Passive income = the best

[Amethyst]

This description totally grossed me out, and has haunted me ever since. Maybe it is the thought of such willful negligence on the tenant's part - I mean he might be ancient, but he had to know what a wastebasket was. At least it wasn't a young woman, or you know what she'd be flushing!

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Originally Posted by calmloki Then there was the WW2 vet who flushed his blue plastic Q-tips, which, in time, made a basket weave across the outlet horn of the toilet. A snake would move the Q-tips, then they would reweave. Pulled the toilet, then fought with a drain line that was plugging up for the next few months - that was mostly from his flushed dental floss.

[Walt34]

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Originally Posted by ExFlyBoy5 Actually, I can sleep all day and it still hits the bank. Can you get ANY MORE passive than that?

Well, a little. With my pension all I have to do is have a pulse. I could be in a coma, and still get paid.

[MichaelB]

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Originally Posted by Walt34 Well, a little. With my pension all I have to do is have a pulse. I could be in a coma, and still get paid.

That's passive. You probably want to keep that coma thing to yourself. No need giving ideas to other interested parties. Always better to let them think they're better off when you're healthy.

[Aslowdodge]

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Originally Posted by Sojourner +1 I wonder what it costs OP to pay his brother and trusted friend for all the (seemingly) hard work they are doing to manage and maintain his rental properties and provide him with all this "passive" income. As Chuckanut rightly points out, the vast majority of us have no such people we can rely on to help us generate substantial passive income via rental properties, whereas everyone has access to low-cost, diversified mutual funds and ETFs that can provide ample passive income for most people over time.

True. Sometimes involving family in a business can get really sticky

[calmloki]

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Originally Posted by Amethyst This description totally grossed me out, and has haunted me ever since. Maybe it is the thought of such willful negligence on the tenant's part - I mean he might be ancient, but he had to know what a wastebasket was. At least it wasn't a young woman, or you know what she'd be flushing!

why yes, I do. Those mostly plug the main lines.

[Aslowdodge]

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Originally Posted by pb4uski On the first part, I would love to see the citation where the IRS states that a non-passive activity can be used as a tax shelter... put up or shut up. On the second part, the only way your rentals can shelter other income is if the rental shows a loss ... in which case the rental isn't a good investment. Ignorance is bliss.

Yes but keep in mind that the loss can be a paper loss for example like accelerated depreciation or regular depreciation. If your rents broke even with expenses but the depreciation gave it a loss of say 20K you might be able to count that against you income. I know I did. At the same time the property might go up $100K so it could very well be a good investment.

[Aslowdodge]

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Originally Posted by ERD50 I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine. But, you (maybe unknowingly) are putting up a straw man argument against a portfolio. A couple things you just have wrong: 1) A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". Yet many people have done very well with it. It's not an illusion, it is real money. Total Return. Period. A balanced portfolio 70/30, returned ~ 10.99% in the past 12 months. More than double the number you are using. Using the 10.99 number, your 40% portfolio should have provided 78.8% of your monthly spending. Sure, that number will vary more than the divs alone, but it also will outpace divs alone in the long run. 2) A stock/bond portfolio does not require active pursuit. A "couch potato" portfolio has been shown to out-perform most attempts at active management. -ERD50

Would you include any tax benefits in this calculation?

[calmloki]

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Originally Posted by ERD50 I must disagree, but before I do, I want to be clear that I have nothing to say about you liking to have real estate and having it work for you, that's your choice, and it's fine. But, you (maybe unknowingly) are putting up a straw man argument against a portfolio. A couple things you just have wrong: 1) A portfolio must be measured by Total Return. It's basic arithmetic, it's the only thing that matters. If it didn't, not a single person with a single functional brain cell would purchase BRK, it provides zero "income", and has an almost zero chance of ever providing "income". Yet many people have done very well with it. It's not an illusion, it is real money. Total Return. Period. A balanced portfolio 70/30, returned ~ 10.99% in the past 12 months. More than double the number you are using. Using the 10.99 number, your 40% portfolio should have provided 78.8% of your monthly spending. Sure, that number will vary more than the divs alone, but it also will outpace divs alone in the long run. 2) A stock/bond portfolio does not require active pursuit. A "couch potato" portfolio has been shown to out-perform most attempts at active management. -ERD50

Don't know about other rental owners, but I don't include appreciation of property when figuring the profit I make. As with the BRK, I don't figure I've made anything till it sells. Unlike BRK, there is liable to be a long stretch between offering a rental for sale and getting a check, which is a big BRK advantage. I do use the tax man's "real market value" to divide into the rental profit, so the higher he says the value is the lower my stated profit percentage is. I do use the tax man's RMV when figuring our net worth, but that is just for guesstimating - when we sell it will be for an unknown amount and the taxes and costs of sale will be substantial.

[pb4uski]

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Originally Posted by Aslowdodge Would you include any tax benefits in this calculation?

It depends on whether you are calculating a pre-tax or post-tax return... if post-tax, then yes, but also include taxes due on sale as if sold.

[ERD50]

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Originally Posted by Aslowdodge Would you include any tax benefits in this calculation?

Sure, after tax is what matters, but that is very specific to the individual situation. And complex. Like depreciation, you pay later. With a Trad IRA, you pay later. With a ROTH, you pay now, but not later.

LTCG may be zero if you keep your taxable income down.

It's hard to do any clear apples-apples. But it does seem to me that some of the tax advantages of a business are overblown by some. I've heard some business owners say "I can write that tool off!". OK, what is your marginal tax rate? They don't know, they don't know that the tool is only discounted by their marginal tax rate. And you had to buy the tool!

You haven't made those claims, I'm just saying it's tough to compare, and my impression is that the tax advantages of rentals aren't so very great, but I might be wrong about that.

-ERD50

[ERD50]

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Originally Posted by calmloki Don't know about other rental owners, but I don't include appreciation of property when figuring the profit I make. As with the BRK, I don't figure I've made anything till it sells. Unlike BRK, there is liable to be a long stretch between offering a rental for sale and getting a check, which is a big BRK advantage. I do use the tax man's "real market value" to divide into the rental profit, so the higher he says the value is the lower my stated profit percentage is. I do use the tax man's RMV when figuring our net worth, but that is just for guesstimating - when we sell it will be for an unknown amount and the taxes and costs of sale will be substantial.

Yes, it's hard to compare an extremely liquid investment like BRK (or any big index or stock) to a less liquid (maybe very il-liquid, like years) RE holding. And I just realized, I'm not hit with X% commission to sell BRK or SPY (3%, 6%?).

Again, it might be just the ticket for some. I find the lack of diversity with a bunch of local RE holdings scary, but that's just me.

-ERD50

[Offgrid Organic Farmer]

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Originally Posted by pb4uski On the first part, I would love to see the citation where the IRS states that a non-passive activity can be used as a tax shelter... put up or shut up.

Losses from a Schedule E are subtracted from your AGI. Thus lowering any taxable income you may have had.

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... On the second part, the only way your rentals can shelter other income is if the rental shows a loss ... in which case the rental isn't a good investment.

Our focus was on buying down the mortgage principal of each property. Thus building equity, which we later used as capital for other projects.

How 'good' an investment is, depends on how much profit you can put in your pocket.

We rolled our equity over and were able to use it to buy our retirement home with cash.

[Offgrid Organic Farmer]

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Originally Posted by marko Your posts generally tend to obsess on avoiding taxes. I wonder how much money that costs you.

If it costs you something, maybe your doing it wrong?

I depreciate every year, and I try to make improvements to keep the cost-basis from dropping.

Up until now all properties that we have had, had mortgages. So we made principal-only mortgage payments every month to buy down those mortgages.

When you sell or re-finance you can use that equity for other projects. A 1031 or like-kind exchange I think they call it. We moved equity from one property to another, and eventually when I retired we used the equity to buy the farm where we live now.

[Offgrid Organic Farmer]

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Originally Posted by pb4uski I agree and that was my point. If OOF had explained it the way that you just did then that is sensible and there would be nothing to dispute but it is hard to know without being a mind reader.

I apologize for not having explained it better.

The phrase that you took offense to, was a phrase that I first heard being used by an auditor in a class I attended one time. So it kind of stuck in my mind.

I should pay closer attention to avoid using that phrase.

[gstillson]

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Originally Posted by Offgrid Organic Farmer If it costs you something, maybe your doing it wrong? I depreciate every year, and I try to make improvements to keep the cost-basis from dropping. Up until now all properties that we have had, had mortgages. So we made principal-only mortgage payments every month to buy down those mortgages. When you sell or re-finance you can use that equity for other projects. A 1031 or like-kind exchange I think they call it. We moved equity from one property to another, and eventually when I retired we used the equity to buy the farm where we live now.

If you no longer use the property for rent (the farm you now live on), shouldn't you have needed to recapture that depreciation of the rental property?

[Offgrid Organic Farmer]

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Originally Posted by gstillson If you no longer use the property for rent (the farm you now live on), shouldn't you have needed to recapture that depreciation of the rental property?

The farm where I live today was never a rental.

Our goal through owning rental properties was to build our Net Worth as fast as possible, without paying income taxes.

About the time that I retired from the US Navy, we found that we could refinance our first property, put that money into our second property, then sell the first property for how much was owed on it. As far as the IRS was concerned there was no taxable profit in the transaction. then we did the same with our 2nd, 3rd and 4th properties. Our 4th property was the one where we used the refinance cash to buy our farm. During that process we were using an accountant. We also got audited, though the IRS was happy with our tax filing.

For the last 12 years we have not used an accountant, as we have not done anything fancy with our finances.

We recently bought another rental property [14 units], we hired a lawyer and an accountant for this project. We think we have figured out another method of avoiding taxes, but we want to make sure that we have it right.

We wanted to form a L3C corporation, but the lawyers here insist they are too complicated. And we can do the same thing as a group of LLCs.

[audreyh1]

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Originally Posted by scrabbler1 But didn't you have to work to earn the money to buy your rental properties, the same way a pensioner had to work all those hours to earn his pension?

Exactly!

[Another Reader]

For me, what real estate did was dramatically increase my income and my net worth. If I had invested all the down payments into equities and bonds, my net worth would probably be less than 30 percent of what it is. I retired at 53, and make more than I did in my last job, a division level manager in a government agency. It's not passive, but the work I do benefits me directly, not an employer.

If this isn't for you, that's fine. There are risks and plenty of hassles. Taking the risks and putting up with the hassles worked very well for me.

[Offgrid Organic Farmer]

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Originally Posted by scrabbler1 But didn't you have to work to earn the money to buy your rental properties, the same way a pensioner had to work all those hours to earn his pension?

When we bought our first set of rentals, we had to come up with the closing costs. It was a 'zero-down' first-time homeowner HUD deal, but there were still a bunch of fees the bank came up with. The first mortgage payment came due after the first time that we collected rents.

My money went to the 'closing costs'.

The property provided my family a home, and the rental income covered the mortgage.

With each of our rental properties, we provided the closing costs, the property was our home, and the rental income covered all expenses [including principal payments]. The deal kept me from paying income taxes on my salary income for those years [1985 to 2001], and they built Net Worth which we were able to cash-out when I retired.

[ERD50]

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Originally Posted by Another Reader For me, what real estate did was dramatically increase my income and my net worth. If I had invested all the down payments into equities and bonds, my net worth would probably be less than 30 percent of what it is. I retired at 53, and make more than I did in my last job, a division level manager in a government agency. It's not passive, but the work I do benefits me directly, not an employer. If this isn't for you, that's fine. There are risks and plenty of hassles. Taking the risks and putting up with the hassles worked very well for me.

That's as it should be. When I invest in a broad index, I'm not putting any effort into it beyond earning/saving the money to invest. You are putting in money and effort, and probably taking more risk, being less diversified. So on average, you really should expect higher returns. Sometimes much higher.

I also suspect there to be a wider range of outcomes, compared to an index investor. So we hear positives from the winners. Maybe there is enough upward bias, because of the effort involved, that maybe not that many do much worse than an index investor, I don't know?

I only take issue when a poster makes real estate sound easier and less risky than it is, and makes investing seem riskier and more effort than it is.

-ERD50