Why I'm Happy Losing Money as a Landlord

Worried woman cash in hand and model house
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I have a confession to make: I lose money on my rental property every month. But I'm OK with that. I've got a long-term plan. Or I'm still delusional and hoping for a turnaround in the housing market. Either way, I stubbornly refuse to lose $30,000 in home equity by selling. I'd rather pay $300 a month out of my pocket in the hopes of hanging on to what little equity I have left.

It's a Renters Market Out There

Much like a home buyer, a renter has a lot of purchasing power. It's a pure case of supply and demand if there ever was one. There are simply more homes on the market for rent in many parts of the country than there are renters. Renters have pricing power to force homeowners to lower the price of rent they pay each month, and as a landlord this causes me to personally lose about $300 a month.

But I'm fine with losing $300 a month. In fact, I'm actually happy about it. Let me tell you why you should be, too, if you're ever in the same situation.

My Tenants' Rent Doesn't Cover My Mortgage

Like many accidental landlords, I found myself stuck with a house a few years ago that I couldn't sell. Or, if I really wanted to sell it, I would've had to at a steep markdown from what I'd bought it for just six years ago during the housing market boom.

After a few tenant turnovers, I lowered the rent in order to find a new renter. (There were simply too many homes on the market. I couldn't compete.) The problem is that my lowered rent didn't cover my mortgage payment. In fact, after taxes, insurance, and private mortgage insurance, I pay about $300 out of my own pocket, in addition to my tenant's rent payment every month, just to pay my mortgage.

But I'm happy to continue taking a loss every month.

Should I take a $30,000 Loss Now or $300 a Month?

My wife and I bought our house in the Southeast at the height of the housing boom. We paid top dollar for our three-bedroom, 2.5-bath home. Today our home would sell for almost $25,000 less than what we paid for it. And we're one of the lucky ones. If we had to sell and take a loss, we'd be out of our entire equity because we placed a large down payment on the house.

At least we wouldn't owe any money out of pocket even after paying for closing costs. %VIRTUAL-article-sponsoredlinks%But I dread the idea of watching $30,000 in equity evaporate overnight. So that's why I'd rather hold on to the house and pay $300 out of my own pocket every month instead of taking the huge bite all at once.

I've Got 8 years to Wait for a Turnaround

In the end, being a homeowner comes down to what your long-term goals are. Why did you buy the house in the first place? Was it simply a place to live? Or did you dream it would provide you with a passive income in retirement after you paid off your mortgage?

I've got a long-term outlook on housing in America. I think that prices will eventually stabilize, and we're seeing that now in many parts of the country. Because I'm paying $300 a month (or $3,600 a year) out of pocket to keep my home, I figure that I have about eight years before I hit that $30,000 mark that I would've lost selling the home right away. So I've got some time on my hands. Surely I can close the gap between the rent I receive and my mortgage payment by then.

I think that home prices will eventually increase on pace with inflation. And if that's the case, it wouldn't be unusual to see the price of rent rise like inflation, as well. So, for example, a landlord with a home that rents for $1,000 a month could see a rent increase to $1,450 a month, assuming 2 percent annual inflation. Of course, your mortgage will remain the same, and you can once again reap a profit from your rental.

Like most investors, I'm not a big fan of taking a loss. But for many accidental landlords, the choice comes down to whether you want to take a large loss now or small ones for years in the hopes of a housing rebound. I'll choose the latter.

Have you ever taken a loss on an investment during the short-term hoping for a long-term gain? How do you know when it's time to throw in the towel?

More from Hank Coleman

8 Foolproof Ways to Grow Your Savings
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Why I'm Happy Losing Money as a Landlord

This is my personal favorite! Think of yourself as a regular monthly bill you have to pay. All you have to do is arrange to have a set amount of money directly deposited from your paycheck into a savings account each month.

I recommend using a separate savings account because if you have access to your funds in your checking account, you're more likely to spend them. Again, it might hurt a bit at first to take home a little less every month, but trust me, after a while you won't even notice it's gone. Here's a moment when the "set it and forget it" strategy works wonders.

It feels great to be rewarded for your hard work. And it feels even better to spend that hard-earned bonus on something you’ll enjoy, like a trip to France or an iPad. At the same time, the pleasure of a vacation or new gadget is short-lived compared to financial security.

So make a pact with yourself to put every bonus you get from here on out to good use. If you direct 90 percent of your bonuses straight into your savings account as a rule, you’ll still have 10 percent to treat yourself with (plus the comfort of knowing that you're building a well-earned safety net). I live by this rule.

OK, OK, this seems like an obvious one -- and easier said than done. Actually, most people spend money on more unnecessary items than they think. So take time to look at where your money is going in detail and begin to cut back. Saving $10 here and there could help you put a lot away in the long run.
Many banks offer seasonal accounts meant to save for holidays like Christmas. These accounts give you reduced access to your accounts, charging a hefty penalty each time you withdraw more than permitted. Since emergencies don't occur often, a seasonal account could make sure you're touching it only when needed (just make sure you're not tempted to blow it all on Christmas gifts).
I love this one. Chalk it up to my massive craving for organization, but I'm all about getting rid of things I no longer use. Rather than throwing these unused goods away, start selling them, and put that money into your emergency fund. All you need to do is post them to a site like eBay or Craigslist or Amazon and you can get rid of items from the comfort of your home. You can also take your clothes to a consignment shop to have them sold for you.
Instead of saving your pennies, put aside any $5 bills that come your way. Never spend a $5 bill again, and you'll be surprised by how quickly this silly trick will help you come up with a few hundred dollars to add to an emergency fund.
You could pick up odd jobs via websites like TaskRabbit.com, DoMyStuff.com, Elance.com, FreelanceSwitch.com or Sitters.com.
If you get a cash-back reward for any spending on your credit card, just make it a rule that those dollars will be dedicated to your freedom fund. It may only add up to $100 extra each year, depending on your spending, but every little bit counts.
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