Passive income = the best

[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.

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]

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.

... 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]

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]

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]

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]

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]

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]

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]

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

 

[97guns]

Well I’m in Thailand and my first set of rents here just rolled into my bank account, can’t get more passive than being 10,000 miles away from the properties, can’t really run down there at 2:00 am to snake out the toilet.

 

[flyingaway]

There is something to be said about the health benefits of rental properties during retirement. I look at my 83 year old FIL who has 47 doors to manage. Notwithstanding the tremendous wealth he has accumulated over 55 years and the income stream his properties generate, I see a very active man, slim, fit, and mentally alert and extremely strong. He enjoys what he does and likes the social interaction. In the 27+ years I have known him, I don't ever recall him addressing a clogged toilet. Things happen, but he deals with them and seems to enjoy it. When we visit him every year, we help him out. His father who did the same, was fit and active until the age of 98 when he died after injuries he sustained in a car accident. I thought genetics had a lot to do with it. However, his 4 brothers and 2 sisters (some are older and some younger) who live off "passive income" only are in terrible shape. They are overweight, some borderline senile, some walk with walkers and have limited mobility. Most of his friends are rotting away in senior homes or have passed away. So rental properties may not be for everybody, but don't discount the financial security and health benefits of managing them into retirement.

Many professors work into their 80s or even 90s, they probably don't need the money, but are good at what they do which keep them sharp.
They are working, not passively.

 

[ef2025]

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

Way to go 97gun! There are different strategies to earn passive income, and REI is one of mine as well. You're my inspiration!! I just got my 1st property 2 years ago, and working hard on my next one!

Hopefully the day for me spending half a year overseas while collecting rentals will come for me soon!

 

[MrLoco]

Well I’m in Thailand and my first set of rents here just rolled into my bank account, can’t get more passive than being 10,000 miles away from the properties, can’t really run down there at 2:00 am to snake out the toilet.

True. Sipping on a Singha beer from 10,000 miles away you can't do anything. Even if you wanted to. If the tenants were not home and the toilet overflowed causing major damage.
Or there was a fire. Or the property was vandalized. Whatever.
Chohk dee. laa gon.

 

[ncbill]

Wasn't one of the posters talking about their "passive" real estate income using a relative as a (essentially free) property manager?

 

[Aslowdodge]

Which would you rather have?

1. $2.2M 60/40 portfolio that you withdraw 3% from each year ($68,000)

2. $68,000 of rents from $1.7M of real estate property

I pick #1 and that's my plan.

Hmmm I pick my option



3. $130,000 of rents from $1.7M of real estate property with tax write offs.


I only have a a portfolio of 1.7M in real estate that I draw $130K in rents each year, 23k of that is roth tax free.

Then another $24K in rental income is sheltered by depreciation write offs deducted from the remaining 107K.
That's my plan and choice.

 

[ERD50]

Wasn't one of the posters talking about their "passive" real estate income using a relative as a (essentially free) property manager?

Yes, I wonder how 'passive' the relative feels it is?

-ERD50

 

[Aslowdodge]

Yes, I wonder how 'passive' the relative feels it is?

-ERD50

I believe it was the OP. I'm sure the relative is working but then that makes it passive for the OP since he is hopefully paying the relative something. The OP appears to have a property manager he pays but then has a relative sometimes watch over the property manager

 

[Perryinva]

I was unaware you could put a rental unit in a Roth? How does that work?

 

[Aslowdodge]

As a business owner I had set up a self directed IRA and a solo401k . Both are roth accounts and I have checkbook control to invest with. Keep in mind you don't get tax deductions like depreciation with real estate because you aren't paying any taxes to start with. 5 of my 22 properties are in those 2 accounts. The accounts own the properties directly, not yourself. Of course you can withdraw from those accounts when you are allowed ( 59 1/2, etc)

 

[Perryinva]

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.

 

[Aslowdodge]

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.

It's a hands off deal. You have to set it up first and you can't buy properties from yourself nor self manage them.

 

[B0bL0blaw]

Well I’m in Thailand and my first set of rents here just rolled into my bank account, can’t get more passive than being 10,000 miles away from the properties, can’t really run down there at 2:00 am to snake out the toilet.

Dude, give it a rest. A word of unsolicited advice -- Enjoy your beer and your trip, and stop spending so much effort trying to convince the internet that your land-lording is passive.

 

[Aslowdodge]

Dude, give it a rest. A word of unsolicited advice -- Enjoy your beer and your trip, and stop spending so much effort trying to convince the internet that your land-lording is passive.

Just curious. Are you saying landlording can never be passive or just irritated with the op?

 

[B0bL0blaw]

Just curious. Are you saying landlording can never be passive or just irritated with the op?

I am not saying either of those things.