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Real estate is starting to get interesting
Old 03-13-2008, 04:23 PM   #1
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Real estate is starting to get interesting

Blabbed about owning some low cost rentals here before and how we bought from the mid 80s to mid 2001. Did it contary to the conventional wisdom to maximise opium - Other People's Money. Result was that we made money more slowly, but i think our risk was much lower. Now, when rents are spiking up, we are looking to sell off some of the multi units and buy a few single family to cut back on the number of tenants i'm responsible too. To that end, we've been looking at houses in SoCal and Florida, and i gotta say - these are some crazy good looking markets! I'm seeing houses that sold last year for $450k being offered at $150k.
Now i haven't done any onsite looks at them, so maybe they are what's left after the Drug Enforcement team did an entry and search of some meth labs, or the last owners were insane puppy mill owners, but my thinking is, if you can buy a house in a decent neighborhood for less than it costs to build a replacement... Granted, it will be some years before the market turns up again (IMO honobob), but big deal - a savings account. I cannot imagine building codes becoming more lax but can imagine it will get more and more expensive to build a home - that should mean existing homes will get more valuable. 'Course maybe the population will shrink - anyone want to bet on that?
Location location though - we were offered an opportunity to loan on a couple little houses in NE Oregon - think we'll pass - they are an 8 hour drive from here and i can't imagine anyone wanting to buy there - zero building permits pulled in their county last year - Google Earth Long Creek Oregon. And yet, 6 miles away there's this: Keeney Estates - Country Home Sites with Acreage in Grant County, Oregon
Maybe it's all perception and attitude - much like the current liquidity problem.
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Old 03-13-2008, 05:17 PM   #2
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There are some great buys in Florida right now but would you like to be a long distance landlord ??
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Old 03-13-2008, 05:34 PM   #3
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Beach-house bargains - Mar. 13, 2008

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Originally Posted by calmloki View Post
(IMO honobob)
The only reason I'm so bullish on real estate is because the three states I've invested in have turned a few thousand in to a couple of million with very little effort or risk. I don't know Florida or even SoCal but I would be leary in investing in an area where values dropped so much. Did they really drop that much or did it sell above market and now is just selling at slightly below market because of the subprime mess or is the asking just a teaser to get the overbid back up in the $400K range? Just because something sold for higher at some point does not make it a deal now!!!!!!!!

I guess you can make money buying crap (crap to me is anything that lost that much value. At the worst times in the 90"s I was never down more than 9%) at the low end and selling at the high but my experience says it's very hard to time those events and in the mean time you're the landlord of crap!

Why not just buy the best you can in a good area that has a STABLE history of 9-11% annual appreciation? From the few figures I've run the potential upside on a chance in a million is wasted on holding costs. Not to say you can't anticipate an above average appreciation rate if you do your homework but that really is alot of work. Not my style but I've always been the one the downside would fall on.

4% Appreciation my *ss
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Old 03-13-2008, 06:18 PM   #4
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There are some great buys in Florida right now but would you like to be a long distance landlord ??
Normally long distance rental is what i'd call a way dumb move. But i'm thinking more of a 1031 exchange of a multi-unit into a nice single family, renting it out for a year or so and then who knows - maybe move in and 5 years later all that nasty taxable gain we have from buying a place and depreciating it over the last 19 years becomes **Tax free**. So my simple mind thinks "hmm, tax on a sale in Oregon would look like about 25% fed + about 9% state = 34%. If i can legally avoid that 34% tax over a 6 year period that's worth about 5% per year, ignoring any rental income and various expenses". As an added kicker, six years should be long enough for real estate to settle down and start heading back up - might be a bit of property appreciation in there. Good enough for me.
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Old 03-13-2008, 06:37 PM   #5
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But i'm thinking more of a 1031 exchange of a multi-unit into a nice single family, renting it out for a year or so and then who knows - maybe move in and 5 years later Good enough for me.
You do realize that you would only have to move into it for 2 years to get the sweet $500,000 tax free and I believe it's still up in the air as to how long you need to rent. I've seen as low as 6 months.
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Old 03-13-2008, 07:09 PM   #6
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Last year my CPA told me the rules have tightened up - now you have to own the 1031 replacement minimum 5 years before you can move in and sell after 2 years living in it. Also have to be careful about only renting it for 6 months - he recommends renting it part of one year, all the next year and part of the next year to be safe. I believe you will still have to recapture the depreciation at 25% Fed plus your state tax ordinary income rate - in CA that's currently 9.3% max.


I have some smart friends who seized the opportunity & have lived in 3 rentals and sold taking the 500K profit each time - they started years ago and got out before the market changed.
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Old 03-13-2008, 07:18 PM   #7
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Need to clarify my post above - you'd need to rent for 3 years and live in it for 2 years - making 5 years total.
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Old 03-13-2008, 07:20 PM   #8
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Again just talking off the top off of my head but I thought the "tightening" was that you couldn't do this more than twice in any 5 year period if you owned multiple properties thus stopping you from turning over a property every two years to meet the 2 years residence in a 5 year timeframe. If only someone had access to the internet?

My situation is that I own multiple properties that are rented for years but then I intend to live in each 2 years to claim the exemption and then move to the next property.
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Old 03-13-2008, 07:55 PM   #9
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Originally Posted by honobob View Post
You do realize that you would only have to move into it for 2 years to get the sweet $500,000 tax free and I believe it's still up in the air as to how long you need to rent. I've seen as low as 6 months.
Could be i'm wrong, but my understanding is that if i 1031 like for like income for income property and then convert to personal residence i need two years of residence to qualify for tax free, but 5 years total:
From https://www.1031cpas.com/1ten31Excha...ons.htm#500000
"the rules changed effective October 22, 2004 with the American Jobs Creation Act of 2004 which imposed a new ownership requirement of 5-years for property received as replacement property in a 1031 Exchange. The 2-year residency requirement remains unchanged.
So, taxpayers converting investment property to their personal residence thru a 1031 Exchange with subsequent conversion of the replacement property to a personal residence can still take advantage of the tax-free sale of a personal residence under IRC 121 subject to the 5-year ownership rule".
Which makes it look like 5 years, not 6 as i thought, and i think the last two of the five as a personal residence. And depreciated amounts are taxable, but i bet we haven't depreciated 20% of the property's value.

Here's one of the properties on which we've seen an ad:http://real-estate.nextag.com/propID...nia/homes-html
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Old 03-13-2008, 08:01 PM   #10
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According to this article below that I found on the internet and which was published November 2004 - you have to live in the property for 5 years - not 2 as I'd thought! Still worth it if you can exclude $500K each time. Let's hope they don't change any more rules!


"Once you've owned and used the villa for two years -- at least under the old loophole -- you'd qualify for the tax-free exclusions under Section121. Voila! Your formerly taxable investment property gains would be transformed by alchemy into non-taxable gains -- up to half a million dollars -- and you could sell the villa with limited or no tax exposure, depending on the amount of gain deferred via the earlier 1031 exchange.
Now for the new law: It narrows the loophole. It doesn't prohibit such tax-driven conversions outright, but it does require exchange property acquirers to own and use the real estate as their principal residences for five years, instead of the usual two years.
Exchange experts say the law could have been much worse.
"There's a silver lining here," says Michael Phillips, a partner in the San Francisco law firm of Rocca and Phillips and vice president of Pacific Realty Exchange Inc. "By implication, the bill confirms that you can do" conversions of exchange-acquired investment real estate and subsequently use Section 121 to exclude some or part of the gains."
Published: November 1, 2004
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Old 03-13-2008, 08:30 PM   #11
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Originally Posted by outtarentals View Post
According to this article below that I found on the internet and which was published November 2004 - you have to live in the property for 5 years - not 2 as I'd thought! Still worth it if you can exclude $500K each time. Let's hope they don't change any more rules!


"Once you've owned and used the villa for two years -- at least under the old loophole -- you'd qualify for the tax-free exclusions under Section121. Voila! Your formerly taxable investment property gains would be transformed by alchemy into non-taxable gains -- up to half a million dollars -- and you could sell the villa with limited or no tax exposure, depending on the amount of gain deferred via the earlier 1031 exchange.
Now for the new law: It narrows the loophole. It doesn't prohibit such tax-driven conversions outright, but it does require exchange property acquirers to own and use the real estate as their principal residences for five years, instead of the usual two years.
Exchange experts say the law could have been much worse.
"There's a silver lining here," says Michael Phillips, a partner in the San Francisco law firm of Rocca and Phillips and vice president of Pacific Realty Exchange Inc. "By implication, the bill confirms that you can do" conversions of exchange-acquired investment real estate and subsequently use Section 121 to exclude some or part of the gains."
Published: November 1, 2004


Creation Act of 2004 does this.
Observation 1 A taxpayer is not compelled to live in the residence for five-years. The taxpayer is only compelled to own the residence for five-years from the acquisition date and reside in it for periods of time adding up to two-years during the five-year period for the full gain exclusion.
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Old 03-13-2008, 10:12 PM   #12
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Yes, Honobob, I would believe my CPA's interpretation of the law rather than this particular article I found on the internet - there are several different interpretations on the internet. He told me some years ago that under the new rule you have to own the replacement property for 5 years but only need to live in it for 2 years during that time.

Glad that's settled! Exchanging at least one of my rentals and moving into the replacement property for 2 years has been part of my exit strategy for some time now. Hope there are no surprises from the IRS before we can get it done!
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Correct Number of Years
Old 03-13-2008, 11:30 PM   #13
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Correct Number of Years

The property has to be owned for 5 years total. If one lives in it as a primary residence for two of those years, one can sell it with the tax exclusion.

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Old 03-14-2008, 09:21 AM   #14
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Quote:

Why not just buy the best you can in a good area that has a STABLE history of 9-11% annual appreciation?
.... because they don't cash flow. Crap, IMO, is anything that forces you to keep your day job to subsidize your tenants housing. When did buying HIGH become fiscally responsible?

On a side note, glad to see 1031 exchanges become more clear ... planning to either move to or roll the profits from the lake property which was purchased via a 1031 exchange.
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Old 03-14-2008, 09:33 AM   #15
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Originally Posted by calmloki View Post
Normally long distance rental is what i'd call a way dumb move. But i'm thinking more of a 1031 exchange of a multi-unit into a nice single family, renting it out for a year or so and then who knows - maybe move in and 5 years later all that nasty taxable gain we have from buying a place and depreciating it over the last 19 years becomes **Tax free**. So my simple mind thinks "hmm, tax on a sale in Oregon would look like about 25% fed + about 9% state = 34%. If i can legally avoid that 34% tax over a 6 year period that's worth about 5% per year, ignoring any rental income and various expenses". As an added kicker, six years should be long enough for real estate to settle down and start heading back up - might be a bit of property appreciation in there. Good enough for me.
This may seem like a dumb question, but how many moves do you want to make? How much is it worth to you?

The reason I ask is because spouse and I made 19 moves over the course of our careers and we're darn tired of it. The thought of packing up all the stuff and moving it, then unpacking and settling, along with all the cleaning & shopping, is quite tiring. It's not exactly "On Golden Pond" where Henry & Katherine pack up a few suitcases & wicker baskets at the end of the summer. Besides it's nice to watch the neighborhood mature, see the neighbor's kids grow up, be able to display tchotchkes without worrying about packing them for transport, and generally having to dispose of a pile of stuff only to repurchase it at a new location.

This month I'm watching a house up the street for sale. The owners are completing their two years, during which they overhauled everything. They even rebuilt the pergola on the front walk and rehabbed the inside. The advantage of all the work they did is that they were living onsite and doing their own work (or supervising it) but the disadvantage is that they essentially lived in a construction zone for nearly two years.

At the end of it you get to turn to your spouse and say, "Honey, how 'bout we move and do this again, and find us some new neighbors?"

Renting or selling the rental property

To put some numbers to the question, our proposed $650K sale of our rental would require us to pay $66K in cap gains taxes. (Whether you live in it or not, regardless of how long since the last tenant left, I believe you have to pay depreciation recapture.) That means I'm paying $66K to NOT pack up, NOT move, NOT unpack, NOT pay a mover for the heavy stuff, NOT settle into a new neighborhood, and to NOT do it again.

So you might want to convert the "cap gains tax-free" and percentages into actual dollars on a spreadsheet and then subtract your moving expenses. (Time & hassle, though, may be difficult to assess.) The actual numbers may have a much different impact on your psyche than "34% tax-free!!"

There aren't many easy answers to this debate. I went to a presentation a few years ago where elderly landlords were trying to decide how to get out of the rental business. It wasn't too hard for a realtor (aged 75 himself and not lookin' very healthy) to persuade most of them to 1031 their rentals into a TIC for a 5-7% yield. (Unfortunately his $200K TIC investment was promptly demolished by Katrina, but it was probably a small percentage of his investment portfolio.) The attendant sales costs, management fees, and other 1031 expenses/commissions reduced their after-tax yield to more like CD rates for a few years, but they were willing to pay a healthy premium for an annuity the cashflow.
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Old 03-14-2008, 10:17 AM   #16
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Beach-house bargains - Mar. 13, 2008
Did they really drop that much or did it sell above market and now is just selling at slightly below market
:confused:

This makes no sense. If it sold "above" market and it now sells "below" market, then of course it dropped that much. A price drop is mathematical. Opinion doesn't influence it.
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Old 03-14-2008, 11:09 AM   #17
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This makes no sense. If it sold "above" market and it now sells "below" market, then of course it dropped that much. A price drop is mathematical. Opinion doesn't influence it.
I think the question is whether the "change" is variance around the mean or an actual change of the mean.

But it's also a discussion of warping reality to conform to one's biases.
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Old 03-14-2008, 11:24 AM   #18
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Reality is coming at warp-speed to the Boston area RE market. Another 150+ being auctioned by Countrywide at the end of the month. Not too surprising, they're offering financing at thier own auction ... so I expect prices will be bid (and rebid again) higher than rents can sustain.

Can't attend (had plans to be out of state) but I am hoping to get my realtor to go. Need to watch these. But I did drive by a couple of the auction properties. McMansions in half-million dollar culdesacs. Picking these up for 1/2 of what's owed would be a prize ... only if one were to move thou (it'll NEVER cashflow). At half price you'ld be buying at the 2002/2003 price.

On a side note if anyone is in the Boston area and wants a day of excitment ... here's the link to the auction. PM me after the auction so I can get the sold prices from you.

Foreclosed Properties: Buying Foreclosed Home, Properties & Foreclosed Home Listing For Sale
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Old 03-14-2008, 05:20 PM   #19
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This may seem like a dumb question, but how many moves do you want to make? How much is it worth to you?

....
Good question. Was in 6 places before turning 18, in the last 30 years we've moved once - next door. We did this house to suit ourselves and got pretty darn close, but it's not the end all and be all. We sold two little houses early last year. Between owning them as rentals forever and paying not much for them and AMT, George gets $75k for the kitty next month. We have 9 different rental properties left to offload. I can't see moving every two years for the next 18, but i can imagine declaring residence in a snobird location and maybe getting a different place up here. Snobirding for awhile might tell us more about where we want to park for a spell - and if we could avoid $150k or so in taxes by doing so i could probably deal with a move or two - maybe even three!
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Old 03-14-2008, 08:01 PM   #20
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:confused:

This makes no sense. If it sold "above" market and it now sells "below" market, then of course it dropped that much. A price drop is mathematical. Opinion doesn't influence it.
Makes perfect sense. Let me explain it to you. In my example the property never sold at a market price (see "above" & "below") therefore the mathemetical difference is not an accurate portrayal of the market. A popular appraisal phrase is "one sale does not make a market".

Here in California there are numerous properties each year that are not reassessed at their sales price because the law requires property to be assessed at market value. Usually if the amount is off by more than 5% the county will reject the sales price and assess at market value. Sometimes the sales price is the result of agreements between family members (intentional or not) and alot of times when someone chooses not to use a realtor or a competent one and end up seeing several properties in one NBHD at a certain price and then are led to an overpriced property in an inferior NBHD and are led to believe it is comparable (especially happens in a hot market). New developments are also a where the developer jacks the sales price on initial sales by including upgrades or prepaid HOA dues, etc to increase the number of sales and the sales amount.

I also hear people talk about how much off the asking price they got but never confirm if the asking was anywhere near market. So no bias, just pointing out some pitfalls of buying property at a "discount".
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