Passive income = the best

[braumeister]

We really like a good spirited discussion, but we really hate personal attacks.

As long as we all remember that, this thread can remain open.

 

[rodi]

I would also like to remind members that there is an ignore function. If you do not like the style or posts of another member you can select to ignore them... This works far better than personal attack.

 

[trumpeting_angel]

That's the key, your margin. But do you feel the property manager is responsible for the run of expenses you now have?

I’ve become disillusioned with property managers after 16 years of property ownership. The first one was incompetent, and the second one did a superb job but seems to have taken on more work that he can handle.

I did make money when I self-managed, but I moved too far away to continue this.

Thee properties have both appreciated considerably, and one will be paid off soon, so I shouldn’t complain. Like w*rking, it doesn’t hold the allure and passion it once did.

 

[trumpeting_angel]

I’m surprised at the hostility in this thread. Maybe it’s a matter of tone, but really there’s no reason for some to defend, and some to seem to condemn, a type of investment. To each her/his own.

 

[braumeister]

there is an ignore function

Good thought!

And for those who may not have ever used it, here's the method:

Find a post by someone you would rather not hear from any more.

Click that person's username (over there in the left column).

Scroll down the popup list and select Add _____ to your Ignore List.

That's it! And you just saved yourself a bunch of money by avoiding a possible prescription for blood pressure medication. What a wonderful feature!

 

[ncbill]

I’ve become disillusioned with property managers after 16 years of property ownership. The first one was incompetent, and the second one did a superb job but seems to have taken on more work that he can handle.

I did make money when I self-managed, but I moved too far away to continue this.

Thee properties have both appreciated considerably, and one will be paid off soon, so I shouldn’t complain. Like w*rking, it doesn’t hold the allure and passion it once did.

Thanks for pointing out the value of depreciation in shielding other income.

So will you sell or 1031-exchange into another real estate investment?

 

[bmcgonig]

Does it have to be set up before purchase of the property? Property tax and depreciation are of little use to me due to current default income, so I have taken none. I only have the one property and it is basically just buying itself. It would be worth more to me if I could Roth the income.

Maybe I'm wrong here but don't you have to take depreciation otherwise the IRS will do it for you?

 

[Aslowdodge]

Aslow-

Pls reconcile these two sets of numbers for us; they don’t seem to match. But, perhaps my math is wrong.

I did a quick Zillow/NeighborhoodScout search on Marietta, and it seems to be a RE market with profitable rental property opportunities available (without getting assaulted/robbed when collecting the rent). So, I’d also like to hear more about how you’ve built what you consider a profitable rental RE portfolio. Stuff like:

- Purchase $ vs Monthly Rental ratios you look for
- Property types (SF, Multi-unit, etc)
- Source of properties (market, auction, etc)
- What Net/Gross Rent ratio you try to achieve

Whoops made a mistake. The cap rate is for the 17 properties I hold in my name only, the other 5 are held in my retirement accounts.
I hold no rentals in Marietta, as you may have noted I said they were 800 miles away.
The portfolio has been built up over the last 3-4 years. Typically I was buying foreclosures in the midwest although I did get 2 at online auctions. A common deal might be for a sfh in the range of 30 to 50 k with repairs and rehab at 10 to 17k to get rent ready. The appraised value after that would typically pick up about 40 to 60 percent more than the invested amount. I mostly have sfh but added a few condos in when the numbers looked good for the cash flow. Usually the condos went up very little after reapairs.
I try for the 2% rule which basically is 2% of the all in price for monthly rent. This is really hard to find and is almost impossible to find now unless you go into riskier properties.
My properties are in what I would call C+ to b - areas. Some crime, mostly blue collar workers.


Here is an example of one of my houses
47,950 purchase, 12,013 rehab-all in we'll round it to 60K
house rents for 1200 and after all expenses inc prop management cash flows about flows about $680 a month.
I cash out refinanced and it appraised for $92K at the time but I think it's higher now. The loan gave me pretty much all I had invested plus a few extra thousand so I have zero invested. The loan proceeds were used to buy another house.

Now there is a mortgage so after servicing the debt the cash flow is now $297 a month instead of $680.
The result is a cash flow of $3564 per year with no money invested since I got it all back. The depreciation taken is about 1900 a year making the taxable amount on this house about $1664 per year.
The equity I own in the property is about $27K, again no money of mine is invested at this point.



My target is to try and get a 13% return on investment for cash flow each year on each property.


When I cash out refinance you can see I have less invested and because of leverage my return is way higher. Because of 2 cash out refinances my roi has gone up
So at this point I have about $750K of my own money invested with 2 cash out loans. The value of the 17 properties is a skoosh under 1.5 million.

The gross rents are 216K with a net of $108K after all expenses per year.
108,000/750,000= 14.4



None of this is factoring in the 5 properties in my IRAs which I haven't paid as much attention to. Those should generate about 22K a year in net rental income when I decide to start withdrawing which at my age is whenever I decide. That plus my 108K I get now brings me to $130K a year. Right now I don't need the money even though its flowing into the account. I am actually hopping to wait another year and build up enough to buy another rental and bring that 22k up to 28K.



Keep in mind most of the equity gained was not by appreciation by just holding them as the midwest is fairly low, but bu taking vacant unused homes and repairing them to be market value.


I will say the deals I got are really hard to find now. Many investors have flocked to the midwest and are overbidding for houses.
I have enough to live on comfortably so I may stop buying soon. I have a few more cash out refinances which will raise that 14.4 that I'm doing because interest rates are still relatively low. But with rates going up and returns going down I may just stop.


Hope that makes more sense.

 

[Aslowdodge]

Maybe I'm wrong here but don't you have to take depreciation otherwise the IRS will do it for you?

I don't know if the IRS will do it for you, but I believe if you ever get audited they will recalculate you returns with it then recapture it when you sell.

 

[trumpeting_angel]

Thanks for pointing out the value of depreciation in shielding other income.

So will you sell or 1031-exchange into another real estate investment?

I would prefer to sell but I’m afraid my accountant will yell at me.

 

[pj.mask]

Wow some concerns here. When you sell your house you have to report the value minus any depreciation that you did or could have taken. They don’t recall and give you credit - they just charge you for it.

In Texas you can’t refinance a rental property - dunno about elsewhere.

As has been discussed numerous times - finding some unique deals due and making a profitable return can’t widely be applicable. I made a ton of return on stock I bought at the bottom of the recession but I don’t advise that to others. Likewise I bought a house right after the housing crash but that option isn’t available.

I see 2 parts here 1) buying houses and flipping them and 2) renting them out. If you buy a distressed rental and repair it for $60k and it is now worth 92k you made 50%
Now you are renting out your 92k house for $680*12 about 8k/yr. So assuming you have no repairs or any unexpected expenses (yes right) you make 9% on the actual renting part. Probably less as the house has appreciated since.

Sounds like you would be better off flipping houses and investing those profits into stock market.. but that sounds an awful lot like Work

 

[Huston55]

Whoops made a mistake. The cap rate is for the 17 properties I hold in my name only, the other 5 are held in my retirement accounts.

I try for the 2% rule which basically is 2% of the all in price for monthly rent.

When I cash out refinance you can see I have less invested and because of leverage my return is way higher. Because of 2 cash out refinances my roi has gone up
So at this point I have about $750K of my own money invested with 2 cash out loans. The value of the 17 properties is a skoosh under 1.5 million.

The gross rents are 216K with a net of $108K after all expenses per year.
108,000/750,000= 14.4

I have enough to live on comfortably so I may stop buying soon. I have a few more cash out refinances which will raise that 14.4 that I'm doing because interest rates are still relatively low. But with rates going up and returns going down I may just stop.

Hope that makes more sense.

Aslow-

Thx much for supplying all the details & kudos on your successful RE venture.

I like the “2% Rule”. Definitely hard to find almost anywhere now but, you bought after the RE crash when the opportunity was there...well done.

I now understand how you calculated what you called a “Cap Rate.” It’s actually the “Return one Invested Capital” (ROIC), whereas the Cap Rate would use current market value, making your Cap Rate ~10%. But, by either calculation, you’re doing quite well.

Plus, the tax advantages of your RE income make it even more attractive when compared to alternate investments.

I know there are several other Rental RE gurus on the forum (‘Senator’ is one who comes to mind). It would be interesting to hear what ratios they use and/or earn.

 

[Aslowdodge]

Aslow-

Thx much for supplying all the details & kudos on your successful RE venture.

I like the “2% Rule”. Definitely hard to find almost anywhere now but, you bought after the RE crash when the opportunity was there...well done.

I now understand how you calculated what you called a “Cap Rate.” It’s actually the “Return one Invested Capital” (ROIC), whereas the Cap Rate would use current market value, making your Cap Rate ~10%. But, by either calculation, you’re doing quite well.

Plus, the tax advantages of your RE income make it even more attractive when compared to alternate investments.

I know there are several other Rental RE gurus on the forum (‘Senator’ is one who comes to mind). It would be interesting to hear what ratios they use and/or earn.

I understand what you are saying about cap rate. In my mind it is that for me but if someone were to buy it it would sit at about 7-8x.
I did catch the tail end. A few others got there a year or 2 before me and were buying at 15-20K! Most of the bank owned properties are gone now unless they are holding back, but even they have to know investors are paying top dollar now.

 

[Aslowdodge]

Wow some concerns here. When you sell your house you have to report the value minus any depreciation that you did or could have taken. They don’t recall and give you credit - they just charge you for it.

In Texas you can’t refinance a rental property - dunno about elsewhere.

As has been discussed numerous times - finding some unique deals due and making a profitable return can’t widely be applicable. I made a ton of return on stock I bought at the bottom of the recession but I don’t advise that to others. Likewise I bought a house right after the housing crash but that option isn’t available.

I see 2 parts here 1) buying houses and flipping them and 2) renting them out. If you buy a distressed rental and repair it for $60k and it is now worth 92k you made 50%
Now you are renting out your 92k house for $680*12 about 8k/yr. So assuming you have no repairs or any unexpected expenses (yes right) you make 9% on the actual renting part. Probably less as the house has appreciated since.

Sounds like you would be better off flipping houses and investing those profits into stock market.. but that sounds an awful lot like Work

I'm not sure if you were addressing me or the other poster.
Haven't heard anything about rental not being refinanced in Texas. There's a guy on the mustache forum rehabbing in Texas with the target of refinancing each one. He has a pretty good thread.



The 680 a month if you were referring to me has expense reserves for repairs calculated in already as well as vacancy, ins, prop manahement.
I was looking to set up a cash flow machine so I wanted to hold the properties. Flipping means paying taxes on the sale. If sold the whole 1.5 million which I wouldn't have because of paying taxes so maybe 1.35 million and put it in the market and drew the traditional 4% out I get 54K a year with no tax benefits vs the $108 I get now.


I'm also worried about the markets taking a downturn since it's had quite the run. In all my years of rentals ( about 30 years) I've only seen one downturn in rents of about 15 percent and that lasted a year before I brought them back up, even in the bad times.


It really isn't too much work as my property manager supervises the whole rehab, all I do is send money.


The opportunities are still there, but I have to find another city if I want to continue.

 

[Offgrid Organic Farmer]

I don't know if the IRS will do it for you, but I believe if you ever get audited they will recalculate you returns with it then recapture it when you sell.

I was stationed overseas for a few years, so we hired a property manager. He bungled things so badly, that we could not file our income taxes.

We requested all the data the IRS had on us for those 3 years, and then we requested audits for those years.

They recalculated our returns with depreciation included. But there was no recapture in it. No taxes were due.

We refinanced that apartment complex and used the cash to buy our retirement farm.

 

[Aslowdodge]

I was stationed overseas for a few years, so we hired a property manager. He bungled things so badly, that we could not file our income taxes.

We requested all the data the IRS had on us for those 3 years, and then we requested audits for those years.

They recalculated our returns with depreciation included. But there was no recapture in it. No taxes were due.

We refinanced that apartment complex and used the cash to buy our retirement farm.

I only meant the recapture was done when you sold, but since you haven't sold, it hasn't happened.
Sorry the prop manager bungled things up, that had to be a PITA.

 

[Offgrid Organic Farmer]

I only meant the recapture was done when you sold, but since you haven't sold, it hasn't happened.
Sorry the prop manager bungled things up, that had to be a PITA.

My apology. Whenever I try to tell our whole story, people get confused. So I am trying to learn to be brief.

My previous post in this thread takes us from 1997 up to about 2005.

2006 and 2007 we had rental income and we were once again paying down the mortgage. We were living on our farm and things were great.

2008 the city big employers had huge lay-offs. We lost all our tenants.

2009 we covered the mortgage from savings, until our savings ran out. We tried a short-sale but the bank refused. We tried to quit-claim deed the apartments back to the bank, but they refused. The bank then foreclosed on the mortgage and sued us for the market value of the property. This forced us into bankruptcy.

In the bankruptcy, the bank was forced to take the apartments, and to stop the foreclosure and the lawsuit.

It also exposed them for failure to do all the paperwork back when they gave us the mortgage, as it turned out they did not have a clear claim to the property as we thought they should have had.

We kept our farm, and we did not owe them anything further.

2010 - 2016 We were on our farm, doing the farm thing.

2017 we bought another apartment building and began remodeling it. It initially had one tenant.

2018 After substantial remodeling we now have four fresh tenants. By the end of the year we will have fourteen tenants.

Does that make any sense?

I have not seen any IRS recapture.

 

[Aslowdodge]

My apology. Whenever I try to tell our whole story, people get confused. So I am trying to learn to be brief.

My previous post in this thread takes us from 1997 up to about 2005.

2006 and 2007 we had rental income and we were once again paying down the mortgage. We were living on our farm and things were great.

2008 the city big employers had huge lay-offs. We lost all our tenants.

2009 we covered the mortgage from savings, until our savings ran out. We tried a short-sale but the bank refused. We tried to quit-claim deed the apartments back to the bank, but they refused. The bank then foreclosed on the mortgage and sued us for the market value of the property. This forced us into bankruptcy.

In the bankruptcy, the bank was forced to take the apartments, and to stop the foreclosure and the lawsuit.

It also exposed them for failure to do all the paperwork back when they gave us the mortgage, as it turned out they did not have a clear claim to the property as we thought they should have had.

We kept our farm, and we did not owe them anything further.

2010 - 2016 We were on our farm, doing the farm thing.

2017 we bought another apartment building and began remodeling it. It initially had one tenant.

2018 After substantial remodeling we now have four fresh tenants. By the end of the year we will have fourteen tenants.

Does that make any sense?

I have not seen any IRS recapture.

Okay, so you went overseas on the first apartment complex? I think in your case with the BK and you walking from it the whole tax thing gets convoluted. It's not like you made a profit from it to take the recapture expense from.
Glad you came out ok in the end. Those were some tough times on a lot of people.

 

[Winemaker]

Wow some concerns here. When you sell your house you have to report the value minus any depreciation that you did or could have taken. They don’t recall and give you credit - they just charge you for it.

In Texas you can’t refinance a rental property - dunno about elsewhere.

When selling a rental property, the capital gain (Selling price less cost of property) is taxed. Depreciation, taken over 27.5 years for residential, 39.5 commercial, is a non cash expense taken each year. That depreciation is taxed at 25% under the old law, and is taxed regardless of whether you took the expense on your return or not. Not sure of new rate, but DD and I will be in the 22% bracket til the law changes or we die. 3%, meh.

To avoid the tax charge, one can do a 1031 exchange for like property, and start all over again. DW and I are in the hunt for an acceptable property in a snowbird situation, but we'll see.

We have refinanced our 2 rental properties for a $60,000 cash out, lowering our 1st mortgage rate from fixed 7% to an adjustable that is now 4%, was at 3.125% for years. The 2nd was reduced from 7 7/8% to 4 3/8%, both fixed. I can't see a state banning a straight out refinance, but i can see a cash out refinance ban, since the equity you pull out is tax free.

 

[Offgrid Organic Farmer]

Okay, so you went overseas on the first apartment complex? I think in your case with the BK and you walking from it the whole tax thing gets convoluted. It's not like you made a profit from it to take the recapture expense from.
Glad you came out ok in the end. Those were some tough times on a lot of people.

During my Active Duty career, we viewed building equity in a property as our 'profit'.

We tried to put as much of the Net profit into paying down the mortgage, or into building up the cost-basis, as we could maneuver.

We did the 1031-exchange in going from one apartment building to the next, which each change of duty station.

During my career, we owned four different properties, and our Net Worth grew steadily between them.

The apartments we had in 2008 were the last in a series of properties.

We were able to extract the equity and put it into our farm, before the Recession crashed.

Overall this kept us from paying income taxes on my salary income for 20 years, and when I was ready to retire, it provided the cash needed to buy our farm.

The bankruptcy hurt emotionally. But I do not see where it hurt us financially.

 

[Amethyst]

I have lots of cautionary advice about rentals and property managers; and I try to make it clear that this is only based on our personal experience, which obviously isn't the same as that of the successful rental-owners.

(Actually we did have a number of easy years of landlording, in the mid-80's to mid-90's. If only we'd stopped then).

I’m surprised at the hostility in this thread. Maybe it’s a matter of tone, but really there’s no reason for some to defend, and some to seem to condemn, a type of investment. To each her/his own.

 

[redduck]

I tried to fix this for you.

Getting ready to leave for 104 days in Asia soon [-]and getting my finances in order, I’ll be collecting over $16k in rents while [/-]sipping on whatever they drink out there I hear Vietnam has some bangin coffee

Additionally, if you hadn't made this into a new thread, but simply added it (with the adjustments above) as a post to Anyone got any travel planned? 2018 version? this all would have been less stressful for you.

 

[Aslowdodge]

The bottom line is that passive income is good no matter the source and as long as you have enough to do what you want, no one can say one way is better than the other.