Am I missing something?

6 Replies

BP,

I understand everyone's goals are different (as they should be) and customized towards what they are trying to accomplish but why are so many people ignoring the other aspects of yield in RE investing and only focused on the popular cash-flow aspect?  Again, I am not saying that there aren't others structuring their investments differently but WHERE ARE THEY?

Thanks,

Brett 

Eh?  Lots of folks here talk about wholesaling and fix and flipping.  Some discussion about new builds, property management, etc.  And some folks do discuss speculative RE investments where you buy rentals that are cash flow break even or negative but bet on getting future appreciation.  What aspect of investing is it you're interested in that's not getting discussed?

Jon Holdman, Flying Phoenix LLC

I guess I should've elaborated.  I'm specifically referring to buy and holds.  This site is huge so I should keep searching but I thought maybe id get someone to point me in the right direction as to the forum and posting that's related. Thanks!

Well, buy and holds are all about producing income.  One way or another.  Cash flow right when you purchase is a pretty good indicator.

But there are other aspects.  Potential appreciation.  Possible, and many of us have done well in this regard recently.  OTOH, many people who bought 10 years ago were hurt very badly.  Some may well never fully recover from that hurt.

You also have principal paydown.  Once a property is paid off, the money that was going to debt service goes into your pocket.  That makes rentals a good long term investment vehicle.  OTOH, things can change over 15 or 30 years.

Another aspect that's often touted are the tax benefits.  While these are real, I think they're far more frequently used to put lipstick on a piggy rental.  Sellers will make claims about using passive losses to offset other income.  That is possible, but there are a number of restrictions on that.   Further, the only deductible expenses that's not real money out the door is depreciation.  Depreciation is a two edged sword.  While it reduces taxable income as you hold the property it also reduces your basis.   So when you sell, your gain is increased.   And the amount of gain up to the amount of depreciation is subject to a tax on non-recaptured depreciation.  Currently that's capped at 25%, but I saw something today discussing possible tax law changes to eliminate this cap.

Jon Holdman, Flying Phoenix LLC

Those were the other aspects I was referring to yes but:

With the idea of the "principal being paid off":  You slowly begin losing more and more leverage in the property as you pay down the principal.    

       -Not only are you losing the leverage on the Bank's (or other type of lender) $ AND in the cases I see argued by paying it off you lose all of that leverage.

       -The capital-at-risk is also effected by "paying off the mortgage" or with that end goal in the mind of the investor.  If for some reason that area or market goes south you now have more equity in that one building to lose (relates to above leverage).

*How about a shorter hold period with the idea that once the leverage is lost the investment is sold and the process repeated.

The other thing about an indefinite hold period is that like you mentioned once the property is finally sold they will deal with a huge taxable amount that could have been prevented with a shorter period. Look at the tax benefits and depreciation numbers in the 5-8 year range and see what happens, this will probably look much better to you. This is for SFH but apartments and multi-units held longer.

The tax benefits are real and I would be very interested in the restrictions that you are speaking about.  Depreciation, Interest Expense, and amortization of loan fees are all writeoffs and can easily outweigh a "low cash flow property's" bottom line.  Capital gains will be taxed at 25% but this is recovered during the sale and NOT many years down the road when it would be so high.  Also the power of $1 tax saved today is much better than $1 reduction is basis 20years from now...(as long as that dollar is used wisely haha)

In regards to appreciation, many regions did get hit hard with local economies still recovering.  BUT this should also be a good indicator of which regions and economies can recover quickest after a housing market crash.  Many risky investments proved to be exactly that during the correction and might have wised many up to narrow their focus on areas that they are experts in only.  This is a major aspect and if an area is studied enough and enough due diligence is done then a buy/hold(medium term) should be very good.  Like with any investment the opportunistic buy is usually the riskier.   

thanks for sparking the conversation, interesting thoughts! 

Talking about loosing leverage as you pay off the principle... Many times you can have the rent, pay your loan and all your other bills on the rental and still have cash in your pocket left over. If the tenant buys the house for you fast that's not really a bad thing. I try to have the tenant pay for the house and all my costs associated with it, within 5 years. You don't have to put a lot of your own money into paying off the loan. Also, you can refinance if you get a lot of equity and would like to leverage other people money. I usually finance or refinance rentals to get all of the money I put into it out and let the tenant pay off my loan then I can choose to finance it again if that is what I want. I also like having both rentals as well as financing for others through Land Contract or Rent with the option to buy. They both have pros and cons. For example, if the market goes up my rentals are worth more and if the market goes down I have the land contracts locked in bringing in a nice price for some houses. 

only focused on the popular cash-flow aspect?

In the long-run for "Buy and Hold" cash-flow is the "why" to why we do this.

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