I admit it, I do not see the purpose in FIREcalc

[Offgrid Organic Farmer]

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Originally Posted by daylatedollarshort Recessions have happened pretty regularly in the past in the U.S. and many financial pundits think we are overdue for the next one.

If only someone had a good crystal ball

[Offgrid Organic Farmer]

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Originally Posted by marko I don't like hate paying taxes but I do. The real question is "after taxes can you live comfortably?". I can. Quite comfortably. If taxes make or break one's plan, there might be a problem with the plan.

True.

My wife and I made a hobby out of keeping our income tax-sheltered during my Navy career, and tried to keep it going after I retired.

[Offgrid Organic Farmer]

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Originally Posted by Golden sunsets Wait!! The OP had to file bankruptcy because of his real estate holdings in 2009 and yet he is now investing in real estate again?😱 What am I missing here?

The first time, we had mortgages and we extracted enough tax-free profit to buy our farm.

This time we are going into income property without a mortgage.

[Another Reader]

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Originally Posted by Offgrid Organic Farmer When I retired, we sold other proerties and put the cash into one property. Our favorite property. [when you sell, you have to reinvest the money or else it becomes subject to taxes. I think it was called a 1031 'like kind' exchange] Then a little later, we re-financed that property, as a method of turning equity into tax-free cash. We used that cash to buy our farm. I guess we could have sold it, but at that time it was full of tenants and paying its mortgage. We hoped to withdraw the equity and leave it to build equity again. It never occurred to me to sell it, as that would have required paying taxes. In the middle of the recession, nobody was buying anything. We tried to do a 'short sale' but the bank refused to allow it. Due to our efforts to sell it, that triggered the bank to foreclose and file a law suit.

The bank foreclosed on you because you did not pay the mortgage. Apparently, your state allows deficiency judgements so the bank went after that as well. If they did not get anything out of the deficiency judgement because you filed bankruptcy, there are two losers in that lawsuit. Some negotiation and discussion of of their inability to collect if you filed bankruptcy might have prevented the deficiency suit.

OP, you took on far more risk in my view than you should have. You concentrated all your money in one holding. You used it as an ATM to pull out cash instead of paying off the mortgage and riding out the storm when it inevitably came.

Leverage has its' place. Think about being more conservative with it this time, because your rental market is higher risk.

[marko]

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Originally Posted by Offgrid Organic Farmer When I retired, we sold other proerties and put the cash into one property. Our favorite property. [when you sell, you have to reinvest the money or else it becomes subject to taxes. I think it was called a 1031 'like kind' exchange] Then a little later, we re-financed that property, as a method of turning equity into tax-free cash. We used that cash to buy our farm. I guess we could have sold it, but at that time it was full of tenants and paying its mortgage. We hoped to withdraw the equity and leave it to build equity again. It never occurred to me to sell it, as that would have required paying taxes. In the middle of the recession, nobody was buying anything. We tried to do a 'short sale' but the bank refused to allow it. Due to our efforts to sell it, that triggered the bank to foreclose and file a law suit.

All this makes owning stocks sound like an easier, better option.

[MichaelB]

To each his / her own, eh? There are many ways to invest and manage one's finances, and the "best" is whatever works.

[copyright1997reloaded]

OP, my post about Bill Gates was just a bit of a tease. I don't think you are smug.

Having said that, while rentals (in the case of property) and dividends (in the case of stocks) provide an income "cushion" when those asset classes are falling in price, in the long run both (rentals and dividends) will fall if the asset class price continues to be impacted over a period of time.

In the case of dividends, companies are reluctant to lower dividend payments until forced to do so. But they eventually do have to do so if the economy doesn't recover in a reasonable amount of time. This was born out during the great depression, as many many companies were force to severely reduce or eliminate their dividend payments.

The same is true with rentals. If the price of those assets are reduced for a longish period of time, the rental price will go down. Economic theory says it must, as there is always a rental vs purchase decision to be made by the renter/buyer, and because as the ability to pay is reduced (because people lose their jobs), the demand at any price point will be reduced. (Yes, people need housing, but they will do things like live with others or move to lower cost/better opportunity areas). As with dividend payments, the decrease is typically delayed because moving is a pain.

Every asset class is subject to the laws of supply and demand.

[marko]

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Originally Posted by MichaelB To each his / her own, eh? There are many ways to invest and manage one's finances, and the "best" is whatever works.

For sure and I didn't mean to denigrate one approach over another. OP's approach just seems like a lot of work to me. But YMMV

[ERD50]

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Originally Posted by Offgrid Organic Farmer Do your stocks provide a decent tax shelter? If so how much of your other income streams are sheltered from taxes by your stock holdings?

It appears that your income level (and mine until I start collecting pension/SS/RMD) would put you in the lower tax brackets where the long-term (> 1 year) capital gains and qualified dividends are not taxed at all. Can't beat that, that's better than 'tax advantaged' (deferred - pay me later).

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Originally Posted by MichaelB To each his / her own, eh? There are many ways to invest and manage one's finances, and the "best" is whatever works.

Yes, and by most people's measures, 'bankruptcy' doesn't fit in with 'working'.

-ERD50

[pb4uski]

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Originally Posted by Offgrid Organic Farmer Do your stocks provide a decent tax shelter? If so how much of your other income streams are sheltered from taxes by your stock holdings?

Absolutely.

Most of the dividends that I receive are tax-free, as are LTCGs. In fact, the effective tax rate on my stocks is negative because the foreign tax credit that I get from my international stocks exceeds the small ordinary tax that I pay on non-qualified dividends from my international stocks.

And unlike your real estate where you face a big tax bill if you convert it to cash to spend, I can judiciously sell stocks and pay no tax at all since LTCG are tax free if managed correctly.

My tax bill on my pension and stock income would be zero but I choose to use a portion of the headroom to the top of the 12% tax bracket to do low cost Roth conversionrom my tax-deferred accounts.... since I retired I have converted over $250k and paid less than 7.5% in tax... compared to savings of 28% or more when I deferred that income.

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Originally Posted by Offgrid Organic Farmer Yes, the recession screwed me. My tenants all lost their jobs and I went without rental income for 2 years. I lost that apartment building. My pension was not enough to support me and an empty apartment building. Now I have gone nearly 10 years without any rentals. My pension has been plenty. With my new set of rentals [and no further recessions] I should be fine.

During the recession, I still received dividends from my stocks. They went down in value on paper but I held them and they recovered and then some. The decline in value was stressful, but not nearly as stressful as the foreclosure proceedings that you endured.

$10k invested in Vanguard Total Stock 10 years ago... near the pre recession peak... would be worth over $25k today.. although shortly after investing it would have declined in value to ~$5,400... but not a total loss like your apartment buildings.

http://quotes.morningstar.com/chart/...22%3A%5B%5D%7D

You say that you should be fine with your new set of rentals with no further recessions... I hate to burst your bubble but periodic recessions a regular part of economic cycles.

A geographically concentrated portfolio of apartment properties is much riskier than a diversified stock portfolio.

[Texas Proud]

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Originally Posted by Offgrid Organic Farmer When I retired, we sold other proerties and put the cash into one property. Our favorite property. [when you sell, you have to reinvest the money or else it becomes subject to taxes. I think it was called a 1031 'like kind' exchange] Then a little later, we re-financed that property, as a method of turning equity into tax-free cash. We used that cash to buy our farm. I guess we could have sold it, but at that time it was full of tenants and paying its mortgage. We hoped to withdraw the equity and leave it to build equity again. It never occurred to me to sell it, as that would have required paying taxes. In the middle of the recession, nobody was buying anything. We tried to do a 'short sale' but the bank refused to allow it. Due to our efforts to sell it, that triggered the bank to foreclose and file a law suit.

That is kinda the point that people are making... you filed BK.... very few people on this forum has done that... so what you did was NOT a good idea as you did not survive the downturn...

Now, you seem to have recovered.... not sure how... but you do have a pension... most people here do not have a pension, so if they filed for BK they are not going to stay retired....

I would be interested in hearing how you did recover? IOW, if you were truly BK then how did you get money to buy a new place? Also, how much income is the farm providing? Last, how much time and effort are you putting into the farm and apt bldg? I do not see you being retired, but that is a discussion that goes nowhere with people who still work for income and say they are retired....

[audreyh1]

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Originally Posted by Offgrid Organic Farmer We have many neighbors who are on SSDI or SS, of $600 to $800 a month. These are all people who own their homes with no debt. So obviously they are doing fine. $500/month is certainly cutting it close. I hope you are okay.

I hope you realize that the person has saved a great deal so that they aren't dependent on only $500 a month from SS. That’s where FIRECALC comes in.

[Offgrid Organic Farmer]

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Originally Posted by Another Reader It looks like the OP picked Maine as his residence because of the low cost of living. The trouble with that approach is the cost of living is low for a reason. There is a lot of poverty and not a lot of industry in Maine. I don't think of Maine as home to a lot of wealthy farmers and ranchers. There are a lot of small, subsistence farming operations there. When I pick a place to invest in residential real estate, I look for a strong, growing economy. I want people with good jobs but a reason to rent instead of buy to occupy my units. I do not look at places where the economy is dying and there are not a lot of people moving in to take good jobs. I may be wrong about Maine's economic prospects, but if I'm not, the OP is likely taking on the same risks that caused him to lose the apartment building in 2009. A downturn in the state and local economy could have his tenants vacating as they did where he was in the last recession. Without new tenants with jobs to replace them, he would be likely to lose his Maine property, as he lost the property in 2009. The OP understands the benefits of owning and operating a rental real estate business. I'm just not sure he picked a low risk location for the business.

Our life goal was to live on a small subsistence farm, and we have accomplished that. You are correct there is a growing community of small subsistence farms here.

Since we moved to Maine we have been watching the local economy. While over 92% of the state is forest, there is no money to be made in forestry. Lumber is cheaper when it is imported. The paper industry is shrinking as the internet takes over. Our pulp mills have been shutting down, towns have been going bust.

The nearby state university campus has re-branded itself as a party school and it draws a lot of students from out of state. We have been considering renting to students only. There are a lot of locals that are under-employed or marginally employed, if a landlord ever rented to any of the locals, you would most definitely end up having to evict each one of these locals. As they simply lack sufficient income to honestly cover rent long-term.

In my travels, I have seen that cities with high paying jobs always seem to have a high COL, real estate prices are higher. I have owned properties in California, Scotland, Connecticut and in Washington. If I had a much higher income I might consider real estate in a high COL, again. But as a retiree, I simply do not have that level of income.

To be able to support my family on my pension, I needed a low COL region, which Maine is. Maine is the oldest state with the highest percentage of retirees. [I know everyone thinks this distinction should be Florida, right?] People who only have SS or SSDI for income when they find Maine, they learn that they can own a cabin in the woods, raise some chickens and pigs, and they can get by okay. If your SS is between $700 and $800/month it is extremely difficult to survive in most other regions.

[Another Reader]

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Originally Posted by pb4uski Absolutely, most of the dividends that I receive are tax-free, as are LTCGs. In fact, the effective tax rate on my stocks is negative because the foreign tax credit that I get from my international stocks exceeds the small ordinary tax that I pay on non-qualified dividends from my international stocks. And unlike your real estate where you face a big tax bill if you convert it to cash to spend, I can judiciously sell stocks and pay no tax at all since LTCG are tax free if managed correctly. During the recession, I still received dividends from my stocks. They went down in value on paper but I held them and they recovered and then some. $10k invested in Vanguard Total Stock 10 years ago... near the pre recession peak... would be worth over $25k today.. although shortly after investing it would have declined in value to ~$5,400... but not a total loss like your apartment buildings. You say that you should be fine with your new set of rentals with no further recessions... I hate to burst your bubble but periodic recessions a regular part of economic cycles. A geographically concentrated portfolio of apartment properties is much riskier than a diversified stock portfolio.

I can't really agree with most of this.

During the downturn, the values of my out of state properties dropped dramatically. My rents actually went up, because most of the people that foreclosed or short sold still had some income and needed a place to live. I don't think you need to be geographically diversified if you invest in locations with strong, diverse economies.

My values are now above where they were in late 2006 for the most part. My Silly Valley properties are up from the early 2007 peak by at least a third. I made a dumb mistake or two, so not all of the properties have accomplished a recovery. I bought a number of properties at fire sale prices in 2009-2012, and they have almost tripled in value.

The net yields before tax on my properties are likely higher than your dividends. I'm running a business, so I expect my returns to be higher than someone collecting dividend checks.

I receive preferential tax treatment, writing off six figures of depreciation every year. I can sell a couple of appreciated properties with no tax consequences because I have unused depreciation losses from the early years and losses from correcting a couple of the dumb mistakes. Your tax bill is low because your income is low enough to benefit from zero tax on LTCG. My income is probably substantially higher.

We each have found a way that meets our income objectives and allows us to sleep well at night. One approach is not inherently better than the other. What you are doing works well for most people, especially risk-averse people that aren't interested in operating a business. If you are willing to learn how to run a real estate business and you manage the business well, the rewards will likely exceed what you can achieve by steady, unleveraged investing in the stock market.

[Offgrid Organic Farmer]

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Originally Posted by Another Reader The bank foreclosed on you because you did not pay the mortgage. Apparently, your state allows deficiency judgements so the bank went after that as well. If they did not get anything out of the deficiency judgement because you filed bankruptcy, there are two losers in that lawsuit. Some negotiation and discussion of of their inability to collect if you filed bankruptcy might have prevented the deficiency suit.

We lost tenants, regardless of how low we dropped rent, there simply were no renters in that city. Everyone there had lost their jobs. We paid the mortgage out of our savings, until our savings was gone, because we kept hoping that we woudl find new tenants.

Then we offered to quit claim deed the property over to the bank, that seemed to trigger the bank's actions. They refused to allow a short-sale. They foreclosed on us, and they sued us for the property and its retail value.

Even after we offered to give them the deed to the property, the foreclosure dragged on. IT seems there was a bunch of mortgage companies in that era who had failed to do their diligence in the paperwork. So the courts held up the foreclosures.

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... OP, you took on far more risk in my view than you should have. You concentrated all your money in one holding. You used it as an ATM to pull out cash instead of paying off the mortgage and riding out the storm when it inevitably came. Leverage has its' place. Think about being more conservative with it this time, because your rental market is higher risk.

True.

This time around, we are not getting a mortgage. If we can not get tenants, the world will not end.

[pb4uski]

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Originally Posted by Another Reader I can't really agree with most of this. During the downturn, the values of my out of state properties dropped dramatically. My rents actually went up, because most of the people that foreclosed or short sold still had some income and needed a place to live. I don't think you need to be geographically diversified if you invest in locations with strong, diverse economies. My values are now above where they were in late 2006 for the most part. My Silly Valley properties are up from the early 2007 peak by at least a third. I made a dumb mistake or two, so not all of the properties have accomplished a recovery. I bought a number of properties at fire sale prices in 2009-2012, and they have almost tripled in value. The net yields before tax on my properties are likely higher than your dividends. I'm running a business, so I expect my returns to be higher than someone collecting dividend checks. I receive preferential tax treatment, writing off six figures of depreciation every year. I can sell a couple of appreciated properties with no tax consequences because I have unused depreciation losses from the early years and losses from correcting a couple of the dumb mistakes. Your tax bill is low because your income is low enough to benefit from zero tax on LTCG. My income is probably substantially higher. We each have found a way that meets our income objectives and allows us to sleep well at night. One approach is not inherently better than the other. What you are doing works well for most people, especially risk-averse people that aren't interested in operating a business. If you are willing to learn how to run a real estate business and you manage the business well, the rewards will likely exceed what you can achieve by steady, unleveraged investing in the stock market.

I'm actually very familiar with real estate as I manage a commercial real estate property for my mother.

In my post I was contrasting my experience with stocks over the last ten years to what the OP described happened to him and his question as to whether stocks provide a decent tax shelter. Many people are totally unaware of the 0% rate for qualified dividends and LTCG if you manage you income right... I suspect that the OP was in that group. In the other part I was responding to his description of what he went through during the great recession compared to what I went through holding stocks.

I'm glad that your real estate worked out for you but a lot of real estate investors faced financial ruin during the great recession. For me, I'm lazy and stocks are a lot easier.

[Offgrid Organic Farmer]

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Originally Posted by marko All this makes owning stocks sound like an easier, better option.

Stock can be easier. Better?

My grandparents were burned badly by the market crash. When they got back on their feet, they did rental real estate, and it turned out to be a solid investment for them.

So growing up I was taught to avoid the stock market, and that rental real estate is preferable.

When I was working, we focused a lot on the tax-sheltering abilities of rentals. Stocks can not do that.

We went from 1983 to 2001 without paying any income taxes. Nothing was 'withheld' from my salary and no taxes were due when we filed each year. At the same time, we gained a lot of Net Worth. Tax-shelters can be a nice tool.

Our 'rental real estate' provided my family with a home at each duty station, side income, built-up Net Worth, and provided tax-sheltering.

As a whole these are things that owning stocks, can not do.

[Hermit]

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Originally Posted by MichaelB To each his / her own, eh? There are many ways to invest and manage one's finances, and the "best" is whatever works.

True. I tried real estate and it was a disaster. I didn't loose any money, but I lost a whole bunch of time. The summer my daughter was born, I spent most of my free time working on the rental which was about an hour away which meant I would stay over there for the day. By the time I got done painting, staining woodwork, and repairing/replacing things that needed repaired/replaced I was done with the rental business and sold that house. I have had no desire to have anything to do with the rental business since.

[MichaelB]

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Originally Posted by marko For sure and I didn't mean to denigrate one approach over another. OP's approach just seems like a lot of work to me. But YMMV

My post wasn't directed toward you, just a reminder to everyone - including the OP - that there are many ways to make money. And yes, some are easier than others.

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Originally Posted by ERD50 Yes, and by most people's measures, 'bankruptcy' doesn't fit in with 'working'. -ERD50

Not sure what prompted that. A landlord can go broke, and so can a stockholder.

Everyone in this discussion seems to have a way to make money that works for them. Good for everyone.

[Another Reader]

What they probably sued you for was the difference between what they netted from the property when they sold it and the total of the unpaid balance, the accrued interest, and the legal fees and other expenses incurred in collection and foreclosure efforts. all the more reason to invest in a state where the collateral is the extent of what can be collected and deficiency judgements are not permitted.

Were they able to collect anything from you and your "estate" in bankruptcy? If not, they wasted their time and money pursuing this.

Before you write any checks, consider studying your rental market and its' history. What is the real vacancy rate and collection loss? How difficult is it to evict, especially in winter? How much have rents changed over the last ten or fifteen years? How expensive is it to maintain and repair property in an area where harsh winters are the rule? All those things affect your rental business and its' success.

You did salvage one asset from the foreclosure and the subsequent bankruptcy, the farm. You kept at least some of the equity that you extracted. How does the value of your farm plus what you lost in the bankruptcy compare to what you had into the apartment building?