own 9 rental properties, what should i do next?

34 Replies

Hello Ryan,

Congratulations on your success. In your scenario I would do a 1031 exchange, and get into apartment complexes for the same reasons Bryan mentioned. 

Sincerely, 

Originally posted by @Steve Vaughan :
Originally posted by @Suly Bolanos:

@Ryan McCook talk to your accountant or CPA about cost segregation. It's an excellent tax savings strategy for buy and hold investors.

Only an excellent idea If you plan on leaving the property to your children when you pass away.

The long term cap gain tax rate is 0 up to $77k in income.  12% or so is avg.

Depreciation recapture is far less tax friendly when you sell. More like 25%. Converting what would be cap gain later to depreciation recapture is short-sighted for most. 

 Or one spouse is a high income earner and the tax benefit from cost segregation is huge. 

@Ryan McCook . Use your equity to purchase more properties.

Or sell some and invest in opportunity zones, or roll into a 1031 exchange

@Ryan McCook I think your situation describes a lot of investors who bought 5-9 years ago in Phoenix.  We are sitting some significant equity and every month we look at the return on equity and it's like 3% 4%.  I'm just going through the review process with my wife on our portfolio performance for 2018 for our taxes, and I noticed that the cash on cash return is fairly awesome and the additional principal pay down is such a nice bonus.  Point 1 is just to sit back and enjoy the success.  Many on this thread are telling you to go larger, some much larger.  I find that to be more buying a job and headaches.  I self manage my portfolio in Phoenix with minimal touch points.  Generally only when people move out do I spend any significant time on it.  

With that said, I'm still in acquisition mode, just not in Phoenix.  We started buying in the midwest per the herd last year.  The returns are better than I can get locally even with the cost of PM.  I'm only buying in a market that I'm very familiar with, I'm not using turnkey providers, and I have boots on the ground.  So far it is working, I made 2 offers this week and the numbers look like 70K purchase price 5-8k rehab rents for 1100-1200, those numbers are winning all day long.

In terms of financing, you should look at get a business line of credit with your portfolio. That way you can have access to cash when you need it.

Best of luck

Originally posted by @Victoria S. :
Originally posted by @Steve Vaughan:
Originally posted by @Suly Bolanos:

@Ryan McCook talk to your accountant or CPA about cost segregation. It's an excellent tax savings strategy for buy and hold investors.

Only an excellent idea If you plan on leaving the property to your children when you pass away.

The long term cap gain tax rate is 0 up to $77k in income.  12% or so is avg.

Depreciation recapture is far less tax friendly when you sell. More like 25%. Converting what would be cap gain later to depreciation recapture is short-sighted for most. 

 Or one spouse is a high income earner and the tax benefit from cost segregation is huge. 

There are limits on passive loss, unless you are a qualified real estate professional. There are tax benefits with cost segregation because you are accelerating depreciation on a portion of the structure, but generally it is not worth the effort for single family homes. The reason is cost of the study and added accounting efforts relative to benefit on smaller dollar purchases. One other thing to keep in mind if holding properties long term is that taking more depreciation early, limits the amount in the future. So if you are holding the property long term, it will increase your tax bill down the road. So it is important to understand your long term strategy. One final consideration is the possibility of IRS questioning what you are doing. You want a proper cost segregation study and CPA experienced in the process. 

@Joe Splitrock  This is what I got out of Ryan’s post.  He has 9 cash flowing rental properties and he’s considering two different options at the moment. I simply mentioned a 3rd option which can reduce his taxable income and increase his cash flow.  Joe, if you’re under the impression that you can’t cost segregate “after the fact” you’re missing out on a great opportunity even for yourself.  The truth is you can do cost segregation anytime during your ownership and "catch-up" the accelerated depreciation you would have gotten if you did cost segregation in year one.  To do this though, the law requires you to file a Form 3115 Change in Accounting Method.  Also, there are cost-effective solutions for properties with a basis as low as 200k.

To your success, 

@Ryan McCook congrats on your success in acquiring 9 properties 5 years!

I would first figure out what your goals are? Do want to keep managing these 9 properties or want to scale bigger?

I personally would 1031x into one or two commercial multifamily properties and manage just one or two roofs instead of 9. Reap the benefits of multifamily!

Originally posted by @Suly B. :

@Joe Splitrock  This is what I got out of Ryan’s post.  He has 9 cash flowing rental properties and he’s considering two different options at the moment. I simply mentioned a 3rd option which can reduce his taxable income and increase his cash flow.  Joe, if you’re under the impression that you can’t cost segregate “after the fact” you’re missing out on a great opportunity even for yourself.  The truth is you can do cost segregation anytime during your ownership and "catch-up" the accelerated depreciation you would have gotten if you did cost segregation in year one.  To do this though, the law requires you to file a Form 3115 Change in Accounting Method.  Also, there are cost-effective solutions for properties with a basis as low as 200k.

To your success, 

 I just think in this situation it is not good advice. He stated that he owns 9 single family homes purchased for $1.3M so that works out to $144K per home. Assuming 20% land value, he is depreciating $115K over 27.5 years. Filing Form 3115 is complex and subject to IRS review which potentially includes review of the cost segregation study. I question how much could be accelerated and if it is worth the cost. The segregation study and CPA effort is pretty expensive, then add to that the IRS risks. Following straight line gives you the same expenses, just over a longer period.  

We can agree to disagree, but even you stated "there are cost-effective solutions for properties with a basis as low as 200k" and these properties have depreciated value of near half that. 

I think cost segregation is a great strategy in some cases, just not this one.

Hi,

Not sure how risky or difficult this is to pull off, but if you put 50k down for a 1 mil loan at a 4.8% mortgage rate (you have pretty good wiggle room to go higher) and buy a property at 7% cap, the cap on your down payment will equal to 20%, bringing in another 10k per year.  Hope this idea isn't too outlandish, just thought of it Last night for an investment my father could try, but he thought it was too risky because he didn't want to put any properties on the line.

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