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Comment by SketchySeaBeast | Hacker News Reader

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.

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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).

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

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

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.

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.)

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.

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

Not if you die first!

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

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.

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.

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