties and invest it in a normal portfolio. don't consider buying real estate again until the next crash.
60-20-20 us-intl-bond
bombcar
Posts: 1519
Joined: Sun Aug 12, 2007 6:41 pm

Re: Do I have too much real estate ?

Post by bombcar »

I’ll be frank - you gambled on real estate via rentals and won.

You need to cash out your winnings and move on.
av111
Posts: 730
Joined: Mon Jan 26, 2015 12:27 pm

Re: Do I have too much real estate ?

Post by av111 »

OP

Is rent - (interest (not principal) + taxes + insurance + HOA) a negative number for the rentals?
How much are you saving from the 150k income net after taxes every year?
Why would you want to keep the rentals?
AV111
KlangFool
Posts: 32360
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do I have too much real estate ?

Post by KlangFool »

hervens wrote: Sun Jun 09, 2024 7:27 pm

primary residence: ~2450, rental 1: 2157, rental 2: 1167
Rental 2 is a condo, so there's also condo fees. Rental 1 is an older 3 unit apartment building with 3 tenants and requires more maintenance.
2 - all fixed except for my primary residence.
3 - rental 1 is non recourse if I recall correctly

I also forgot to mention the 2 rentals are in the same LLC that I conduct my IT Business in. My reason for doing this was to use money I'd saved up in the corporation to buy the real estate.
hervens,

1) Your gross income is 150K per year

2) Your annual savings = $1,700 per month X 12 ~ 20K

3) Your primary residence plus rental deficit ~ 3K per month = 36K per year.

4) Assuming taxes at 50K (very high estimate), your non-housing related expense = 150K - 50K - 20K - 36K = 44K

5) Your total outflow plus 3 mortgages (69K) + 44K = 113K

6) Your cash savings = 40K

7) Your mutual fund = 90K

8) In the worst case, you have 40K + 90K X 0.5 (50% drop) = 85K

9) 85K/113 = 0.75 = 9 months.

10) Sell your rentals!

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
JJMrk
Posts: 5
Joined: Sat Jun 08, 2024 3:43 pm

Re: Do I have too much real estate ?

Post by JJMrk »

Are you in Canada? Mortgage “renewal”. No fixed rates?
ajg189
Posts: 39
Joined: Tue Mar 26, 2019 3:11 pm

Re: Do I have too much real estate ?

Post by ajg189 »

The recent market appreciation has likely resulted in you doing really well as far as building up equity in these properties.

That said, today the market is starting to cool off (depending on where you are, but still not nearly as hot as the Covid run up). You have $370 in equity that costs you $500/mo. Of course you get some equity from mortgage pay down but this is low given where you are in the amortization schedule of these loans. I imagine it’s around $6-10k per year.

Let’s generously assume you’re getting $10k in mortgage pay down annually. Your rentals cost you $6,000 per year in cash flow loss alone, not counting vacancy or any maintenance. I’d imagine you end up with about $0 or less before factoring in any appreciation for these properties.

On $370k equity, you’d need these rentals to continue appreciating at about 3% annually to have a decent return. There are much easier, less risky ways to make $25k per year on $370k than holding these particular properties and they won’t cost you every month. I would definitely sell both.

For context, I have a decent rental and it generates $1,000/mo in cash flow and another $1,000/mo in mortgage pay down on $300k in equity. It’s getting 7-8% return before factoring in any appreciation and I still think about selling it because of the headache sometimes.
Bikesy
Posts: 136
Joined: Fri May 15, 2020 7:16 am

Re: Do I have too much real estate ?

Post by Bikesy »

I have 5 rental units. One is cashflow negative around $-500/month. I've calculated I have about $500/month net in non cash flow positive increase to my net worth by holding on to the property (amortization, appreciation, tax savings). I mention that first to say that I'm not opposed to an investment that's cashflow negative as long as you have a reason. I'll be honest though, I'm not a fan of having my entire RE portfolio be cashflow negative. The rents from my other properties are high enough that it more than covers the shortfall of the one negative property. The negative cash flow property is the last one I purchased and its the quintessential "cheap house on the expensive street". I believe it will increase in value faster than the broad market. I think my suggestion would be to decide if you want to invest in RE long term. If the answer is yes I wouldn't add another property until you're in a more stable position and I definitely wouldn't add another negative cash flow property.
User avatar
Watty
Posts: 29263
Joined: Wed Oct 10, 2007 3:55 pm

Re: Do I have too much real estate ?

Post by Watty »

bombcar wrote: Sun Jun 09, 2024 9:37 pm I’ll be frank - you gambled on real estate via rentals and won.

You need to cash out your winnings and move on.
I suspect you are right.

The OP still has still not said what the properties rent for which could be a sign that the rent is not enough to make them a good rental and they know it.
Topic Author
hervens
Posts: 7
Joined: Tue Jan 30, 2018 2:11 pm

Re: Do I have too much real estate ?

Post by hervens »

JJMrk wrote: Sun Jun 09, 2024 10:53 pm Are you in Canada? Mortgage “renewal”. No fixed rates?
Yes, Greater Montreal, QC area.

Thank you for all the responses, it's very helpful.
The general consensus I'm getting from most is that I should sell.

First of, what would I do with all that money ? I feel those rentals in a way have forced me to live below my means by making me feel a bit 'broke'. If I have $400k+ sitting in a brokerage account I'm scared it would encourage me to increase my standard of living over the years.

There's also the emotional turmoil of selling. I initially saw those 2 rentals as a long term investment strategy and part of my retirement plan. Just the thought of selling both makes me feel a bit like a failure.
Watty wrote: Mon Jun 10, 2024 6:16 am I suspect you are right.

The OP still has still not said what the properties rent for which could be a sign that the rent is not enough to make them a good rental and they know it.
The monthly rents for both properties are at least $600 below current market value. The tenants have been there for quite a while and there are laws in place limiting the maximum rent increase I can give in a particular year.
bombcar
Posts: 1519
Joined: Sun Aug 12, 2007 6:41 pm

Re: Do I have too much real estate ?

Post by bombcar »

You could pay down your mortgage.

But really you need to learn to be disciplined and not spend everything you have. I’m not sure how Canadian accounts work but retirement is often a good way to tie some up.

Don’t save it all - do splurge a bit on something to make you feel a winner if need be - but something one time like a nice vacation.
JackoC
Posts: 4776
Joined: Sun Aug 12, 2018 11:14 am

Re: Do I have too much real estate ?

Post by JackoC »

JJMrk wrote: Sun Jun 09, 2024 10:53 pm Are you in Canada? Mortgage “renewal”. No fixed rates?
Right Canada but for info in US (don't know about Canada) you're not supposed to finance rental properties with residential mortgages. US Banks generally need you to be the initial resident and their permission to move out and substitute a tenant. On BH assumption all is above board you probably won't get a 30 yr rate on a rental property. You may not get a 30 yr term. You'll more likely get a rate fixed for 5-10yr with a 30 yr *amort schedule* but balloon due in 10 yrs.

Negative cash flow on moderately levered properties also seems strange to me, but it's a different market so could be. None of our properties would be near negative CF at now's rates and only 56% LTV. But question pretty much answers itself given (all of our) tendency to judge investments in the rearview mirror, theoretically wrong as that is. There's no big regret standing in the way, because 'it made money'. If somebody else is really going to buy it at a price that gives negative CF (which must include mortgage principal, IOW it's not actually negative cap rate with excludes principal, which is savings) at moderate leverage I would say sell to them, at least one.
KlangFool
Posts: 32360
Joined: Sat Oct 11, 2008 12:35 pm

Re: Do I have too much real estate ?

Post by KlangFool »

hervens wrote: Mon Jun 10, 2024 7:26 am

There's also the emotional turmoil of selling. I initially saw those 2 rentals as a long term investment strategy and part of my retirement plan. Just the thought of selling both makes me feel a bit like a failure.
hervens,

1) How could you be a failure when you are making money?

2) How could these 2 rentals be a long term investment when they are "negative cash flow"?

KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
terran
Posts: 3249
Joined: Sat Jan 10, 2015 9:50 pm

Re: Do I have too much real estate ?

Post by terran »

I'm no real estate investor (although I learned a bit about it when I was younger), but with such small mortgages compared to value and still losing money those don't seem like very good investments. Seems like you'd be better off selling both and pocketing the equity. Bogleheads isn't exactly anti-real estate, but also not exactly pro-real estate either. Maybe post on the bigger pockets forum and see what they say. If they tell you to sell then you definitely should as they are pro-real estate.
mikejuss
Posts: 3084
Joined: Tue Jun 23, 2020 1:36 pm

Re: Do I have too much real estate ?

Post by mikejuss »

hervens wrote: Mon Jun 10, 2024 7:26 am First of, what would I do with all that money ? I feel those rentals in a way have forced me to live below my means by making me feel a bit 'broke'. If I have $400k+ sitting in a brokerage account I'm scared it would encourage me to increase my standard of living over the years.
This seems like an odd way to look at things, OP. Invest the proceeds and forget about them for a decade or two. Do you have a brokerage account?
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
fireman
Posts: 44
Joined: Wed Feb 07, 2018 7:36 am

Re: Do I have too much real estate ?

Post by fireman »

Sandtrap wrote: Sun Jun 09, 2024 7:36 pm Residential R/E Income Property is a "business" and when run as such, can be lucrative.
Each property must have positive "net" cash flow, ideally at a 6-10 percent CAP rate.
(Do not depend on calculate property value appreciation in profit and loss, etc. It makes no sense to operate a business at a loss because the property under the business location that is owned is rising in value).
Right now, with the mortgage/loans, you have negative cash flow.

From a business owners perspective, irrespective of your personal finances, etc, etc, etc.
Sell.
I agree with this. OP, I would sell to lock in those appreciation gains. Holding out for more appreciation with negative cashflow is speculative. Could work out or could be a disaster. Not much different than crypto IMO.

If you want to be in RE, then redeploy the equity in better cash flowing RE. Of course, this does not have to be an all or nothing proposition. You could sell and redeploy half of your net in RE and the other half in non-RE (or some other split). If you were in the US (mentioning for the benefit of others reading this), these properties seem ripe for a 1031 exchange into one or more better cashflowing properties to defer the capital gains.
SubPar
Posts: 494
Joined: Mon Apr 27, 2020 11:48 am

Re: Do I have too much real estate ?

Post by SubPar »

hervens wrote: Mon Jun 10, 2024 7:26 am The monthly rents for both properties are at least $600 below current market value. The tenants have been there for quite a while and there are laws in place limiting the maximum rent increase I can give in a particular year.


Can you mark the leases to market with new tenants? I.e., is the rent cap only related to lease renewals by existing tenants?

If not, you overpaid for both properties. Just consider it a learning lesson and move on. How are you determining the current valuation? If you're selling these as investment properties, your valuations may be optimistic.
User avatar
Watty
Posts: 29263
Joined: Wed Oct 10, 2007 3:55 pm

Re: Do I have too much real estate ?

Post by Watty »

hervens wrote: Mon Jun 10, 2024 7:26 am
Watty wrote: Mon Jun 10, 2024 6:16 am I suspect you are right.

The OP still has still not said what the properties rent for which could be a sign that the rent is not enough to make them a good rental and they know it.
The monthly rents for both properties are at least $600 below current market value. The tenants have been there for quite a while and there are laws in place limiting the maximum rent increase I can give in a particular year.
Again you are not actually saying what the houses are being rented for.

Is that because you do not want to hear what people say about the rent being enough to make the properties a good investment or not?

While the Bogleheads is not primary about real estate investing you can get really get good input here if you give people enough information to make informed comments.
hervens wrote: Sun Jun 09, 2024 7:27 pm Rental property 1:
Mortgage, 298k, market value: 525k
cash flow: -$100/month

Rental property 2:
Mortgage, 178k, market value: 330k
cash flow: -$400/month
.....
(mortgage payment) primary residence: ~2450, rental 1: 2157, rental 2: 1167
Rental 2 is a condo, so there's also condo fees. Rental 1 is an older 3 unit apartment building with 3 tenants and requires more maintenance.
"rules of thumb" are always pretty questionable but one rule of thumb is that a good rental should rent for about 1% of a properties value each month. That would mean that #1 should rent for about $5,250 a month and #2 should be renting for about $3,300 a month to be a desirable investment property.

You did not say what is included in your "cash flow" numbers but that could be adjusted for things like condo fees, utilities you are paying, property taxes, maintenance, building reserves, etc.

It would be interesting to hear the actual numbers but I would suspect that they are currently renting for maybe half of the "1% of a properties value" rule of thumb now.

Those numbers might be off or there might be other things which I did not think to include but they really sound like they may be terrible rentals unless you can show how the numbers work better.

There is an old saying, "It is better to be lucky than smart." You should really look at selling them.

Most housing markets are relatively strong still which can make selling a property a lot easier and quicker. If you wait a few years then decide to sell them then it could take a very long time to sell them. If you have to leave them empty for six months in a bad housing market to sell then that can be very expensive.
User avatar
White Coat Investor
Posts: 17681
Joined: Fri Mar 02, 2007 8:11 pm
Location: Greatest Snow On Earth

Re: Do I have too much real estate ?

Post by White Coat Investor »

hervens wrote: Sun Jun 09, 2024 4:03 pm I was was going over my budget, and wanted to get some advice on whether or not I'm currently taking on too much risk.
I currently have 2 rental properties plus my primary residence, all 3 bought less than 4 years ago.
My question is whether or not I should sell one of the rentals in order to lower my risk and increase my cash position. I would prefer to avoid selling if possible

Profile
Male 32 years old with stay at home wife and 1 year old baby.
Wife currently has no plans on going back to work.

Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client.
Cash: 40k in savings account. (+20k from the wife's savings)
Other invested assets (mutual funds): 90k

Primary residence:
Mortgage: $395k, market value: 550k

Rental property 1:
Mortgage, 298k, market value: 525k
cash flow: -$100/month

Rental property 2:
Mortgage, 178k, market value: 330k
cash flow: -$400/month

Unfortunately, I'm loosing money on the 2 rental properties every month primarily because of the increase in interest rates.
However, they're both very well situated and have appreciated in value since I bought them.

What concerns me is that after having paid all my expenses, (car payment, mortgage, food, rental deficit, etc.) I'm only left with about $1700 per month that I can put towards savings. I don't want to put my family at risk if a bad luck were to happen, such as a job loss. I also don't want to miss out on the potential future value appreciation of the rentals if I were to sell

Having said all that, would it be best to sell any of the rentals, or continue to hold on as I've been doing ?
While I'd do all I could to get those properties cash flow positive (raise rent, add on other fees, lower expenses, refinance debt, recast mortgages etc) this isn't screaming "emergency" to me. If you think your long term return on these properties is worth the risk, hassle, and additional cash going in, then feel free to keep them. Certainly don't buy any more cash flow negative properties.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
User avatar
cchrissyy
Posts: 2485
Joined: Fri May 05, 2017 10:35 pm
Location: SF bay area

Re: Do I have too much real estate ?

Post by cchrissyy »

hervens wrote: Mon Jun 10, 2024 7:26 am
First of, what would I do with all that money ? I feel those rentals in a way have forced me to live below my means by making me feel a bit 'broke'. If I have $400k+ sitting in a brokerage account I'm scared it would encourage me to increase my standard of living over the years.

There's also the emotional turmoil of selling. I initially saw those 2 rentals as a long term investment strategy and part of my retirement plan. Just the thought of selling both makes me feel a bit like a failure.


first, you can invest it in a simple money market at 5% and instead of a loss you would be making $20,000 per year of interest for absolutely no effort or risk. although my actual suggestion would be a normal stock and bonds portfolio in order to do better than that. and do not consider it available to spend, because someday it will either grow into your retirement fund, your primary home upgrade fund, or the purchase money for a rental property when the market conditions are truly favorable for such a thing and when your own personal financial position is strong enough to handle the risk and not be overly concentrated in this venture.


about feeling like you made a mistake, honestly, you did and the mistake is in the past. nothing you can do right now changes that fact. accept your mistake, thank your lucky stars you made money and can afford to exit the mistake. at this moment, the only real mistake to make is to refuse to learn from it and move forward.
60-20-20 us-intl-bond
BirdFood
Posts: 493
Joined: Sat Mar 23, 2024 12:15 pm

Re: Do I have too much real estate ?

Post by BirdFood »

hervens wrote: Mon Jun 10, 2024 7:26 am First of, what would I do with all that money ? I feel those rentals in a way have forced me to live below my means by making me feel a bit 'broke'. If I have $400k+ sitting in a brokerage account I'm scared it would encourage me to increase my standard of living over the years.
Keeping yourself cash-poor and in danger of bankruptcy in order to protect yourself from spending your money is taking on a larger risk to protect yourself from a smaller risk.

You could pay off the car. Contribute to a 529 for your child. Add to retirement funds. Create a more generous emergency fund. If you only sell one property, you could put some money into the mortgage for the other one, and create a business account with a generous amount for maintenance on the other property.
hervens wrote: Mon Jun 10, 2024 7:26 am There's also the emotional turmoil of selling. I initially saw those 2 rentals as a long term investment strategy and part of my retirement plan. Just the thought of selling both makes me feel a bit like a failure.
Also less important than avoiding bankruptcy. And it wouldn't, IMO, be excessively risky to keep one of them.
protagonist
Posts: 9466
Joined: Sun Dec 26, 2010 11:47 am

Re: Do I have too much real estate ?

Post by protagonist »

deleted
Last edited by protagonist on Mon Jun 10, 2024 5:22 pm, edited 1 time in total.
protagonist
Posts: 9466
Joined: Sun Dec 26, 2010 11:47 am

Re: Do I have too much real estate ?

Post by protagonist »

I can't tell you what to do, but I can tell you what I would do.
Being a landlord is not fun. Some people like it more than others, but you have to also take into account how much it would be worth to you to not have to deal with being a landlord, and just have your money invested passively.
Especially Given that:
hervens wrote: Sun Jun 09, 2024 4:03 pm Unfortunately, I'm loosing money on the 2 rental properties every month primarily because of the increase in interest rates.
If I was losing money, especially at a time when even simple risk-free investments are making money in real terms, there is no way I would want to keep the property.
Ask yourself, if you had to do it over starting today, would you buy those properties, or do something else with your money? Forget about the past.
However, they're both very well situated and have appreciated in value since I bought them....
I also don't want to miss out on the potential future value appreciation of the rentals if I were to sell
Past appreciation is no guarantee of future appreciation.

Maybe you really know something, and your hunch that they will continue to appreciate, more than some other investment of similar risk, is correct. If you are convinced enough of your logic, and you don't mind the second job of being a landlord, then perhaps you should hang on. In my experience, hunches like that are as likely to be wrong as right. The real estate market is pretty fickle and complex, and subject to countless unknowable variables (as you found out recently).

I wouldn't want the hassle of being a landlord unless it was a sure bet, and your bet is currently losing.

I would dump them.
User avatar
22twain
Posts: 4101
Joined: Thu May 10, 2012 5:42 pm

Re: Do I have too much real estate ?

Post by 22twain »

hervens wrote: Mon Jun 10, 2024 7:26 am First of, what would I do with all that money ?
In Canada you have tax-advantaged retirement accounts (I think they're called RRSPs?) that are similar to IRAs, 401Ks, etc. in the US. Can you increase your contributions to those accounts using the cash that you would realize from selling real estate? If withdrawals from those accounts are penalized before retirement age, that would help keep you from spending the money too quickly.
Meet my pet, Peeve, who loves to convert non-acronyms into acronyms: FED, ROTH, CASH, IVY, ...
Oddball
Posts: 389
Joined: Thu May 03, 2018 9:35 am

Re: Do I have too much real estate ?

Post by Oddball »

I think long term they should be fine, but right now as 1 income family having properties that drag on your cash flow is risky.

Looks like rental 1 is a 3 unit with rents around $650 each unit? What is the market value of the rents and what are you allowed by law to raise them to?

Is the amortization schedule over 30 years? I have no clue how mortgages in Canada work but if it is shorter that could explain why you cashflow seems so low.
ScubaHogg
Posts: 3917
Joined: Sun Nov 06, 2011 2:02 pm

Re: Do I have too much real estate ?

Post by ScubaHogg »

hervens wrote: Sun Jun 09, 2024 7:27 pm
It was the allure of becoming wealthy through real estate investing. Books such as rich dad poor dad, and other real estate investment gurus bought me into it. I did have some success as my properties did gain value, but not sure if continuing in this direction is the right thing to do as my cash position is very low and starting to worry me a little bit.
I’m not a real estate guy and don’t usually comment on real estate threads. But this was a red flag. If you are doing it cause of Kiyosaki I would de-risk now

That guy is a scammer and has charlatan written all over his face
“…the expected profit required from a gamble increases not with the size of the risk, but rather with the size of the risk squared.” - Missing Billionaires
dbr
Posts: 46659
Joined: Sun Mar 04, 2007 8:50 am

Re: Do I have too much real estate ?

Post by dbr »

I suppose one principle that applies to this kind of complicated scenario is that if you have to ask then you probably should not be doing it.

This forum does have some very good people as sources for advice, but one would also ask if you cannot find an experienced and knowledgeable mentor to help sort out the issues. The devil is in the details.
unwitting_gulag
Posts: 854
Joined: Mon Dec 05, 2016 3:37 pm

Re: Do I have too much real estate ?

Post by unwitting_gulag »

ScubaHogg wrote: Tue Jun 11, 2024 10:04 am
hervens wrote: Sun Jun 09, 2024 7:27 pm
It was the allure of becoming wealthy through real estate investing. Books such as rich dad poor dad, and other real estate investment gurus bought me into it. I did have some success as my properties did gain value, but not sure if continuing in this direction is the right thing to do as my cash position is very low and starting to worry me a little bit.
I’m not a real estate guy and don’t usually comment on real estate threads. But this was a red flag. If you are doing it cause of Kiyosaki I would de-risk now

That guy is a scammer and has charlatan written all over his face
Indeed. One occasionally reads about stock-trading "formulas" and other get-rich-quick schemes in the stock market, but far more common in the genre, is something to do with real estate. Real estate is the paragon of zero-to-hero exhortations to go out there and hustle, and you too can be sipping expensive mixed-drinks beachside, in only a decade or so. Not only is this scammy, but it delegitimizes a BH-style approach to real estate (which, one presumes, actually does exist).

If the OP ventured into real estate on the basis of false and flippant enticements, even so, he seems to be doing OK. The negative cash flow isn't shudderingly-negative. It's not like -$2000/month (as happens for example for many SFH in Los Angeles). One line of thought, is to say that what the OP is doing, while not outright bad or self-destructive, is too sparse on paper-assets, and too heavy on bricks-and-mortar. The implication would be to sell one of the properties, but not both, thus simplifying the landlording-life, and freeing more cash for other investments. So... a compromise.
moneyflowin
Posts: 302
Joined: Sat Oct 16, 2021 6:14 am

Re: Do I have too much real estate ?

Post by moneyflowin »

In some regions, RE investment profit comes from appreciation because cap rates are very low; in others, the profits come from monthly cash flow because of high cap rates. Which one describes your region?

But your rental numbers look a bit frightening. Your rental debt is only 53% LTV which isn't high leverage, yet they're cash-flow negative. If/when the economy goes south, you'd be looking at very negative cash flow to the point it would affect other aspects of your life.
User avatar
AerialWombat
Posts: 3151
Joined: Tue May 29, 2018 1:07 pm
Location: Cashtown, Cashylvania

Re: Do I have too much real estate ?

Post by AerialWombat »

JackoC wrote: Mon Jun 10, 2024 7:50 am Right Canada but for info in US (don't know about Canada) you're not supposed to finance rental properties with residential mortgages. US Banks generally need you to be the initial resident and their permission to move out and substitute a tenant. On BH assumption all is above board you probably won't get a 30 yr rate on a rental property. You may not get a 30 yr term. You'll more likely get a rate fixed for 5-10yr with a 30 yr *amort schedule* but balloon due in 10 yrs.
Not to derail the thread, but this is inaccurate information.

The vast majority of US residential rental properties (1-4 unit) are financed with conventional 30-year fixed rate mortgages. This is the norm, not the exception. When you purchase the property, you will pay a slightly higher interest rate (usually 0.5% to 1.0% higher) to compensate the lender for the extra risk on an investment property.

To be clear, these are usually conforming Fannie Mae and Freddie Mac government-backed loans for non-owner occupied 1-4 unit homes. Rules for investment property loans can be found in the Fannie Mae Selling Guide, available online.

In addition, the standard mortgage contract for all owner-occupied, primary residence loans that are government guaranteed, including VA and FHA loans, state that the buyer must reside in the home for one year as their primary residence. After the one year is up, the owner may convert the home to a rental property at their whim, no permission is required from the lender or the government guarantor. This is the norm for the vast majority of mortgage loans in the US, with very rare exceptions (such as some USDA loans, some special low-income programs, etc.). These are obviously also 30-year, fixed rate loans.

As a common example: Under current Fannie Mae regulations, it is absolutely allowable to buy a house with a 30-year conforming primary residence mortgage, live in it for the mandatory one year, and then put a tenant in it and go buy yourself another house to live in for another year. Rinse, repeat. Again, no permission needed from the lender or government.

Fannie Mae used to have a limit on how many conforming loans you could have. It used to be a max of 4, then it became 10. A few years ago, it became unlimited, with the caveat that any number past 10 must be a primary residence first. In effect, by removing the absolute 10 loan limit, they started to de facto condone this process of serial conversion into rental properties.

Regulations change, and lenders can add overlays, so always check with your lender at the time of mortgage origination, but this is the system as of the date of this post.

I did it many times. This is how I built my rental portfolio during the low interest rate era.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
bombcar
Posts: 1519
Joined: Sun Aug 12, 2007 6:41 pm

Re: Do I have too much real estate ?

Post by bombcar »

ScubaHogg wrote: Tue Jun 11, 2024 10:04 am That guy is a scammer and has charlatan written all over his face
If someone wants more detail, this is worth a read: https://johntreed.com/blogs/john-t-reed ... dad-part-1
bltn
Posts: 1907
Joined: Mon Feb 20, 2017 8:32 pm

Re: Do I have too much real estate ?

Post by bltn »

One thing that I observed from my short time as an individual investor in rental real estate. The price obtained from a sale often didn t equal the appraised market price. And if liquidity was needed the sale price might be even less. I realized that boring investment in US stock index funds was my surest path to wealth. And the liquidity of stock index funds was always nice to have.
babystep
Posts: 908
Joined: Tue Apr 09, 2019 9:44 am

Re: Do I have too much real estate ?

Post by babystep »

hervens wrote: Sun Jun 09, 2024 7:27 pm
JJMrk wrote: Sun Jun 09, 2024 4:08 pm What’s your net worth? Any assets in retirement accounts? What are the interest rates on the 3 mortgages?

Do you have a written investor policy statement with a desired asset allocation?
Net worth is the equity of my real estate investments + the liquid accounts I would assume.
(525000−298000)+(330000−178000)+(550000−395000) + 90000+ 40000= $664 000
About $45k is in a retirement account.
To be frank, I'm actually surprised to see that number, I didn't think I was worth that much, but I guess most of it is non liquid and I would have to deduct expenses such as capital gains taxes and other closing fees.

Interest rates on the 3 properties.
Primary residence: 50% of the mortgage is variable, and the other half fixed at about 2.5%.
Rental property 1: interest rate 6.9%
Rental property 2: interest rate 5.5%

cchrissyy wrote: Sun Jun 09, 2024 5:53 pm there is absolutely nothing about your income, savings, and life situation that suggests you should take on the risk of rental properties.
i am confused how and why you got into this but i suggest you make a careful and clear plan to sell as soon as you reasonably can.
It was the allure of becoming wealthy through real estate investing. Books such as rich dad poor dad, and other real estate investment gurus bought me into it. I did have some success as my properties did gain value, but not sure if continuing in this direction is the right thing to do as my cash position is very low and starting to worry me a little bit.
KlangFool wrote: Sun Jun 09, 2024 4:15 pm OP,

1) What is the mortgage payment of each property?

2) Is anyone of them an ARM?

3) Are they non-recourse loan?

"Income: $150k / year working in the IT industry. Currently self employed (LLC) with the same client for the past 2 years. Income can easily be replaced if I were to loose the client."

4) This is overly optimistic. In a serious recession, you would have zero income.

KlangFool
primary residence: ~2450, rental 1: 2157, rental 2: 1167
Rental 2 is a condo, so there's also condo fees. Rental 1 is an older 3 unit apartment building with 3 tenants and requires more maintenance.
2 - all fixed except for my primary residence.
3 - rental 1 is non recourse if I recall correctly

I also forgot to mention the 2 rentals are in the same LLC that I conduct my IT Business in. My reason for doing this was to use money I'd saved up in the corporation to buy the real estate.
How much is the mortgage amount on the variable portion? Can you pay-down just the variable portion?

Also, would you get the lower rate if you refinance the Property 1?
Post Reply