First purchase...Did I screw up?

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First purchase...Did I screw up?

Craig Dieterich
Member since 2020 · 41 posts · 56 votes

I found a small, fully remodeled duplex for $35k in a depressed area of South Carolina with good renters in place bringing in $900/mo in rent, but it had to be a cash deal because it was slightly over appraised price and I also could not find any lender willing to lend that small amount. It will bring in $10,800 in annual rent, but after all expenses (property tax, management, water, and insurance) it will net about $8000 annually. Am I going to get screwed on taxes because I don't have anything to write off (loan interest)? Was it wrong to pay cash for this? What should I have done different? I live in California, so am I going to have to pay South Carolina income tax as well as CA? Is there anything else I didn't think of?

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Mark Fries
Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
5y

@Craig Dieterich

Buy it, stop over analyzing.

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  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    @Craig Dieterich

    I’m glad I’m not the only one to think this wasn’t a home run. @Caleb Heimsoth and @Steve K. took the words out of my mouth. Sure, on paper the cash flow looks great. In my opinion, with the low rents, this place could eat you alive, and with the long term showing no appreciation, that’s an even bigger no-no for me.

    I wish you the best with it though!

    2Reply
  • Curtis Mears
    Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
    5y

    @Craig Dieterich as long as the numbers workout, I would not be concerned if it is a cash deal. So pay yourself the interest instead of the bank. Also, you will have write offs as time goes by. You will have utilities, new roof, hvav units, etc that will be written off. Also, your drive miles used for rental as well as any home office and cell phone.

    0Reply
  • Samara HuntleyPro Member
    Investor · Charlotte, NC · Member since 2020 · 124 posts · 189 votes
    5y

    @Craig Dieterich

    Sounds like a killer deal to me. I assume lower class area but the cap rate is still astonishing @ 22.8%. Cap rates that high are practically non existent in today’s market! You also have depreciation for 27.5 years. Keep tenants in there, write off depreciation and let the property do the rest man. Congrats on this deal.

    1Reply
  • Samuel Proctor
    Rental Property Investor · Flagstaff, AZ · Member since 2017 · 34 posts · 24 votes
    5y

    @Craig Dieterich from out of your own mouth it sounds like you met your goal which should be priority one. The numbers make sense. I’m not familiar with the tax consequence side of things but I applaud your ability to find a deal and execute.

    Would you be able to refinance and get your principal back if you wanted? Overall I think you did well.

    1Reply
  • Jordan Murrell
    Las Vegas, NV · Member since 2020 · 162 posts · 113 votes
    5y

    @Craig

    Hey Craig

    This sounds list a deal to me without seeing the details. You will always need to account for taxes and insurance. Are you in the flood zone? Tornado? Etc

    Take a look at David Greene’s long distance real estate investing book!

    Goodluck

    0Reply
  • Alvin Sylvain
    Los Angeles · Member since 2018 · 464 posts · 471 votes
    5y

    "Am I going to get screwed on taxes because I don't have anything to write off (loan interest)?"

    My Dad, may he rest in peace, used to keep a substantial sum of money in his checking account.

    I said, "Dad, why don't you put some of that into a savings account and get interest payments?" Recognize now, this was back in the day when banks actually paid a decent interest, not that paltry nothing they pretend to pay these days.

    My Dad, bless his heart, said, "No, then I'd have to pay taxes to the IRS."

    What I could never get him to understand was, yes, some of that income goes into taxes, but you do get to keep some of it! The way he was doing it, he got to keep nothing.

    The Moral of the Story is: be happy sharing income with Uncle Sam! I truly doubt you'd be happier with nothing.

    As to what California will tax you on, you must get advice from a California Tax Expert. This is no time for penny pinching, without expert tax guidance, you can get screwed.

    2Reply
  • Jay Yoo
    Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes
    5y

    @Cindy Bacigalupo Cindy. New investors with one or two properties, should we still need to create LLC? Is LLC required per property for the intended purpose?

    Thanks

    0Reply
  • Chico Ford
    Real Estate Agent · Prior Lake, MN · Member since 2015 · 42 posts · 63 votes
    5y

    @Craig Dieterich Based on the numbers you've shared you have a great deal.  Don't second guess yourself.  I assume you purchased the property in accordance with your strategy and plan. If you did...great.  Many people have left great points on your post here.  I would offer that you look at your real estate strategy as a portfolio approach as it relates to your tax benefits.  While you may not have as many tax benefits on this deal, If I were in your shoes I would try and balance out my tax strategy on my next 2 to 3 deals.  Look at your total portfolio not just each individual deal.  Good Luck!

    0Reply
  • Connor Stark
    Real Estate Agent · Los Angeles · Member since 2019 · 57 posts · 40 votes
    5y

    I'm not too familiar with the product out in that market, but I wouldn't be upset for a property to be pushing out a 22% cash on cash. No headache and great returns. Then again, I'm used to LA where majority of duplexes are listed at prices that involve coming out of pocket a significant amount each month.

    0Reply
  • Nicholas Balcom
    Saint Louis, MO · Member since 2020 · 33 posts · 2 votes
    5y

    @Annie Johnson

    Thank you I will and that to my list!

    0Reply
  • Account Closed
    Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
    5y

    @Craig Dieterich

    I’d be less worried about taxes, and more worried about owning a D class rental long distance. It’s either a killer deal, or in a really really bad neighborhood. If it is in that bad of an area repairs and vacancies will quickly eat that $10,000 a year cashflow. If the tenants are solid I’d do everything to keep them.

    3Reply
  • Account Closed
    Member since 2018 · 4 posts · 1 vote
    5y

    First thing I would change is the fact that you live in California. You can write off utilities, property taxes and whatever else you pay. The numbers sound very good. I say gratulations on this purchase!

    0Reply
  • Andrew Rosenberg
    Honolulu, HI · Member since 2020 · 196 posts · 190 votes
    5y

    @Kendall Staggs exactly! My first thought was to tell the orig. poster to research tax deprecation schedule. Just make sure to depreciate building, not land.

    0Reply
  • Besnik Kadriu
    Real Estate Agent · Boston Ma · Member since 2020 · 82 posts · 23 votes
    5y

    @Craig Dieterich

    I’ll I can say is congrats , I wish I can find deals for 35k in Boston Ma.

    Numbers make sense! You’re making money!

    Brandon turner says “ is better that you decide than what you decide! Happy to hear , cannot wait to get my first rental. Working on it!

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    You are worrying about the wrong thing. The question to ask yourself is why is this property only worth $35K? You didn't get a steal because it doesn't appraise for even that much. Usually risk is proportional to return. If the returns are that high there is a reason. What is the risk you are not seeing? Why have local investors not snapped this up long before you came along? Those are the real questions. Taxes are hardly the main issue.

    7Reply
  • Robert Beardsley
    Member since 2020 · 117 posts · 84 votes
    5y

    YES you will get screwed on Taxes.... you Live in CA dont they Tax people there at 99.9%?

    0Reply
  • Mark Jones
    Investor · Tulsa, OK · Member since 2016 · 10 posts · 6 votes
    5y

    Don't worry about the taxes. Look at the extra revenue you are bringing in. Say you are in the 25% tax bracket. You spend a dollar in expenses to save 25 cents in taxes. Don't spend money just for a tax write-off.  Keep the dollar and pay the 25 cents of tax.  This is an oversimplification but spend money on expenses you need not just a tax write-off.

    1Reply
  • Angela Yan
    Rental Property Investor · San Francisco, CA · Member since 2017 · 206 posts · 138 votes
    5y

    Sounds like a great deal. Almost too great. Property tax is always a ***** and always comes out more as tough times are ahead and cities will be hurting. THEY WILL NOT BE COMING DOWN. Buying any RE at $35k seems cheap. I bought one SFR at $32k that rents out for $900 per month now. Sweet deal. I enjoy even though i probably going to have to evict this tenant as he stopped paying the last 3 months after him being MIA. He was great for 2 years paying on time. Tough times for all classes coming soon. Good luck.

    0Reply
  • Kyle Hern
    Member since 2018 · 22 posts · 10 votes
    5y

    Hello @Craig Dieterich,

    In all fairness, I'm very new, too. I only have 1 duplex that I house hack. I've only had it for a little over a year. However, your deal sounds great. I think what you're missing is that it takes more quantity and time for real estate to become great.

    Since you're more focused on cash flow, then you have to realize that that kind of strategy is just buying in bulk and selling individually. You buy time in bulk and you buy units in bulk. You buy a 30 year loan (bulk) then rent monthly (individual months). You buy multiple units at once, whether it's a duplex or apartment building (bulk), then you rent out each unit (individually).

    The fact is that you're just starting and haven't been able to buy much bulk, yet. With time and more units, you'll find better cash flow. I think this deal you've found has opened more opportunities for the future.

    I'd also like to put in one final note about leverage. I understand that you couldn't find a loan small enough for this deal. However, the fact that you did look for one makes it seem like you expected one. Once you weren't able to get it, then the deal became less than expected. It's still a good deal, but it might just make you feel a little less successful, when in fact you were.

    Anyway, I hope that helps. Good luck!

    0Reply
  • Jacob Reese
    Member since 2020 · 2 posts · 1 vote
    5y

    You've got a good deal. If you want out, we can talk. How are you finding these deals? 

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    5y
    Originally posted by @Samara Huntley:

    @Craig Dieterich

    Sounds like a killer deal to me. I assume lower class area but the cap rate is still astonishing @ 22.8%. Cap rates that high are practically non existent in today’s market! You also have depreciation for 27.5 years. Keep tenants in there, write off depreciation and let the property do the rest man. Congrats on this deal.

    @Samara Huntley I think most experienced investors would actually look at a 22.8% cap rate as a negative  in the current market. Cap rate is an indication of quality and a function of risk: it’s not linear as in the higher the better, but rather there’s a point where a high cap rate becomes a red flag. A 22.8% cap rate property should not be expected to run smoothly, especially with the market as tippy-toppy as it currently is pretty much nationwide (anywhere investment-worthy is currently in a seller’s market where a 10-12 cap is about as high as one should look for unless they specialize in repositioning distressed properties). The combination of that high of a cap rate with only 25% of (low) rent budgeted for all expenses  and the expectation of no maintenance for some time, as an out of state investor, is a recipe for disaster here, I’m afraid. As soon as anything goes wrong (which it does) it’s negative cash flow territory. Of course nobody here but the OP has enough information to actually analyze this deal  properly, so who really knows? Location is the most important factor in any investment,  and we don’t know the location. But from the cap rate and the purchase price, I think it’s safe to deduce that it’s in a bad location. A duplex with brand new everything, only $35k? Sorry but that just doesn’t add up. If it was actually fully rehabbed, the seller would have recently sunk a lot more than $35k into the property  to make it “turnkey”. Pretty unlikely somebody just decided to fix up a property and sell it for below their rehab cost out of the goodness of their heart. If that were the case it also would have appraised for much more than $30k. Much more likely somebody put some lipstick on a pig. Hopefully not the case for the OP’s sake, but probably so. I’m guessing anyone commenting on the numbers alone here without considering the location and property type, doesn’t have experience owning property in this asset class. The OP probably doesn’t have to worry much about paying taxes on profits, I’m afraid.  Seems like a bad case of “spreadsheet magic” to me. Or maybe it is the deal of the year. 

    5Reply
  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y

    @Craig Dieterich

    Fully remodeled duplex, all major systems new, high paying tenants already in place, nothing to do for years, acquired sight unseen and over appraised at 35k.

    Hope it's all true, but honestly something doesn't sound quite square. I can't imagine someone selling if that were the case, even someone who was totally desperate it would seem would hang on.

    I invest at long distance myself and have acquired properties I've still never seen in person, but I've always gone for very high quality properties in very high quality neighborhoods and always have had my top shelf PM inspect before buying. Plus I turn away 20 for everyone I buy.

    But who knows it takes all kinds and maybe it will work out as anticipated. Mine have done very well, good cash flow good appreciation.

    2Reply
  • Christopher Smith
    Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
    5y

    @Christopher Smith On the tax front, if you're resident in CA whatever you pay to SC you should normally get full credit for on your CA return so it will cost you nothing more.

    0Reply
  • Don H.Pro Member
    Rental Property Investor · Los Angeles, CA · Member since 2014 · 26 posts · 0 votes
    5y

    It’s best to talk with an accountant in your area to make the right decisions moving forward. However, my take, you will be fine tax wise and will have to pay the typical taxes of earning money as an investor. I’ve owned real estate out of state and I also live in CA and it all worked out. Good luck..but don’t worry, nothing to worry about. 

    0Reply
  • Claudio Salvatorelli
    San Diego, CA · Member since 2020 · 150 posts · 54 votes
    5y

    If the numbers you run make sense, then it's a numbers game. I agree with some comments in here that one thing is what you see on the paper and one thing is what you actually can earn. Can you reveal the exact address or area?

    Good luck

    1Reply
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