What to do with 700,000 ? Pay down , leverage or stocks
Member since 2021 · 41 posts · 32 votes
Hey everyone ! I’ve posted a few times before but it seems it’s been a while and so many things have changed .
Quick summary ! Young guy, owe about 2.6 million in loans in RE , also have a job that’s yields about 200-400k a year . Currently sitting in on some reserves but I’d like to put them to use . What would you do ? I don’t want to go into more debt , but it’s the only way I can reduce my tax burden every year . I can pay off 2 properties with about 800k and that will add 9500 a month in come , but the taxes will be more at the end of the year . Or I can try to look for a property around the 700-1 mil price point o pay cash and that will help reduce some taxes . Or put some in the stocks and pay off a loan . So many different scenarios and I really don’t know what to do . I don’t want to do syndications . Any recommendations ?
Thanks
With that size portfolio you need to be planning with a tax professional.
I doubt you want to add to your taxable income so I'd be looking for additional purchases or investments. Have you thought about buying multiple properties instead of just one large deal? In many markets that $700k can go a long way towards acquisitions.
With that size portfolio you need to be planning with a tax professional.
If your goal is to pay more for your properties, then go ahead and pay them off with that extra cash.
If your goal is to pay 100% for a property, then pay all cash upfront.
If your goal is to reduce your taxes, and not add any added cost to your properties while doing this, then leverage them.
If your goal is to max out your income from these properties as well as increase your net worth and your total assets, then sell your current properties, and buy new ones (cash flow positive) at the minimum DP.
@Mike Bianchi
Sounds like a good problem to have in making this decision. Do you think you would want to consider out of state investing? It sounds like part of your mental hurdle is based on what that $ can get you relative to your market. In my area you could buy a whole neighborhood for that much cash especially with a mix of leverage. And to be fair that’s not unique to my market it’s much of the Midwest.
Also, I appreciate the concern with “not wanting to take on more debt.” But again I think if I had that much cash and consistent income I’d take a look at a few things such as larger down payments to keep monthly payments low, let’s say 50% down and keep some cash in reserves for a rainy day. Or, I’d look at properties (yes, multiple in the right market) to buy with cash but knowing I can pull that cash out later if I wanted to and begin recycling the capital over and over, while still having the safety of acclamation to the initial investment.
Just my thoughts and $0.02 which ain’t with a buck :)
@Mike Bianchi - I suspect you are looking at your absolute debt, and you don't want to add to it. A better way to look at debt is to measure your overall leverage. If you are underleveraged you need to take on more debt, otherwise your return on equity (and cash) goes down. Law or nature - either your are growing or you are dying. You have to decide what the right amount of levergae is for you. Personally I do not want to fall under 50% leverage and not go over 60% for the portfolio. Individual investments start at 75%.
Next question, what is your debt structure. What is the interest rate and how long is it fixed. My base assumption is that we are going to see more inflation (currently 4.2% CPI offcially, but higher in reality) so fixed rate debt is a good thing to have. Take a clue from the US goverment.
Another way to optimize is liquidate properties that don't have the best long term prospectives and trade into better quality assets. Better tenants, fewer headaches, better capex projections.
I am hell no on stocks! A bright future is already priced in. Where do we expect earnings to go from here??
If you do not want to do a syndication, are you planning on starting your own property management company, or just building properties outright and then hiring a 3rd party property management company? With those resources there should be plenty of options. I offer syndications, but I also offer true partnerships on smaller deals where the investor is more involved.
@Mike Bianchi wow! I bet a lot if investors would like to have your problems.
While it is nice to reduce taxes, paying taxes means you’re making money.
Investing has to take our personality and risk tolerance into consideration. You could buy a property for cash and always cash out later.
I doubt you want to add to your taxable income so I'd be looking for additional purchases or investments. Have you thought about buying multiple properties instead of just one large deal? In many markets that $700k can go a long way towards acquisitions.
Your right Bonnie , I dont want to add taxable income , but i also dont want to add debt , I know its very hard , hence why i am asking for recommendations . Not that i wont add debt , but my goal is to minimize my debt as much as possible , i would prefer to be debt free if possible , its much less stressful
With that size portfolio you need to be planning with a tax professional.
The sad thing is , I did , and all he told me to do was max out Ira , Sep and all that . I basically have to read tax books and propose to him doing things such as the cost Seg , Etc . He proposed doing a cost seg my first purchases to reduce about 15% of the purchase but as ive progressed , ive noticed hes more conservative which theres nothing wrong with but i feel that when i tell him my goal is to pay 0 or little taxes , I feel guilty or morally wrong . I hope nobody takes the comment about me wanting to pay 0- little in taxes the wrong way . I know some people are iffy with paying your due share in society . For example , ive purchased other properties and ill reach out to an engineering cost seg firm who says they can deduct about 60-80% of a certain property but he will tell me 15-30% , and that difference is what will either make me pay taxes or offset it completely . I guess i need to look for another Cpa
@Mike Bianchi
Sounds like a good problem to have in making this decision. Do you think you would want to consider out of state investing? It sounds like part of your mental hurdle is based on what that $ can get you relative to your market. In my area you could buy a whole neighborhood for that much cash especially with a mix of leverage. And to be fair that’s not unique to my market it’s much of the Midwest.
Also, I appreciate the concern with “not wanting to take on more debt.” But again I think if I had that much cash and consistent income I’d take a look at a few things such as larger down payments to keep monthly payments low, let’s say 50% down and keep some cash in reserves for a rainy day. Or, I’d look at properties (yes, multiple in the right market) to buy with cash but knowing I can pull that cash out later if I wanted to and begin recycling the capital over and over, while still having the safety of acclamation to the initial investment.
Just my thoughts and $0.02 which ain’t with a buck :)
Great points Nate . To answer you 1 by 1 , I am very hesitant to purchase out of state or out of city . I am a hands on guy and i like to be at max 30 minutes away from the properties . The market is hot and hard to find deals so its tough now . I feel that i cant trust/depend on anyone so thats why i want to stay close in case i feel that someone is trying to gip me or i can do a better job of whatever the task is , and then delegate it after . Again , I would prefer not to add more debt , not to say i wont but i would try to reduce my debt , its just a stressful thing for me mentally , even tho it shouldn't but its just always on my mind . At the same time , i dont want to pay 100-300k a year in taxes so im in a tough spot of trying to do a little of both . Minimize tax burden while reducing debt , I know rich people with really good accountants have so many loopholes they go through
@Mike Bianchi - I suspect you are looking at your absolute debt, and you don't want to add to it. A better way to look at debt is to measure your overall leverage. If you are underleveraged you need to take on more debt, otherwise your return on equity (and cash) goes down. Law or nature - either your are growing or you are dying. You have to decide what the right amount of levergae is for you. Personally I do not want to fall under 50% leverage and not go over 60% for the portfolio. Individual investments start at 75%.
Next question, what is your debt structure. What is the interest rate and how long is it fixed. My base assumption is that we are going to see more inflation (currently 4.2% CPI offcially, but higher in reality) so fixed rate debt is a good thing to have. Take a clue from the US goverment.
Another way to optimize is liquidate properties that don't have the best long term prospectives and trade into better quality assets. Better tenants, fewer headaches, better capex projections.
I am hell no on stocks! A bright future is already priced in. Where do we expect earnings to go from here??
Thanks Marcus . I would say im fairly leveraged , im around 57% leveraged , and have 2 paid off . I think you have a good point , I was just looking at total debt and that i would eventually like it to be at 0 but in order to grow , leverage is key . I didnt know if there was any creative strategies anyone might be utilizing that may be helpful . Im aware of the 1031 and upping my basis but that would just add debt as well and that would mean i would have to sell and find a " decent " property to buy. Most of my loans have 2-4 years left before maturity so having fixed debt may be useful especially in the rise of interest Rates .my rates are 5.25 , 5.25 4,75 and 3.95 with 3-5 years fixed and 20 year amort , 1 of them i have a 7 year amort since its almost paid off as well . Im sure i should've received a better rate , but it is what it is . I asked for a rate reduction 6 months ago , they said no , this is the rate their offering now . So that was upsetting and will probably be looking for new bank to buy deals with if i add debt .
If you do not want to do a syndication, are you planning on starting your own property management company, or just building properties outright and then hiring a 3rd party property management company? With those resources there should be plenty of options. I offer syndications, but I also offer true partnerships on smaller deals where the investor is more involved.
I manage my units now , they're fairly easy , turnaround is low , so i dont consume too much time renting them out . once they are rented , tenants typically stay for a while . I am not educated on syndications so i cant speak on that but from the gist of it , i would like to make a 15-25% return and receive the tax benefits , and from what i understand syndication doesn't offer that . as far as partnerships , My dad a long time ago opened a business with a professor and it went well for a while but then he got screwed and i promised my self i wouldn't join a partner ship .
@Mike Bianchi wow! I bet a lot if investors would like to have your problems.
While it is nice to reduce taxes, paying taxes means you’re making money.
Investing has to take our personality and risk tolerance into consideration. You could buy a property for cash and always cash out later.
I wont disagree. I am blessed and very thankful for my health to be able to do this . I see taxes as an expense to the business , if i can reduce that expense legally , great , if i can cut it completely legally , Even better . Thats just me personally , not everyone feels the same im sure . Im looking for properties at certain price point that we can buy and reduce our tax burden the same year . Its just hard. So thats why i was asking if anyone had any recommendations of any other ideas of how to get your tax liability to as close to 0 as possible " legally " while not going crazy in debt .
Hi @Mike Bianchi
This is a good issue to have. In my humble opinion I'd say it all comes down to your own personal comfort. Let's rephrase the question. Do you want a bigger tax bill due to being debt free or do you want more good debt that puts money in your pocket? With the way the economy is heading if you own cashflowing real estate that you can finance with "fixed" debt you're going to do very well. Any debt that has an adjustable rate I'd start paying down or getting rid of if you haven't already.
I am not a stock guy but, anything that has to do with automated transportation seems like a great stock to get into now. If you're going to go by historical trends physical Gold and Silver will be a great place to put your money in. I hope this helps.
If you do not want to do a syndication, are you planning on starting your own property management company, or just building properties outright and then hiring a 3rd party property management company? With those resources there should be plenty of options. I offer syndications, but I also offer true partnerships on smaller deals where the investor is more involved.
I manage my units now , they're fairly easy , turnaround is low , so i dont consume too much time renting them out . once they are rented , tenants typically stay for a while . I am not educated on syndications so i cant speak on that but from the gist of it , i would like to make a 15-25% return and receive the tax benefits , and from what i understand syndication doesn't offer that . as far as partnerships , My dad a long time ago opened a business with a professor and it went well for a while but then he got screwed and i promised my self i wouldn't join a partner ship .
Syndications (done correctly) do provide 15+% returns along with the tax benefits. If they did not, most of us would not invest in them.
@Mike Bianchi Buy AMC stock tomorrow. Seriously. At $48, you can get in at the very beginning of a short squeeze that's soon to happen. I can guarantee you the price point will go up well over $100. If you play your cards right with AMC, you can retire much earlier than you ever dreamed!
With that size portfolio you need to be planning with a tax professional.
The sad thing is , I did , and all he told me to do was max out Ira , Sep and all that . I basically have to read tax books and propose to him doing things such as the cost Seg , Etc . He proposed doing a cost seg my first purchases to reduce about 15% of the purchase but as ive progressed , ive noticed hes more conservative which theres nothing wrong with but i feel that when i tell him my goal is to pay 0 or little taxes , I feel guilty or morally wrong . I hope nobody takes the comment about me wanting to pay 0- little in taxes the wrong way . I know some people are iffy with paying your due share in society . For example , ive purchased other properties and ill reach out to an engineering cost seg firm who says they can deduct about 60-80% of a certain property but he will tell me 15-30% , and that difference is what will either make me pay taxes or offset it completely . I guess i need to look for another Cpa
Then you need to find another tax professional. You really don't want to rely on your own knowledge. It's a good problem to have though, lol.
With that size portfolio you need to be planning with a tax professional.
The sad thing is , I did , and all he told me to do was max out Ira , Sep and all that . I basically have to read tax books and propose to him doing things such as the cost Seg , Etc . He proposed doing a cost seg my first purchases to reduce about 15% of the purchase but as ive progressed , ive noticed hes more conservative which theres nothing wrong with but i feel that when i tell him my goal is to pay 0 or little taxes , I feel guilty or morally wrong . I hope nobody takes the comment about me wanting to pay 0- little in taxes the wrong way . I know some people are iffy with paying your due share in society . For example , ive purchased other properties and ill reach out to an engineering cost seg firm who says they can deduct about 60-80% of a certain property but he will tell me 15-30% , and that difference is what will either make me pay taxes or offset it completely . I guess i need to look for another Cpa
Then you need to find another tax professional. You really don't want to rely on your own knowledge. It's a good problem to have though, lol.
Yes, I agree .
If you do not want to do a syndication, are you planning on starting your own property management company, or just building properties outright and then hiring a 3rd party property management company? With those resources there should be plenty of options. I offer syndications, but I also offer true partnerships on smaller deals where the investor is more involved.
I manage my units now , they're fairly easy , turnaround is low , so i dont consume too much time renting them out . once they are rented , tenants typically stay for a while . I am not educated on syndications so i cant speak on that but from the gist of it , i would like to make a 15-25% return and receive the tax benefits , and from what i understand syndication doesn't offer that . as far as partnerships , My dad a long time ago opened a business with a professor and it went well for a while but then he got screwed and i promised my self i wouldn't join a partner ship .
Syndications (done correctly) do provide 15+% returns along with the tax benefits. If they did not, most of us would not invest in them.
if thats the case , then it may be the right path . just depends on how much the tax savings be . Assuming i put 500k , your saying there is some deals that would yield 15% year one and have a tax savings ? any ball park idea what type of tax savings would be on that kind of injection . I know thats vague , but to keep it simple
Why change what you're doing if it's already working? If you are getting closer to retirement or are concerned about job security, I can understand wanting to make a change. If you can tell us why you feel being debt free is safer, it would help us a bit in giving options. And I would definitely speak with CPAs that specialize in helping RE professionals. It's nice having a CPA that has many clients that are in the same industry. They will have so much more knowledge because they can see first hand what businesses are working because they know how much they're making and ways to avoid and defer taxes. I have even met other investors through my CPA and RE attorney. If your CPA is not bringing new ideas to the table, they're not providing you value and you may want to rethink giving them your business.
@Mike Bianchi first step is to find a great CPA that has expertise working with real estate investors. Cost segregation seems like it might be a good fit for your needs. The cost for this has come down in recent years. Find a good CPA and they usually have a cost seg. engineer they can recommend.
@Bob Metry
We have a engineering firm that does the cost segs for us but that’s not necessarily the issue . It’s that that I have be the aggressor in finding ways to minimize my taxes vs having a cpa tell me , Option 1 option 2 option 3 and so forth . All I get from my cpa is , max out your ira or sep ira or buy some equipment and that’s basically it . I’m always doing calculations on what I need to buy to reduce my tax burden either a property , business car or what not . I need someone who knows some very good “ legal “ loopholes besides the cost seg that can reduce my tax burden . Sometimes I won’t get lucky enough to to find a property to buy , then I’ll be stuck with a huge tax bill .
@Grey Stone
Making a good income from a job is never Guranteed forever so I want to have passive income over take my workable Income . On the debt side , there’s 2 reasons , 1 personal reason I can’t explain but the other is I find it less stressful knowing I don’t owe the bank anything and they or anyone have no control over me . I wake up peacefully , that may sound dumb but that’s just how I feel . As far as your other point ; I agree , I don’t feel they are providing me with new options or ways to defer taxes legally . They keep saying if we can get you at an effective rate of 15-20 % , that’s good . I’ve tried to subtly let them know my goal is to pay 0 to little in taxes if possible . I may need to find a new cpa
@Mike Bianchi you could buy fully renovated 12+ unit multifamily in OKC for that price range. It's a safe place to park cash from an potential market correction standpoint. In the last downturn Forbes actually called us recession proof. If you are going to buy somewhere I'd absolutely focus on markets that will hold their value after everything corrects. Happy to help! Good luck!