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Losing money on a rental property

by Liz Pulliam Weston

Ginnie's done well with three rental properties she purchased in Memphis. The fourth is the reason she called us.

She's invested $25,000 in repairs to this rental, which isn't in a great neighborhood, and has trouble finding tenants. Each month she's losing money and she wonders if it's worthwhile to hang on, hoping for eventual appreciation to offset her losses.

A lot of real estate homeowners, and investors, wish they had the crystal ball that would tell them when home prices will start to turn around. Then they could make more informed decisions about whether to stay or bail.

We don't have that crystal ball, alas. Many economists thought we would have hit bottom by now, but home prices nationally fell again in the first quarter, in the steepest decline since late 2008, according to real estate site Zillow.com. Memphis has been one of the harder hit locales, with a 12.5% drop year over year. Zillow chief economist Stan Humphries now predicts that nationally prices won't hit bottom until 2012 at the earliest, and he suspects we won't see a strong recovery in values for several years after that.

So it's unlikely Ginnie will see price appreciation anytime soon. Instead, she has an investment that's chipping away at her net worth, since she's using savings to keep the property going. Selling it would stop the bleeding and she could consider it a lesson learned.

A better way to invest in real estate is to find properties that are cash-flow positive--meaning that the rent more than covers your expenses, even after you reserve money for property repairs, maintenance and vacancies. Then appreciation, which is likely to be tepid in many markets for years, will be a bonus, rather than the only justification for owning the property.

  • Liz Pulliam Weston is an MSN financial columnist and the author of, "The Ten Commandments of Money."

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