Real estate vs Equities

[Senator]

Quote:

Originally Posted by SumDay Tenant hassles trumps it all.... The houses are in horrible shape...This, coupled with the Real estate is NOT passive income. If you have even a teeny bit of tenderness in your heart, they will figure it out and suck the life out of you.

You are correct. It all boils down to tenant quality. I have rented to some of the worst, now I always shoot for a Class A tenant. Almost all of my tenants are professionals, college educated. To get quality tenants, you have to have a quality place, not a dump.

Some are teachers, pilots, Military, nurses, business owners, law enforcement, etc. I do have some blue collar workers, but not many. And those have solid credit score and plenty of money to pay the rent too.

But RE is like any business. You have to know how to run it. And you have to either manage it, or have it managed. And if your manager does not have any experience of their own, or you cannot guide them, you are asking for trouble. Most property managers do not have a clue how to manage property, and they do not have any they personally own.

If you do not know how to price your rental, all you get is trash. Good tenants can go anywhere, the trash lives where they can. Price too high, and all you get is trash.

I could get burned by the next tenant, but I put my bets on low-risk tenants.

[traineeinvestor]

I prefer and equities and real estate rather than equities or real estate.

Owning tangible assets helps me sleep at night. Having cash deposited into my bank account several times a month goes a long way to covering the living costs without having to think about withdrawl strategies.

Yes, it is more effort than a passive equity portfolio, but not by enough to interfere with anything else I want to do or cause stress.

[dallas27]

For me, real estate has strong static returns, but doesn't compound the way stock does. Well, at least it won't compound return unless you suck the equity back out and buy more real estate, and therefore create more work for yourself. But at what point are you creating a job for yourself that anchors you to a specific location.


Sent from my iPhone using Early Retirement Forum

[prudent_one]

I don't know enough about real estate to jump in, plus it's too late in the game for me to try to start now. I have friends who did well and friends who did not and they all are smart people. I noticed the ones who did not do well actually spent more time and effort on it but I never tried to understand why.

[JoeWras]

It seems that if you get in the game deep, you have to have a certain aloofness to your tenants. Don't get involved in their lives. Be consistent and stern with the rules, etc.

In another thread we were talking about empathy and investing. Sounds to me like you have to put your empathy away when being a landlord. I don't mean that in a disparaging way, it is just the truth of the matter.

My grandmother was a landlord and had too much empathy. She got run over by some tenants. Perhaps that is what has stuck with me and why I don't want to get in the game.

[ERD50]

Quote:

Originally Posted by Senator ... It does provide a solid 6-figure income. But I only pay taxes on less than half of that due to depreciation and business expenses. ....

Statements like that always strike me as a little too much of a 'rosey-colored-glasses' view.

If I say that I have X income, but pay less taxes on that due to expenses.... that's not really 'income' then, it is 'revenue'. I can't spend it or save it if it went to expenses. If it was 'income' it would be taxed as income.

We don't pay 'revenue tax', we pay 'income tax'.


And depreciation defers taxes, it doesn't eliminate them. Deferral might be good (many of us with Trad IRA's are questioning that), but it isn't 'not paying taxes'.


If rentals work for you, that's great. I just get a little more skeptical when someone starts painting things as greater than they are.

-ERD50

[Senator]

Quote:

Originally Posted by ERD50 And depreciation defers taxes, it doesn't eliminate them. Deferral might be good (many of us with Trad IRA's are questioning that), but it isn't 'not paying taxes'.

You are right it defers taxes, likely forever.

If I have $300K in rents, $150K in expenses, $60K in mortgages, I have $90K left over, cash to spend.

Then, if I have $60K in depreciation, I am not really paying any taxes on that $60K. No Self employment taxes, no federal taxes, no state taxes. It does not offset social security. Even a nursing home or a federal tax lien could not get it. I only pay taxes on the $30K. Receive $90K, still be eligible for a ACA subsidy.

Even if I had the money in hand, and spent it. You cannot do that with IRA money.

If I die before I sell, no one pays taxes on the $60K, ever. If I do a 1031 exchange to buy a property I eventually live in, I never pay taxes on it unless I sell. If I die in that house, no one ever pays taxes on that amount.

I may never pay taxes on the depreciation. And if I do, it's long term capital gains, that has a mostly lower tax rate.

There are also far too many business tax advantages when you own rentals it's almost impossible to list. Vehicle expenses, office expenses, etc.

Try writing off a home office when you withdraw money from an IRA.

[HpRyder]

Quote:

Originally Posted by ERD50 Statements like that always strike me as a little too much of a 'rosey-colored-glasses' view. If I say that I have X income, but pay less taxes on that due to expenses.... that's not really 'income' then, it is 'revenue'. I can't spend it or save it if it went to expenses. If it was 'income' it would be taxed as income. We don't pay 'revenue tax', we pay 'income tax'. And depreciation defers taxes, it doesn't eliminate them. Deferral might be good (many of us with Trad IRA's are questioning that), but it isn't 'not paying taxes'. If rentals work for you, that's great. I just get a little more skeptical when someone starts painting things as greater than they are. -ERD50

Your right on several points. Net rental income is taxable. Depreciation defers taxes, with loop holes.

Yes landlording can be painted a little too rosy, it's not for everyone. And it's not a get rich quick scheme. But I don't think its too rosy a description.

The bottom line is after many years of doing this, at least in Ca, you can clear on average 50% of rents per month spendable cash in the bank. This is after PITI, repairs excluding depreciation and of course you'll pay taxes on the resulting net income. But it’s great to have the money to pay the tax with lots left over to spend.

Depending on how aggressive you accumulated rentals during your accumulation phase, on your tolerance for BS, on your tenant management skills, this can easily be more than 8K per month cash in the bank after PITI and repairs.

That’s pretty good income for phoning plumbers, electricians, roofers, handymen etc to go to a rental & repair it, for lawyers to get rid of tenants and CPAs to do you taxes.

[bobafett]

Quote:

Originally Posted by dallas27 For me, real estate has strong static returns, but doesn't compound the way stock does. Well, at least it won't compound return unless you suck the equity back out and buy more real estate, and therefore create more work for yourself. But at what point are you creating a job for yourself that anchors you to a specific location.

This is the one aspect of real estate I don't like that much. If you're just getting started it requires a serious amount of leveraging and risk taking to get desirable returns. The initial process is like building a house of cards which depends largely on regional economic factors. If you screw up anywhere during the process you could be stuck for a long time with marginal or even negative returns.

[tryan]

I peaked out at 23 units ... most (13) bought at the exact RIGHT time (RTC auctions). But the rest bought at the exact wrong time (late 80's). Carried the "bad" ones upsided down for 12 years then bailed when they flipped right side up.

Still have many of the "good" ones and they created the way for FIRE at 45 yo.

What Senator says about the tax deductions is spot on. We deduct LOTS of stuff that the equity owner can not: cell phones, internet, news paper/magazines. Heck, I have a lake house that rents as a vacation rental and EVERY expense is deducted from the rents regardless of how much time I spend there "working".

But the poor liquidity can not be understated. Many exit plans are blown away by fees, tight banks, or poor market conditions.

[Lsbcal]

Once I owned an apartment with a friend in Silicon Valley. Did pretty well but there were ups and downs. I didn't want to manage that stuff any more and so just went with equities. The friend took his gains and went to another city to buy a big apartment. He went bust in a poor economy. Lost it all and got divorced.

RE is a business and is illiquid. Should be balanced with a liquid portfolio like stocks/bonds/cash. Of course, you can ignore this and take the risk.

In retirement I want to do fun things and I don't need a business to keep me busy. Others will have a different take as mentioned above.

[Cobra9777]

I have two rental homes and an REIT ETF, which account for 15% of my overall AA or 25% of equity+RE. As I've posted before, the houses are rented to my 20-something kids and their spouses. So, zero tenant hassles. They were purchased with cash pulled from the bond allocation over the last several years. I make an after-tax ROI of 6.5%, and both are in growing areas with good prospects for appreciation. The kids pay all maintenance, although I help them out if it's within my mechanical capability.

I've thought about getting deeper into real estate, but I'm comfortable with the overall AA and don't really want to deal with tenants. I have no data to support this, but my sense is that the long-term return is probably a little better (and more stable) than equities, but the workload would be considerably more. We also have a large primary home, so that's enough real estate exposure for me at this point.

[tryan]

Quote:

my sense is that the long-term return is probably a little better (and more stable) than equities,

There would never be an apples to apples comparison for this. Just looking at real estate ... for every property I have that increased 10 fold in 10 years I had one that took !0+ years to return to it's original price. Equities would be much the same. Indexes - just more noise (last I looked the NASDAQ is below it's peak 14 years n'counting).

[rodi]

We have a rental unit - but it's a separate dwelling on our primary residence parcel. Because of this we lose a lot of the deductions - our insurance is combined, our property taxes are combined, and we are mandated (in a recorded document) to keep it as one parcel, and one of the two dwellings must be owner occupied. We built it to help with the caregiving needs of my in-laws. But it provides a very nice income stream now that it's rented out.

It's hard to say how much of our networth is in the granny flat casita - but I know the rental income is between 15 and 20% of our cashflow... so pretty significant.

We looked at rental units for investments a few years ago during the real estate collapse. Even with foreclosures and short sales we still couldn't find 2-4 unit places that "penciled out" as positive cash flow (without appreciation). San Diego's real estate is too pricey, compared to rents. (We also had strict requirements: needed to be within 30 minutes of home, rent had to cover expenses and mortgage (75% mortgage), had to be 2-4 units with no HOA or mello roos.

I love the rent checks though - especially since our casita is new construction so low maintenance.

[Senator]

Multifamily properties are generally much better cash flowing buildings than single family homes.

In 2008 I started acquiring my 4-plexes. Most of mine required ~100K investments, and cash flow ~$20K each, assuming I manage them myself. If I paid 7% to a management company, it would be ~$15K each.

Since I do all the maintenance too, and advertise and show the apartments, I can actually squeeze out a bit more. My NW has more than quadrupled since 2008.

[David1961]

As I recall, about 15 years ago or so, Money Magazine had an article on what is a better long term investment - real estate or equities. I think equities won slightly.

Buying a house, renting it out and having your tenant paying your mortgage sounds like a great idea, but I have known some folks who have done it and it has not worked out for various reasons.
Same thing with "house flipping". The concept sounds great, but in reality it is not that easy.

[Bigbass]

[QUOTE=Senator;1480691]

I may never pay taxes on the depreciation. And if I do, it's long term capital gains, that has a mostly lower tax rate.


25% is the tax rate on Depreciation Recapture

[Lsbcal]

Quote:

Originally Posted by Bigbass ....(snip)... 25% is the tax rate on Depreciation Recapture

Oops. The ball is now in Senator's court.

[Senator]

Quote:

Originally Posted by Bigbass 25% is the tax rate on Depreciation Recapture

You may be correct that it is 25%. But whether or not it is ever paid depends on where the property is when I die. If I sell, it is recaptured, if I die, the heirs get the property at the new basis. No recapture.

But the formula could get twisted a bit. If the building lost money and is worth less than I paid, but the land increased in value, I pay long term capital gains on the land increase and recapture in the building difference.

I can always do a 1031 and buy a new property that I may eventually live in, rent it for two years, then move in. I believe I have to recapture, but I still get the $250K exemption.

But either way, it is what it is. I am in the 28% bracket now, plus MN state tax, so it is offsetting my income now. And throws a tremendous amount of tax benefits and income my way.

More wealth has been built through Real estate than almost any other means.

[Bigbass]

Senator,

Don’t get me wrong, I agreed with you that real estate is a great investment…at least it has been very good for me and of course, I have been lucky also…I have 3 rental properties myself, 2 located in San Francisco which has rent control and the rent board is not easy to deal with when you have bad tenants. But even then, real estate has given me a very nice return to date (even though it’s only on paper at this point). One of the 4-plex I brought in 1999 for 350,000. I initially put 100,000 down but refinanced about a year later to get back 50,000 of my down payment. The building is value at a little over 1 mil now, so my return on my investment is 13 times (50,000/650000) in about 15 years. Currently, my tenants are paying my mortgage plus I get about 1,000 a mo positive income from this building. My husband spent no more than 3-4 days a year on the repairs and calls/complaints. Real estate will be one of the legs to my 4 legged stool for retirement!

I was just pointing out that uncle Sam has most bases covered, just like the rule they added to cover owner moving in their rental property…a special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.”