holding condos and loosing money

First, you are losing money, not loosing it.

Second, you haven't accounted for the depreciation that they wrote off on their income taxes.

Third, any chance of raising the rent or appealing the property assessment (assuming that the properties have lost value in the economic downturn but the assessment hasn't kept up with the decrease)?

Dave

These condos have a negative value. You can refuse an inheritance. If the estate is worth nothing, let it take the hit. Sounds like you should talk to a lawyer. There could be all sorts of interesting complications.

The good news is you're keeping spreadsheets and analyzing. Dave hit it right - you have the interest and depreciation write-off. Appealing the tax value may add a few bucks to cash flow. A couple of numbers of interest would be the cost basis, and the maintenance / improvements budget. Local market behavior, too.

One of the problems with inherited business is the grantor loved it, and the heirs do not. If the family really does not have interest or expertise, that would be a good reason to think of disposing of it.

Otherwise, work in the after-tax numbers to get your real cash flow. Diogenes suggestion sounds appealing - just sell the lowest cash flow property with least potential. If you have extra cash uninvested, get numbers on how much it would take to balance your cash flow, and work out an estimated return on investment over the next 20 years (depending on your age and objectives, your other returns, etc.).

Yes - two.

1. Is it too late to disclaim (turn down) your share of the inheritance?

1. If your answer to number 1 is "no", then here's a question: If you had sufficient personal funds, would you invest your money in this same deal (similar characteristics of debt/equity) with these same people?

-HW "Skip" Weldon Columbia, SC

There is some missing information. If the condos had negative value, why did the executor of the estate not sell them and make up the loss against other assets of the estate? Did one of the heirs request that they be kept? How is the ownership divided among the heirs?

Personally I would look at the possibility of keeping one (or two!) even if the others had to be sold. The location "downtown Chicago" conjures up visions of possible big future appreciation in value. But more information would be needed about that too.

Where is everyone getting negative value? We don't know what the down payment was. We also don't know if 640k is an accurate market value. The peak of the bubble was 2007, not 2004. The only real data we have is the negative cash flow. No interest rate, no down, no date of estate, no offsetting values ... just negative cash flow.

Fill out a full Schedule E (in most tax softwares). Or find the deceased's most recent tax filing. As a landlord you can write off almost every cost. If your rent is more than the mortgage, you are probably definately in the black.

These tax write-offs are a federal incentive to maintain a decent rental stock for the third of Americans who dont own their own homes.

I don't believe it is quite that favorable. The cash flow can still be negative, because the tax write-offs are not 100% but only partial, i.e., they are tax deductions, not tax credits. Also, the OP did not mention insurance, repairs, and fees paid to a property manager or rental agent, advertising, etc. Those are also deductible. But the most important tax write-off is the mortgage interest, which is large if the mortgage is large and recent.

The upshot is that the size of the original down payment and the size of the mortgage, in relation to the original purchase price of the property, is the all-important determining factor as to whether cash flow will be positive or negative.

At any rate, the present cash flow alone does not make it a good or bad investment. Over the years the market value of the property is likely to increase, and, at the same time, the amount of rental income is likey to increase.

Be wary - very wary - of highly leveraged, negative cash-flow "investments". (Perhaps "speculations" is the better word).

"the market can stay irrational longer than you can stay solvent (liquid)".

Present cash flow, you're right, doesn't necessarily make it a good or bad investment, but substantial negative present cash flow can make it an unsustainable investment.

Unless you're pretty certain it's appreciating faster than you are losing cash, you're losing capital and would be better off selling it immediately. And if you still want it later on, buy it back then. How certain are folks about appreciation of their real estate these days? How certain should they have been, oh, a year or two ago?

That is true, but much the same caution applies to any investment. We have just seen recently that investment in the stock market, even if you are prudent and follow the rules that most people would have agreed on a few years back, is not without risk. Just off hand, without knowing any particulars, I would surmise that investment in a condo in downtown Chicago is more risky than a Vanguard index fund, but not as risky as investment in funds devoted to high tech industries. And I would prefer it to investment in a real estate limited partnership any day.

I don't know how you are defining risk, but any investment as highly leveraged as those condos, as illiquid, and un-diversified is going to be more risky than almost any publicly available fund. Tech or otherwise.

Any but the most wild real estate limited partnership is going to be safer as well. Isn't that what those condos are? The OP gets to be the general partner.

-- Doug

The owners who live in those condos as their personal residences would love it if everybody took your advice to heart. Then, they would not have to put up with all those absentee investors buying up the best units and renting them out to undesirable tenants.

In the area where I live, there is another whole additional level of risk in condo ownership. A vast number of units began to leak after they were built, and water damage was extensive. Resident owners and investors alike were suddenly hit with 50K or 100K or more special assessments on top of the purchase prices just to fix the damages.

Research and information gathering are just as important in real estate investment as they are in stock and mutual fund investment, for sure. I would not really have much confidence in assigning risk to various financial products, especially since nowadays things once believed to be "safe" have turned out bad.