My first blog post about being a landlord seemed to have struck a nerve and invited accusations that I am a whining jet-setter and insinuations that I’m a tax dodger. So let me address a couple of these:
Several people commented that there is no way that I “lose” money on my rental apartment and either I don’t understand what I’m doing or simply misstating the facts. What I wrote is that although the apartment’s value has increased many times over, that’s all on paper, and my cash flow is negative on a monthly basis; i.e. more money leaves our bank account every month than comes in through rent.
That’s true, and I could show you the account statements to prove it. I pay roughly $2,100 in principal, interest, taxes and insurance; $500 in condo association fees; and $200 in management fees. That’s a total fixed cost of $2,800 per month, and that’s not even including the $1,500 to $2,000 that I spend in annual repairs and upkeep. My last tenant’s rent was $2,600 per month, so you can do the math.
I grant you that it is true — and I admitted as much in my post — that the reason I pay so much to my mortgagor is because I refinanced the property a few times so the cash came out of the equity and into my bank account. It’s also true that part of the mortgage payment goes to pay down principal, which will eventually come back to me, so I should not account for that as an “expense.” But in my defense, even after all the refinancings, the apartment is not highly leveraged; it has about 50 percent loan-to-value. And I would point out that one of the refinancings was done to fund the remodeling of the apartment’s kitchen, so that was reinvested.
But that doesn’t detract from the larger point that I wanted to illustrate that one should not assume that all landlords are accumulating cash on a monthly basis from their rentals and hoarding it rather than reinvesting in the apartment. Far from it.
Buying a new toilet or dryer comes out of my pocket. I don’t have a surplus to install a marble bath or to put in new carpet. Furthermore, it also shows that no one in their right mind would — today — invest in an apartment in Washington in order to make profit. I can assure you that if you bought an apartment in Dupont Circle for a half-million dollars and tried to rent it out, you cannot make positive cash flow at current rents. So, really, tenants and I are benefiting from the extremely low basis that I have from purchasing the property in 1992, and that is the only way that the math works for an individual apartment rental. And until I sell the apartment, I am not going to reap the benefits of this “investment.”
As for the comment that I should not be able to recoup my loss in my tax refund, the reader was entirely right in at least one respect. Since I am not a real estate professional, investment in real estate is a passive activity for tax purposes, so passive losses cannot be deducted from active income, such as my salary.
What my parenthetical statement was meant to convey is that the loss does have tax benefits for me and can be used to minimize the overall impact of the loss. For example, in fallow years, I accumulate passive losses, and then carry them over to offset them against income in later years when the apartment generates positive gains. Also, I have passive income from another source that I can use the losses to offset against. But what do I know; I’m not a tax lawyer.
A Colorado-based lawyer, Douglas Hsiao has rented out his Dupont Circle condo for 18 years. In his occasional column, he details his search for a new tenant.