My Pro's and Con's of real estate investing

[Senator]

Quote:

Originally Posted by Curmudgeon People always write about the tax benefits of RE investing, but it seems as though there is a huge disadvantage, namely depreciation recapture: If I buy a property now and write off depreciation, it doesn't save me much - I'm already in a 15% Fed. tax bracket. Years from now, when I sell (say, if I need to cash out to fund my retirement) then I owe 25% tax on the depreciation I claimed. That could be a huge tax bill. Do I misunderstand this?

You recapture depreciation at your normal tax rate. No more than 25%.

If you move into the property, it gets prorated.

I just bought a truck for my rental business. That is a 100% write-off. Try and do that with your dividend or pension 'business'.

[RunningBum]

Quote:

Originally Posted by Amethyst If your property has appreciated, and you don't have a lot of previously - unallowed expenses to deduct at sale, then yes, you will have to pay back some of that depreciation. It varies by situation, like all tax things.

Some? All of the depreciation you took comes back to be taxed, isn't it? You may be able to raise your basis by those other expenses, but that's unrelated to depreciation.

I know some people plan to pass down their rentals, and their heirs get to reset the basis, or you can do a 1031 exchange, or make it your permanent residence for a couple of years, but the question asked was if you wanted to sell to raise cash.

[Curmudgeon]

Quote:

Originally Posted by Amethyst If your property has appreciated, and you don't have a lot of previously - unallowed expenses to deduct at sale, then yes, you will have to pay back some of that depreciation. It varies by situation, like all tax things.

I think one of us misunderstands (and quite possibly it's me, which is why I'm asking here). You talk about appreciation, but that is over and above the tax liability I am talking about:

If you buy a property, you MUST* take a deduction for depreciation, and at sale time EVEN IF YOUR PROPERTY DID NOT APPRECIATE (you sell for the same price you bought), then you owe 25% tax on all of the depreciation you deducted.

(* - you don't actually have to take the deduction, but the IRS still treats it as if you did - you still have to pay recapture taxes on the depreciation you COULD have deducted)

Examples: If I buy a property for 100K, and sell it 13 years later for 100K, the amortized depreciation will be about 50% (50K), and I will owe the IRS 25% of 50K in recapture taxes.

If it sells for 200K, I will owe 25% of 50K recapture, PLUS the going tax rate times the 100K appreciation (assuming, for the latter, I don't have any offsetting expenses which increased my basis).

[Fermion]

Quote:

Originally Posted by Senator I just bought a truck for my rental business. That is a 100% write-off. Try and do that with your dividend or pension 'business'.

Why would my dividends need a truck? They are are not that heavy!

Now if you are implying that you are getting away with using the truck for personal use other than to support your rental investment yet still claiming 100% deduction, then I guess it is not much different from me forgetting to include some sale of stock in my tax return.

[RunningBum]

Quote:

Originally Posted by Senator You recapture depreciation at your normal tax rate. No more than 25%. If you move into the property, it gets prorated. I just bought a truck for my rental business. That is a 100% write-off. Try and do that with your dividend or pension 'business'.

I have no need for a truck with my stock investments. If you're using the truck for personal use, you cannot legally take a 100% write-off.

[Senator]

Quote:

Originally Posted by Fermion You could have taken $360k invested in 2010 and purchased $1.2M of SPY on 30% margin. The dividends would have covered the margin interest and the $1.2M would be worth about $3M today. Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

I will never get a margin call on my rentals...

[Senator]

Quote:

Originally Posted by Fermion Why would my dividends need a truck? They are are not that heavy! Now if you are implying that you are getting away with using the truck for personal use other than to support your rental investment yet still claiming 100% deduction, then I guess it is not much different from me forgetting to include some sale of stock in my tax return.

The amount of my personal use is De minimis. I use my personal car more for business than my business truck for personal. It gets a lot better mileage.

And there is a huge difference between writing off a truck and selling stocks. Your stock sales get reported to the IRS by your broker... The truck is on the honor system.

[Fermion]

Quote:

Originally Posted by Senator The amount of my personal use is De minimis. I use my personal car more for business than my business truck for personal. It gets a lot better mileage. And there is a huge difference between writing off a truck and selling stocks. Your stock sales get reported to the IRS by your broker... The truck is on the honor system.

For us, the tax side of things is just not an issue anyway. Capital gains and dividends are taxed at 0% in our bracket so there really is no great need for deductions. The standard deduction puts us in the 0% bracket and we can do some IRA to Roth conversions and still stay in the 0% tax bracket. Those Roth earnings will have no tax and no need for deductions to offset gains either.

[Letj]

Quote:

Originally Posted by Senator I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years. I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

You are right. I started with $200K to buy my first 3 houses. I am now up to almost 50 by refinancing and pulling out money to buy more properties. I have none of my own money tied up since I've pulled out and pocketed multiples of my initial investment and get a healthy net cash flow. I am not sure what else besides real estate can do this.

[Letj]

I should mention that we have a lot of sweat equity tied up in the properties.

[Fermion]

Quote:

Originally Posted by Letj You are right. I started with $200K to buy my first 3 houses. I am now up to almost 50 by refinancing and pulling out money to buy more properties. I have none of my own money tied up since I've pulled out and pocketed multiples of my initial investment and get a healthy net cash flow. I am not sure what else besides real estate can do this. I should mention that we have a lot of sweat equity tied up in the properties.

It sounds an awful lot like a job when you mention sweat equity.

Most jobs you don't have any of your own money tied up and they make you a healthy cash flow.

[Senator]

Quote:

Originally Posted by Letj You are right. I started with $200K to buy my first 3 houses. I am now up to almost 50 by refinancing and pulling out money to buy more properties. I have none of my own money tied up since I've pulled out and pocketed multiples of my initial investment and get a healthy net cash flow. I am not sure what else besides real estate can do this. I should mention that we have a lot of sweat equity tied up in the properties.

My opinion is sweat equity is the key to being successful in real estate. You can exponentially increase your income. I am working on a major remodel now, and will also hire out a few things. Any work I do myself, I save at least $40 per hour, sometimes 100s of dollars per hour. My real job barely returned that.

I am currently tearing out lath and plaster and sheet-rocking a kitchen. New cabinets. New electric and plumbing (pex) already installed. New windows in October. Laminate floors soon.

[Amethyst]

Yes, this is the right way to look at it - if you can do the work yourself, about as fast and as well as a pro can do it, you are really "earning" the money you aren't paying someone else. (The reverse is also true: If you can't do a really good job, or if it takes you forever, then you are cheating yourself by not hiring out the job).

Now that we are focusing on our own home, I think in terms of "If we power-wash and paint our 500-square-foot deck, that's at least $2500 we can put toward new appliances." Plus, we know the job was done in a conscientious manner. That is what I think of as sweat equity.

Quote:

Originally Posted by Senator My opinion is sweat equity is the key to being successful in real estate. You can exponentially increase your income. I am working on a major remodel now, and will also hire out a few things. Any work I do myself, I save at least $40 per hour, sometimes 100s of dollars per hour. My real job barely returned that. .

[RenoJay]

Quote:

Originally Posted by Elbata Soon to inherit home in CA. Wife wants to sell it. Here's why I'd like to keep it: 1. $3500/mo rent 2. We live nearby. Can both manage it, plus I'm a very handy guy. AC, Appliance repair, Garage Door and Plumbing--No problem. 3. CA's Prop 13 continues, and would have very low property tax. 4. Also motivated because of stock market prices at this time.

Given your description, ability to keep the low prop taxes and your handiness, I agree with keeping it.

[Letj]

Quote:

Originally Posted by Fermion It sounds an awful lot like a job when you mention sweat equity. Most jobs you don't have any of your own money tied up and they make you a healthy cash flow.

My husband's sweat equity was the key for us. We were able to refinance and take out much much more than we had invested. We bought mostly foreclosures during the housing crash and the renovation cost us mostly materials and specialized labor like HVAC installation so we were able to build a lot of value. In a sense I guess the money we took out more than compensated for all the sweat equity. As soon as the house was renovated to rental grade, we rented and moved on to the next. There were times when we had several houses waiting for renovation but it all worked out well.

[travelover]

I've gotta go. I see a couple of people on the porch and they have copies of the Watchtower for me.

[RenoJay]

Quote:

Originally Posted by Senator I have 25 renters. ~$340K in gross rents. Purchase price was ~1.8M, but I only had to have maybe 20% of that down, across several years. I am not sure where you can get a $150K+ retirement income and only have ~$360K invested.

I'd love to hear more details like what part of country, is this an apartment or SFHs, when did you buy, etc? Yeah earning $150k on $360k I'm sounds awesome!

[Fermion]

I do wonder why people stop if the money is so good and seems to compound so fast. Especially the people who claim it is no work on their part, everything handled by some agency or workers.

Why stop at 10, 50, 100 houses? If each house is profitable and requires no work, why are there not mega millionaires all over the place with 2,000 or more rental houses? Why do they all switch to writing books or doing infomercials/seminars?

[RenoJay]

Question for the experienced landlords here: my great always pay on time tenant just agreed to another year at a $200 monthly rent increase. (From $1500/mo up to $1700/mo.). She also informed me she just got married and obviously hubby and his daughter wanna move in with my tenant and her kiddos. Should I be doing any screening in new hubby? Like what?

[brucethebroker]

Quote:

Originally Posted by Fermion You could have taken $360k invested in 2010 and purchased $1.2M of SPY on 30% margin. The dividends would have covered the margin interest and the $1.2M would be worth about $3M today. Landlords who don't fully own their rentals are on margin, they just won't know it until we get another housing crash.

I personally am a landlord, and I know dozens of others. None were hurt during the housing crash. Note that it was a HOUSING crash, not a RENT crash.

One of the best buying opportunities I have experienced in 30+ years of landlording was 2008-2012. I had no problems getting renters then-the market was flooded with them due to the foreclosures.