What would you do?

Question

I wanted to ask everyone what you all think my best strategy should be.

Current status:

Wife and I are employed and rather high-income earners (total household income >1M), but because we are employed, we are getting destroyed on taxes.  We are doing traditional investments, including 401k, 457, great pension plans if we stay long enough, etc.  We are investing with the help of a financial manager/consultant to ensure we can maintain a nice lifestyle upon retirement (which is realistically 25-30 years away).

I got excited about real estate investing after reading a couple books and seeing the potential.  Positive cashflow from rental income will not affect our lifestyles and this isn't meant to take place of our jobs.  We live fairly meagerly and splurge more on convenience rather than big ticket items (no fancy car, big house, etc.  just exorbitant seattle delivery fees :) ).

Both our jobs are time consuming.  Wife is on board and fully supportive, but I cannot count on her to "get it done" when issues arise.  I work erratic hours 6-7 days a week.  I would most certainly require a property manager even with my very first property.

My thoughts:

If through rental properties I can break even in terms of rental income versus expenses, and given that I would be in a financial position to pay down mortgages fairly aggressively and benefit from rental income long-term, it seems to me collecting real estate properties would be a great way to build a vast portfolio, perhaps more effectively than traditional investments.  Meanwhile, I would not be significantly affected by waves of market rises and crashes since my job is fairly safe and well-paying and should be able to handle such slow-downs.  After putting money into traditional investments, I imagine I could save an additional 100k annually to invest into real estate.

My current actions:

I'm lurking on this site to try to meet as many Seattle-area investors as I can, reading aggressively about rental property investing, and saving money.  Wife and I are newlyweds and I have lots of student loans so we're in the saving money phase in the meantime.

So, if you were in my position, how would you play the real estate game?  I thought that since additional monthly income is not required, I can look at properties that even net zero positive cash flow, as long as all expenses and costs are covered, have tenants essentially pay down the mortgages while I reap the rewards, and hopefully, appreciation as well.  At age 60 I can sell out or bequeath the properties and retire.  What would you do?

Brent Coombs · Answer

@Steve Vaughan, no need to exaggerate. He'd get a FULL 0.2% slice with his $100k. Lol.

I agree about the "No control" issue. "Non-Recourse" means if THEY go broke, $100k - gone!

@Shiv Jey, I'm curious - why not pay those student loans off? Too attractive as deductions?

Are you saying You WANT to invest in things that continually lose you dollars - to lower your tax?

Steve Vaughan · Answer

Thanks for the clarification about depreciation, Leslie.

So let's see: $50M project. Land is 33% of value. $100k investment gets someone a .0002% slice. The depreciation deduction (his main purpose) is  $.14 per year exactly.  Lol

My last $100k bought a leveraged 10 unit mixed-use which I depreciate over $19k per year.  Syndication may work for some folks but it WILL NOT effect positive change to his tax position.

Unless he loses his entire investment. Which is certainly possible. No control. No say. Multiple layers of sponsors , commissions and fees.  Cheers!

Steve Vaughan · Answer

I'm not sure if you get to share in the depreciation of these syndicated thingies.  Probably not or not enough to help your current tax woes.  Might as well buy a REIT if you ask me.  No control and no say.  My $.02.

If I were you (I'm on the flip side with depreciation deductions coming out of my ears) I would buy solid multi-family assets large enough to afford onsite mgt where the land is 10% or less of the asset value.  I have some where the land is 3%.  That means you can depreciate 97% of the purchase price over it's life.

Strong asset in a good area.  Low land value.  Congrats and good luck @Shiv Jey.

George P. · Answer

ok, you kind of know what you want, but you really dont want it. i can tell.

you guys hate how much taxes you are paying, i get that. you dont need any money and make a ton just going to work. do you really care about breaking even or making $200 per month after all expenses? no. that money is nothing to you. you are after the tax deductions. you dont have time to create your systems, hire and fire people, deal with phone calls, etc.

you gotta work with a CPA, not a financial adviser, to tell you all the options to invest in to get the "Trump tax breaks". he will most likely tell you to just spend it on rental properties, and at that point you are better off hiring someone to do everything for you and you just get the tax deductions...

Just invest in large apartment complexes where you make 5-8% on your money and it's safe, steady. or invest in the builders.

trust me, i know your situation and you dont want to be a hands on landlord.

Brent Coombs · Answer

Account Closed, no. In that scenario, its EXPENSES including mortgage wipe out its rent income.

Brent Coombs · Answer

Can someone provide comments on the above? This seems like a good /passive strategy to me.

Shiv wrote: "I reap the rewards, and hopefully, appreciation as well", but, if there is no positive cash return, there is NO reward for many years - but ONLY the possibility of appreciation (and eventual loan pay off at 60). So yes, if you can afford to put down $200,000 and see NO return from it for 25 years, but THEN you get a fat check for $1,500,000 (in 2040 dollars) when you sell (it should have been for $3,000,000, except for the great crash of  2025), then yes, many people use this approach. Many others will DELIBERATELY look for ones where they'll be NEGATIVELY cash flowing THOUSANDS of dollars for all those years, just to save HUNDREDS of dollars in tax.

All fine - UNTIL the high-income, low-interest-rate merry-go-round stops! My 2c...

Account Closed · Answer

@Brent Coombs Sorry for the confusion - I guess I was looking at it from the total return based on 20% cash down - even if the monthly cash flow from rent is wiped out to 0 by the mortgage payments, because the rent payment is paying the mortgage, they will still achieve a substantial return on their money due to the tenant's payment of their whole mortgage (hopefully) (so if they put 200k down, they will own an asset worth 1million in 30 years) This is a great return compared to what can be found in the stock market, right?

Account Closed · Answer

Assuming that they are able to keep the property rented throughout those 25 years, that is still about ~750% total return on their initial investment, or 30% annually, right? I'm still new to this, but just thinking about the numbers.

Account Closed · Answer

Can someone provide comments on the above? This seems like a good /passive strategy to me.

What would you do?

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