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Comment by rrivers | Hacker News Reader

Second statement is an oversimplification of many in that scenario; e.g. my mother. Single Mom for 30 years, built a career, bought a house in her mid 40s. 2008 recession erased her career, unemployed for 5 years after, now rebuilding. Still has a mortgage on her townhouse.

Let's not assume poor decision making when there are plenty of factors outside of the average blue collar workers control that directly impacted their ability to to the right thing.

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I'm pretty sure the townhouse they're talking about is a second income property. And the lady with 27 units that claims to make $24k/year is ignoring the equity building in her properties. If she ends up with $2 million of property after 20 years she's ignoring $100k/year.

Lots of business owners, farmers, landlords, etc. give the same sob story and conveniently forget they're going to end up with multi-million dollar properties, farms, businesses by the time they retire.

I can see how it's tough with no cash flow right now, but how is that any different than your mom ending up unemployed? Excluding the current situation, no one cares about normal people losing their jobs, but now that the business / landlord class is in a negative cashflow situation we should all be thinking of them.

The quoted scenario is about a second home purchased as an investment property. They likely have a great deal of equity in that home as well as their primary residence. If they do not have much equity in their investment property, they have either been extracting money from it for 24 years or failed to manage it as a business. They are not in the same class as "average blue collar workers", many of whom do not own even their primary residence.

This doesn't seem to be her case though - she owns "27 low-income apartments" - I don't know if those are buildings or just apartments, but 1.2 million in mortgages owed after 2 months is insane if it's just 27 individual apartments. And she only made $24,0000 last year on all that? These numbers are just insane to me.

Edit: Ah, 1.2 million total, not currently owing.

Her total mortgate exposure is $1.2m, not her currently owed amount.

$24k is a yield of only 2% so yeah she's on razor thin margins... which does explain why she's immediately in jeopardy from the slightest economic wobble (not that this is a slight wobble).

Ah, that makes way more sense. Thanks! Me read bad sometimes.

This really becomes a question of leverage. If she only put down 20%, then her return on invested capital is 10%.

Probably $27k of income per month with $29k of expenses, implying a $1.2M loan due in a few years? Just speculating.

Being a landlord is much less profitable than intuition would lead you to assume.

Indeed. I find the people who complain most loudly about how easy and profitable it is to be a landlord generally have no first-hand experience on the topic.

Indeed!

Just talk to professional landlord about cap rates. Generally you aim for 10%+ cap rates, which are exceeding difficult to find with the exception of a few markets.

If your cap rate is less than 10%, you’re on thin margins and a new roof would probably push you into the red.

It’s definitely work and a lot of risk unless you were gifted property in a high demand urban area or vacation hotspot.

Putting your money in VOO or a bunch of FAANG stock will prob net you a lot more for a lot less work based on how the government needs to keep the equity markets appreciating.

Real estate purchased decades ago in hot spots might be easy money, but buying it these days is just for diversification of assets for me.

She's probably not counting appreciation and principle reduction. Her 1.2 million in mortgages is probably on ~2 millionish in property. Last year she probably saw their value go up a few percent while paying down 40k in principle.

Her profit is probably in the 6 figures and the 24k is cash flow.

Hopefully. She's probably just considering the profit that enables her to eat.

There are a lot of games you can play with the IRS to reduce the amount of profit that you show from rental properties. You can count depreciation, property taxes, mortgage payments, utilities, maintenance, improvements, and a whole host of other expenses. Particularly with depreciation thrown in, it's not uncommon for small-time landlords to show losses on their rentals.

But even if it's low-income housing in Connecticut, that's got to be close to $500-1000/month in rent per unit. Accounting for some amount of delinquency or vacancy, that's still $150k-$300k in revenue, and I think I'm being conservative. Something doesn't add up with this story.

Everything you listed count as legitimate expenses.

I know, I am a landlord.

Depreciation, as it is normally calculated, is somewhat nonsense on properties, especially over the past decade as they have increased by leaps and bounds in value.

Not to mention the depreciation has to be recaptured at the time of sale.

Not if you die first!

You are depreciating the built structure, not the land. It’s land values which increase.

You can't really decouple the two. There is a value that the land is assessed at, and a value that the structure is assessed at. Both have increased.

Yes you can. In fact, every property tax assessment in California decouples them.

But it's not just a cute game we play to get out of taxes

It's an accounting strategy that we are using for all fixed assets. All things have a useful life, and we just need a way to account for that. Not all improvements to a property will be durable. (Only land has durable value, which is why we only depreciate the portion of the purchase price that was for the improvements to the land)

The new roof we put on a property has a limited useful life. The kitchen remodel has a limited useful life.

If a property is not well maintained, then it may not be worth much in the distant future. If it is well maintained it may be worth more later.

If there is residual value, then we pay the tax when we recapture that value at a sale. If there is no value left at the end, then we don't.

Also, not all houses exist in San Francisco, where a dilapidated tool shed can be worth $1MM and be expected to double every year. Many markets are not very hot in terms of price appreciation. In my midwest market, I'm not even sure there has been any notable appreciation in the last decade. (And if there was, please don't let the county assessor know.)

Anyone who owns a 2nd home in Boulder is not a blue collar worker.

That conflates type of work with payment. Plumbers or other specalties like say underwater welders can make quite a bit of money and those certainly are blue collar jobs. Not common mind you but still blue collar.

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