[Tess]

Hi everyone! To me, owning rental(s) has always felt like a “foot in the door” to financial success.

Now, I’m almost enough of an idiot to just assume that I know all the numbers and therefore I know better about the properties than all the wise self made millionaires in here, but, I also want to learn more about why so many think we should sell the properties. (If you’re not always learning you’re falling behind!)

Here’s the math:

Property #1 is a duplex in Milwaukee, WI, and was purchased in 2014 for $140,000. I lived in it for three years and moved out in 2017. I refinanced in 2020, at 3.25% on a 15 year mortgage. 11 years remain on this loan, which has a balance of $88,000. This property would sell for about $250,000 in todays market.

Cost Breakdown
P&I on mortgage: $750
Taxes: $420
Insurance: $175
Water Bill: $130
Total Costs: $1475
Rent for the units: $1880

This leaves about $405 in monthly cash flow, before any repair costs or vacancies. We are also gaining about $500 in equity each month through the principal payments on the mortgage.

I am too far removed from the purchase and don’t have enough accurate records to be able to talk about my returns on the property, but, of the two properties, I think this one is a better investment.

It will need a new roof soon. If I sold it today, after loan payoff and fees, I would have about $135,000 in proceeds.

Property #2 is also duplex in Milwaukee, WI, and was purchased very recently, in June 2024, for $170,000. We purchased this house thinking of moving into it, but now are not sure if we want to.

This was also financed on a 15 year mortgage, but at 6.85%. The loan has a remaining balance of $124,000, along with a HELOC I took out for part of the down payment at $25,000 at 7%.

Cost Breakdown:
PITI on mortgage: $1750
HELOC payment: $250
Water Bill: $125
Total Costs: $2,125
Rent for the units: $2,225

This leaves only about $100 in monthly cash flow, before any repair costs or vacancies.

We are also gaining about $400 in equity each month as the principal payments on the mortgage. This is arguably the “worse” investment, we bought it with intention to live in the larger unit, but then we had a change of heart.

This property would sell for about $200,000 in the open market. If I sold it today, I think I would have my invested $30,000 back from 6 months ago, but no profit.

Assuming repair costs are only $1200 a year (unlikely), this property is a wash for cash flow, but does gain $4,800 in equity this year, which would increase a little bit each year due to the amortization of the loan. Loan will not be paid off until 2039.

I also want to mention my primary residence. Because, we are willing to move if it makes sense to move.

This is a single family home also in Milwaukee, WI, and was purchased in 2019 for only $20,000 but then remodeled extensively for an additional about $100,000.

We currently owe $12,000 on the 6% loan on this home. We have been paying this loan down aggressively and will be finished paying the mortgage in October 2025.

This home would sell for about $140,000 and rent for about $1,500 a month.

Our monthly costs if we rented it would be about $550 before any repairs or vacancies so we would cash flow well on renting this property once the loan is paid off. If we sold it today, we would have about $110,000 in proceeds… but nowhere to live lol.

Thanks a lot if you have read this all! My instinct is to hold all properties because I have always thought that was the best way for me to gain long term wealth?

But so many people told me to sell them yesterday, I want to know what I may be missing!

[El]

Definitely hold all three. You did good on your investments, creating a positive cash flow in each one. Remember about what I call sunk costs – RE transaction costs.

Those are all done and behind you now.

Hold on to your properties, keep renting and maintaining, you are on the right path to paying it off, keeping the lowER tax base, and once paid off, one by one, being able to live off rent.

[David]

If the properties are appreciating, hold them. If they aren’t appreciating, sell them and buy a couple of rentals in appreciating markets.

Appreciating properties will outperform cash flow properties any day of the week.

And both will beat a nice ride that is depreciating to zero.

Get the used sienna or odyssey and continue with the rental properties.

[Russel]

So, let’s look at the second house.
If you keep it, Milwaukee real estate can be expected to appreciate at about 5%. In 15 years, you can expect it to have grown from $200k today to $415k.

You spent $385k along the way, but that was almost all paid by renters not by you.

And you made a total of $18k in net rent. Ignoring repairs and vacancies. You’ve probably been lucky to break even in cash, but your net worth has gone up considerably.

What if you instead you only have the $30k and can’t invest another dime per month without the renters covering most costs. At 10% for 15 years, that becomes $125k for a $95k profit.

No repairs, no vacancies…more liquidity but smaller net worth gain.
That’s the leverage of a mortgage with renters.

Now we enter the paid off phase. I’m not going to adjust for inflation, but in 15 years you’d have just the water bill, insurance, and property taxes.

Estimating $6500 a year for those based on the info you gave on your payment. So, once the house is paid off, you’d net about $1500 a month.

Let’s fast forward to 30 years from now. Your $30k has been sitting quietly making 10% in an index fund with no contributions. It’s now worth $523k. That’s $493k in gains.

The house is probably now worth $863k and you’ve made $1500 a month in rent for 15 years for an additional $270k. If you invest that $1500 a month in an index fund averaging 10% per year, it’s worth $671k, for a combined $1.53M.

A lot of that is illiquid (home value) but you still have more in the index fund than the other path.

Real estate is the clear winner so far: $1.53M vs $0.52M. But there’s one more scenario. What if in 15 years you sell the house? After taxes and closing costs, let’s say you net $335k on the $415k home value.

If you invest that at 10% for 15 years, it’s worth $1.39M. That’s getting pretty close…and the difference of just $130k could be a wash once you factor in repairs and vacancies over that 30 year horizon.
The advantage of real estate is the leverage.

You get 5% appreciation on the full value of the house, but only paid 20% of the value, while renters pay your carrying costs. Once it’s paid off, you get rent but lose the leveraging so you end up close to even.

I have two rental properties. I hate being a landlord. It does me psychic damage every month…so I’m getting out of that game. One is paid off, so I’d do just as well in the market.

The other, despite being pretty new, has needed enough repairs over the past 2 years to wipe out years of returns.

It can be a good path to wealth, but it’s not an easy one and it’s highly volatile. Once you’ve made enough gains to still get good profits outside of real estate, that’s when I’d jump.

[John]

I’m curious, why are you paying for the water that your tenants use? Is this a local law, local common practice, or are you just choosing to pay the bill as an incentive?

[Tom]

I hate real estate. So do a lot of others and I suspect this dislike turns into prejudiced advice.

While I would never own any (I know, never say never), a former co-worker is funding his retirement via four duplexes he bought through the years.

So, I say you shouldn’t do it but your spreadsheet is telling you that I’m a liar!

[Joe]

You also will also pay taxes on the appreciation when/if you sell a rental.

We have two rentals, a duplex and a single family. We also own the property our small business is in and pay ourselves rent.
We don’t make a ton on the rentals.

We bought them both for around 140k each in 2014 and used equity from downsizing for down payments from our house we sold when we bought a smaller older cheaper house to live in.

It was the smartest thing we did. We don’t live off any of the rental money from those two, and keep 20-30k in that account for expenses that may come up.

The equity they now have probably is doubled even with pulling some equity out of them 4 years ago to pay off our commercial property.
We figured the rentals would be our retirement.

If you can, keep them. I would but consider refinancing the newer one to 30 years.

You really need a cushion of cash reserves or your butt is gonna beat at some point with a hefty repair or bad tenant.

If you can buckle down in other areas and build up a reserve without refinancing that would be ideal.

I think that most that have a nice retirement/investment package going already are not thrilled of rentals.

They look at the (potential) headach, and the exact math of what what the down payment money and and other expenses are and how that would turnover in the market and say it’s not worth it.

But for someone like us and you, it may be the most realistic way to achieve some financial independence for down the line.

When you have a family and don’t make a ton of money, it’s not easy to max out every retirement account.

Things have changed for us and there are times I consider selling them and just letting the equity go in the market but I think it’s best for us to stand pat.

It also can provide an opportunity for some business write offs etc to lower the taxable income, etc.

I think when those are paid off or rents are increased to where you’re seeing more money each month you’ll feel like it was the best thing you’ve done.

Sorry for the ramble…

[Wendy]

You’ll always find some people hate real estate and others love it. At some point things will go south so you need to have a cash buffer – both for your life and the houses.

Your investments seem solid and they should cash flow more and more as the years go on and rents rise and mortgage payments don’t.

You could consider a change to a longer mortgage on the expensive one but having that cash when your kids hit college sounds lovely, too. It sounds like your finances will be significantly different in just 10 months.

I can’t see making a huge decision like selling a property to avoid a 10 month problem.

I would go through your budget and cut whatever you can to help get this car paid off but more importantly – replenish that emergency fund.

I’d personally start by looking around the house for stuff to sell. You have kids.

It’s almost a certainty you have extra stuff. I swear they make it multiply.

[Steve]

Cash flow is king. I’d finance out to 30 years on the higher rate one. I had a rental property doing what you are doing and had a tenant destroy it.

I had to sell it. It was great when the tenant was good.

[Allison]

Equity isn’t cash
Kind of like a heloc isn’t cash
Kind of like having a balance to spend on a credit card isn’t cash
Imo you have a legit cash problem.

Your total income to expenses you’re up to your eyeballs

You don’t have the cash funds to flow thru emergencies, a few thousand dollars in a car issue has you in between a rock and a hard place already.

Your better investment property needs a roof, if insurance doesn’t cover it, you’re paying in full. $20k-$30k be my guess.

So, then you’d upside down on the property what you have into it vs what your profits are.

The math ain’t mathing. Not until you have a stack of cash to flow thru life situations as they arise, these investments are costing you more than simply investing money elsewhere without all the headache

[Laura]

Long ago, I had a barely cash flowing rental without much savings safety net, like OP.

I realized that if I went even one or two months without rent, I would get behind on a mortgage.

Both homes were in good shape but we’re old homes in cold climate, also like OP, so you should in my opinion always have enough to replace a furnace or other costly repair at bare minimum.

The properties themselves aren’t a bad idea, but OP doesn’t have enough savings to cover the what ifs…she is spread dangerously thin.

Because OP hasn’t lived in the 2 rentals for 2 of the last 5 years, she will pay capital gains when she sells. OP also I don’t think realizes it costs money to sell properties, I assume 10% personally but it’s what at least 6%.

So, OP believes she will make a small profit on the second property but the reality is she would likely owe money if she tried to sell at current value.

I also don’t like counting the amount of principal being paid back monthly as a gain…until you own the house free and clear that money doesn’t exist.

Get behind on the payments and you have nothing.
I like the first property a lot more because the debt risk is lower, interest is better, etc. if property mgmt is your thing, it looks like a good set up.

I don’t like the second but she can’t afford to take a hit right now so I’d probably keep it but not sleep at night.

What I would do is refinance the second, and maybe both mortgages to 30 year. Yes, OP will pay more in interest (and refi costs) but if the properties lose money she’ll pay less in taxes.

Regis will give her breathing room…instead of paying off faster build up enough safety net she can fix a roof or go 3 months without a tenant.

OP can always apply extra money to the mortgages when the safety net is built to speed up pay off if desired.

I also think the recommendations from yesterday about husband increasing income is spot on, but that takes time, especially with having a child needing appts and etc.

What I would encourage OP to do is to learn about the stock market. She could make same or better returns, without the risks she’s currently dealing with with.

If you can leave your money in a stable fund, even the market lows are essentially no risk because they will bounce back higher given enough time.

So, as OP gets in a better financial situation, rather than adding properties, I would invest profits in the market.

Lastly, if OP does decide to sell any, if possible I would move into said property for 2 years prior to selling to avoid paying capital gains taxes when you sell.

[Julia]

You’re forgetting risk. What happens when there’s big repairs needed or squatters stop paying rent?

Dave’s babysteps are dependable and sustainable and he was a real estate professional who lost millions and was dirt poor and his marriage nearly fell apart because of his real estate “investments” that were heavily mortgaged.

He speaks from painful experience when he says to only invest in being a landlord after babystep 6.

After babystep 6, go for it with cash! Would you take out loans on your primary residence and go into credit card debt and take out title loans on your cars to pay for more rental properties?

NO! But that is what you are doing by keeping cash in the rentals instead of selling and paying off your debts.

Sell and become debt free! Then invest intentionally, not by circumstances.

[Jenny]

My mom was a SAHM and my dad retired at 53 yrs old…no rentals just investments.

BUT had they bought properties instead, they would be mega rich because all the detached houses that were $300-400K back in the day are all worth over $1.2+++ mil nowadays…personally I’m NOT a fan of being a landlord (at all) so I’m happy with lower returns for my money for no stress.

My husband & I have investments worth 7 figures (in our 40s) all with just investing & slowly grinding our way up (we use a financial advisor who seems to know what he’s doing).

[Matthew]

You take on various risks and you have to spend tine managing and maintaining them.

They might not appreciate in value and might actual depreciate, they might get trashed, you might not be able to immediately fill a vacancy, repair and updating them could be extremely expensive depending on what is needed and could cost more than the profit you get, you work essentially for free to manage and maintain them when you could be doing something else during that time that makes more money, etc.

It’s not simply a numbers game, there’s significant unpredictability and stress involved. That’s not to say it wouldn’t pay off in the end, but real estate can ruin a person financially a whole lot easier than something like stocks.

[Lauren]

Cash flow seems to be the biggest headache – particularly with the newer rental with loan interest rates greater than 6%. And your post does not mention what other investments you could be making if you didn’t have so much cash tied up in the equity of the rental properties.

For example, do you or your husband have access to 401k retirement plans with employer matches that might be a more flexible way to invest spare cash but you are forgoing these to cover the cash needs of the rentals?

One possibility to consider, If you sell just rental #2 and get back your $30,000 downpayment, would that give you the cash to get a decent used car and the money for the roof on the more profitable rental property?

If so, is that breathing room and peace of mind worth it? Also, is there anything your husband can do to either pick up more hours or a higher paying job to help?

Can you raise the rents on your rentals (without decreasing the quality of tenant you have in there) to help make the properties more profitable?

From a purely profitable investment over the long run view, these both seem to be long term good investments, but right now are causing you stress and heartache from a cash flow perspective.

[Author]

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