Mark J. Kohler breaks down a four-quadrant matrix for problem properties based on cash flow and equity. He explains when to hold a property that's losing money but building equity, when to keep one generating cash flow even without equity gains, and when to exit through a short sale or deed in lieu.
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Hi, Mark Kohler here with the tax and legal tip. Maybe more business. Legal tip. I want to talk about what to do if you have a problem property. And this is a phone call that we get at our office all the time. You know, hey, I've got this property, it's underwater, it's not cash flowing. What do I do? Well, I've got a special matrix you're gonna love. Okay. Now I call this the problem property matrix. And any good matrix has four quadrants. So let's bust it out here. We've got cash flow and then we have no cash flow. Not a good thing, right? But it's going to happen. Then we've got equity in this, these two columns and then no equity. So four different scenarios that could occur. Now let's talk about the ideal situation. You've got cash flow and you have equity. Woohoo. Count yourself lucky, right? Yay, you've got cash flow. So we're happy there. You've got cash flow and you've got equity. This obviously is not the portion of the matrix that's a problem. So let's talk about no cash flow but equity. Now this is an important option because I have a lot of clients that say, mark, my property, it's not making any money, I'm going to get rid of it. And I go, whoa, whoa, you know how much equity is in the property? Oh well, it's worth 150 grand and my mortgage is 100 grand. But when I add everything up, I'm still negative cash flow two or $300 a month, maybe even $500 a month. And so they go, it's a loser. And I say, whoa, how much of that negative cash flow is going towards the mortgage payment? What is the outlook for potential growth in that area? Has it consistently gone up? Is it a high risk up and down area? Could you lose your equity tomorrow? See, there's lots of questions here. And so this is one where I tell clients you might want to keep it based on how much is going to the mortgage balance. Because I really want to see if you're building equity moving forward and what is the equity lookout, or sorry, equity outlook. Because we want to see what could the future hold and we may want to keep a property even if it's negative cash flow because we're building equity moving forward. It's like a savings account that you're going to cash in in the future. Now the other option here that tells us, hey, we may want to keep this is it's got cash flow, but no equity. So in this situation, again, it's a question mark. What should we do? It doesn't mean automatically we get rid of it. This is the classic property where it may be a mortgage of 150,000, but it's worth 100. I mean, you're underwater and there's. And you're in fact scared to sell it because you might have to pay some of the mortgage back. And that's really tragic scenario. But if it's cash flowing, why not keep it? You know what I mean? I mean, this, this could be one where you're making two or three hundred bucks a month on cash flow. And even though you don't see a really near end in sight, it might be 10 years before you get your equity back to, you know, above water. You know, that's one where I tell clients, hey, keep it. You know, is the cash flow sustainable? And if it is, I'm going to tell you to probably keep this property for the foreseeable future and then maybe try to get out of it when there's a bump in the market or something like that. So this is another one where you're going to want to keep it. Then we have the perfect storm. No cash flow, no equity. We've got to get rid of this property. And it's ironic. I mean, not ironic, it's shocking how many clients I see that have held on to properties that are in this quadrant. I mean, if you're in here, you've got to start looking at a short sale, a deed in lieu of foreclosure, doing a lease option to get some tenant to hopefully buy it as soon as possible. We've got to get rid of this property because it's a drain on your overall net worth and it's a drain on your net income. So in summary, not every property that says seems to be a problem is really a problem. There may be some reasons to keep that property. Others of you may be sitting on a problem, hoping it's going to change and it's not. And it's time to rip the cord and get out of there. So consider these issues very carefully. At our office, we can be of assistance, our lawyers and accountants trying to help you make the right decision so that you're building your wealth and not going underwater. Thanks for watching and if you love that video, I've got a lot more. Please subscribe to my channel and I shoot weekly videos that can help you in your business, personal life and better live your American dream. Also, check out my newsletter, free newsletter every week with blog articles, tips, strategies, tax deadlines. You'd love it. 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