Investing in Break Even Properties

7 Replies

Wanted to discuss the investment strategy of a long time successful RE investor. He's a BP member and I've enjoyed reading about him. He lays out a very simple investment strategy that, on paper and over the long term, makes sense to me. However, when purchasing property, it's tougher to execute when the numbers aren't stellar cash flow wise (10-15%). But the properties are in strong areas with great curb appeal with increasing rents. Here's the strategy in his words:

What do you look for in an investment?

I look for good investments that will benefit over the long run. I’m mostly buy and hold for long term. I do buy foreclosures and keep some and sell some to turn over the money. I’m not one that is adamant on cash flow. I think that is an area that has negatives to many true investors. No tax benefits per se, usually older dumpy properties with little hope for appreciation and don’t afford much depreciation. I suggest most new investors try to buy break even properties, and just like Monopoly, buy as many as you can. Keep them, refinance and buy more. Keep your main job for the income end and build foundation of properties first. Cash flow will come as rents increase, but don’t sacrifice growth option at desire of cash flow to begin.

There are too many gurus out there preaching cash flow and “replace your job with real estate income”. I’m the opposite of those. Cash flow just happens, in time, but not worth sacrificing acquisition of additional properties by having to put more down to obtain cash flow.

There are 4 main benefits to owning real estate:
1. Appreciation
2. Depreciation leading to tax benefits
3. Principal pay down
4. Cash flow

Charts will continually show that #1 and #2 are the keys to creating “TRUE WEALTH” in real estate, and far out distance the last 2 in the short or long term.

Thoughts?

#2 Depreciation credits is a pipe-dream. Yes, you claim them as long as you continue to operate the facility. Theory is this is an offset to the impact of your CapEx. Part of the end-game however, is the dreaded Capital Gains and the Depreciation Recovery.  So, if you take double declining balance depreciation and hold some time and then sell, the chickens come home to roost.  If you hold for limited time, use straight line method and the Recovery will be less painful.

The only winning strategy is a Living Trust, depreciate like heck, hold forever and the kids then get a setup in basis and a zero cost RE investment.  If they disdain operating a rental, they can sell immediately and have zero capital gains.



Thoughts?

 We picked up 3 owner financed deals in a very short space of time. Weren't really looking for the deal either. All three are coming up to their 3 year mark of a 4 year mortgage.

Our cashflow for all three is practically nothing, in fact, two of them we are very much in the  red but then we did buy them in a semi distressed state.

But here's the thing, I don't care about appreciation, or the depreciations, or the fact we make no money on them, but in just over a year, we will own 5 units free and clear

Our plan with them was very simple - we don't like debt, we pay them off with the rents as quick as we can. Then we get 100% cashflow from March-June 2017. And then i buy a boat.

The problem is when people try the above and have no real income outside their REI activities. We can support all three notes without tenants, not a problem. But a lot of people are unable to, and if they lose a tenant or two, the financial noose round their neck slowly tightens.

Originally posted by @James H. :

Interesting. @JBeard what is the order of 'Benefits' for you?

 The depreciation expense on the 1040/sch-e reduces taxes.  The sole issue becomes the end-game.

@James H. - Very interesting post, particularly because it's the strategy my husband and I use and are comfortable with. While we're not pro's (yet!), we purchase for appreciation and thus long term buy and hold. In the beginning, we break even which is fine because we make good income and so we don't need small amounts amounts of cash flow now.  For instance, we purchased our first property in an A/B neighbourhood and in as little a year we are already seeing rents go up (as well as equity). We're employing the same strategy with our 2nd rental in which we are already in closing stages.

This strategy works well for us. We are more conservative than your avg. investor on BP though IMO.

I always like to boil down my strategy to

Cash flow is how I pay my bills.....appreciation is how I build wealth.

So my strategy was to build a base of cash flowing properties, so that then I had the ability  to expand into properties that have a higher likelihood of appreciation.

I don't see the cash flow only method as a long term means to wealth, unless you eventually use them to build cash to purchase properties that appreciate.

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