I own a rental property that isn’t making any money. My AGI is too high to be able to deduct the losses I’m incurring from it. Any ideas on what I should do?
The property is a townhouse, and was purchased new in 2004. Cost was ~$ 150K. The mortgage was a balloon ARM. I lived in it until 2008. I tried to sell it, but best offer was $ 120K so I kept the property and started renting it out. I hired a property manager.
In 2009, I refinanced the mortgage, a 30 yr fixed at 5.875%. The bank charged a higher rate because it was an investment property.
In 2010, I earned $ 10700 in rent. My costs were: mortgage interest $ 6400, depreciation $ 4400, association fee $ 1300, property tax $ 1900, property manager fee $ 750, liability insurance $ 160, other misc costs such as repairs, maintenance, etc $ 190. My overall costs were $ 15100, so I lost $ 4400 on this rental property in 2010. My losses in 2008 and 2009 totaled $ 7400.
I currently owe ~$ 107K on the mortgage.
My AGI in 2010 was ~230K and will likely stay the same or slightly increase in years to come.
Should I sell the rental property? I’m not sure what I could sell it for in this market, but I’m guessing it could fetch at least $ 120K. I doubt I could sell it for more than what I paid ($ 150K) anytime in the next 10yrs. How would the depreciation and the sell price affect my taxes after I sell the property?
OR, should I pay off the mortgage, and start earning income on the property? I have enough cash to pay off the entire mortgage right now. Paying off the mortgage would result in about $ 2K income per year from the rental property. Can I deduct previous years’ losses against this income?
OR, should I just continue as is, losing money on the property every year? Is there any advantage to this? Should I refinance again? Since I last refinanced, rates have come down even more, and maybe if I shopped around more, I could get a better investment property rate. But there are always refi costs (not only dollar amounts, but significant amounts of my personal time).
I stated on my 2008, 2009, and 2010 tax returns that I did not actively manage the property, so I did not deduct any of the rental property losses off my personal income. Had I stated that I was actively managing, in 2008 and 2009 I could have deducted some or all of the losses off my personal income. My 2008 AGI was $ 52K, and in 2009 it was $ 110K. In 2010 my AGI was too high to matter if I was actively managing the property or not. I’m not sure what it means to be actively involved or not. I approve the rental rate, the tenant, and any major expenses. I pay the mortgage, association fee, property tax, and liability insurance. Otherwise my property manager takes care of the rest. Am I actually actively involved in the property management? Should I amend my previous tax returns to get some money back? My job is in health care, not related to real estate at all.
Thank you so much for any input!
Another option is to call your chosen title company and ask for a few copies of their escrow contract. I sold a house using that. Much simpler than a 12 page, small print real estate contract. I got 4 copies: two for me, two for the buyer. We ( me and the buyer) went over it together, and I had a clean one I could write on, they had one they could write on, and we took our good copy to the title co and signed.
I did add a few things to the title co contract, such as:
If the Purchaser defaults at closing, the escrow amount will be retained by the Seller as its sole remedy.
4: a. Close of Escrow shall occur when the deed is recorded at the ____ County Recorders office. Buyer and Seller shall comply with all terms and conditions of this Contract and Addendums, execute and deliver to Escrow Company all closing Documents and perform all other acts needed in time to allow COE to occur on or before (date), 1:00 PM.
b. If the Buyers need more time beyond (date) to close, there is a penalty of $ 100.00 per day.
5: Possession: Seller shall deliver possession and keys to Buyer when all moneys due are paid in full, which shall be on or before COE, (date), 1:00 PM.
6: Loan status Report (LSR): The LSR, with at the very least the Buyersâ€™ loan information section completed, describing the current status of the Buyersâ€™ proposed loan, is attached hereto and incorporated herein by reference. Buyer instructs the Lender to provide loan status updates to Title Company and Seller. Buyer shall sign all loan documents no later than 3 days prior to the Close of Escrow date. All costs for obtaining the loan shall be paid for by the Buyer.
7: Time is of the essence. All Inspections are to be completed within 5 calendar days of this addendum, including mortgage financing being arranged for the purchase of the Property.
8: PROPERTY CONDITIONS: Buyer accepts the Property in its present condition. On or before COE, Buyer warrants to Seller that Buyer has conducted all desired inspections and investigations and accepts the Premises as is. Buyer warrants that Buyer is not relying on any verbal representations concerning the Premises.
9: Buyer is liable for all taxes, insurance and Homeowners Association fees from the date of closing of this contract.
10: Seller is responsible for all taxes, insurance and Homeownerâ€™s Association fees up to Close of Escrow.
11: Buyer warrants that the Buyer has disclosed to the Seller all information that may materially and adversely affect the Buyerâ€™s ability to close escrow or complete the obligations of this Contract.
12: Changes: Buyer shall immediately notify the seller of any changes in the loan program, financing terms, or lender described in the LSR and shall only make and such changes without the prior written consent of the Seller if the changes do not adversely affect Buyerâ€™s ability to obtain loan approval without conditions, increase Sellerâ€™s closing costs, or delay COE.
13: Verbal discussions will not extend these time periods. Only a written agreement signed by both parties will extend response times or cancellation rights
14: CLOSING: Closing shall be on or before (date), 1:00 PM.
One other item that I would now add is, if the buyer’s offer is a CASH offer, then he wants to change to financing, I would (consider raising the price a bit) and/or add that even if the financing does not go through, that the buyer is still reequired to buy at the original price. If cash, I would also get a proof of funde and a large non-refundable deposit.
If you are in any kind of hoa, consider having the buyer pay all hoa costs.
Hello everyone – I’m new to the board and also new to real estate investing. I have 1 current rental property and am seeking a second. What I’m looking to learn from some of you experts is, what calculations/measures should I use to calculate ROI on potential rental investments? I’m looking beyond simple cash flow and want to be able to compare the ROI on investments of different price points in order to determine which ones will yield the better return.
I am familiar with Cap Rates, Cash on Cash return, etc. but don’t really know what are the good returns to be at with those calculations. i.e. – what I should be satisfied achieving.
Thank you in advance for your input!
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