Convert a property from positive to negative cash flow

Bay Area
1

All,
I have been lurking on these forums and reading posts from most of you right from Redfin BA forum days. I have been mostly a silent participant. I guess, it is time to finally come out and introduce myself, and ask a couple of questions. I like to remain anonymous. I am a techie living in the valley for 10+ years. Never wanted to actively invest in RE but ended up converting my first home to rental in south-bay. I have been managing it myself for a long time and just signed up with property management firm recently. See below for the question I have.

I have a SFH rental in Bay Area, CA. I have around 1.2 mil equity in the property and around ~450K loan. The house is cash flow +ve. Around 12K/year. I have high W-2 income (50% tax), and am thinking about doing a cash-out refi for about +500K and use that cash to reinvest or work-harder in markets and bring the cash-flow to 0 or slightly -ve. This avoids paying tax of ~6K on the income. I can use the use the cash raised to either invest in tax free muni- bond index funds or other less risky investments. The property is in a highly sought after neighborhood in south-bay with good schools and the property has historically appreciated at much higher rate than inflation. Did anyone consider something like this in the past? With rates being so-low it makes sense to borrow at historically low interest rates and making borrowed money work harder and lowering my taxes.

Please let me know, if this thinking is flawed. Will appreciate any insights.

1 Like
2

Cashflow? Do you mean near zero profit?

Profit = Gross rent - (operating expenses, property tax, deprecation)

Can still be cash flow positive since depreciation is a non-cash item

All landlords aim to reduce profit to near zero :slight_smile: and pay no income tax. However, need cashflow to survive :slight_smile:

1 Like
3

Yes, I mean near-zero or slightly -ve (but managable like -1K) profit.

4

Many years ago, I do a cash out re-fi and bought a series of rentals in Austin. Now, all markets (stock, bond, RE) feel frothy… might not be a good time to think of maximizing gain… probably should think of wealth preservation and defend vs possible unfavorable economic conditions.

5

I have done similar a couple times in the past, to invest in more properties and to start my own business. It makes sense to take advantage of record low rates. Tax-wise there was a recent thread on similar topics, and it seems you may not be able to fully deduct the interests since you are not spending the proceeds on improving the rental.

6

Thank you all for replying and sharing your views.