What to do with 700,000 ? Pay down , leverage or stocks
Member since 2021 · 41 posts · 32 votes
What to do with 700,000 ? Pay down , leverage or stocks
Most Popular Reply
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
5yWith that size portfolio you need to be planning with a tax professional.
76 Replies
- Member since 2021 · 41 posts · 32 votes5y
@Joseph ODonovan
I did actually , problem is I bought high
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Mike Bianchi:
Originally posted by @Eric James:
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
Deducting 60-80% is insane and you will just become an audit magnet. Also be aware that accelerating depreciation helps you this year, but it means far less depreciation in the future. So you don't avoid the taxes, you will just pay them in future years. There is also depreciation recapture, so if you decide to sell, you just pay taxes on all that accelerated depreciation. If you exchange into another property, you just transfer basis. That means the new property just has less depreciation available to claim. The taxes will eventually hit you like a ton of bricks. The only way to stay ahead is keep acquiring properties.
As far as your idle cash, paying off a loan does remove that deduction. However if that cash is sitting in investments, you will pay taxes on those investments too.
There is no magical way to avoid taxes if you are making money. I cringe when people say you need a better tax strategy, because there are only so many deductions you can take. Sure you can start claiming personal vacations as work trips, but good luck when you get audited.
Biden administration is doubling the size of the IRS over the next ten years with the goal of increased audits and getting people to pay their fair share. Now is not the time to deploy edgy strategies.
I would acquire more properties and focus on A or B class assets. They may have less cash flow and cost more, but will perform better over time. Since your goal is reducing taxes, adding a couple prime assets to the ledger is a good move. Another option is look for capital improvements on your existing properties. Paint, roofs, landscaping or remodels are all ways to generate expenses that improve your asset.
- 5yJoseph ODonovanPro MemberProperty Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
@Mike Bianchi Hold it, it's going higher than what you paid.
- Member since 2021 · 41 posts · 32 votes5y
@Joseph ODonovan
I sure hope so , i put 50k in it but at 64 avg , which is stupid , which is why I should stay out of stocks
- Member since 2021 · 41 posts · 32 votes5y
@Joe Splitrock
Your correct , i felt like it would be a red flag as well but I asked the engineering firm that did the cost seg a million times , the lady owns a bunch of parks and she said that’s all she does and they offer audit support if that came to be . And yes , we understand about next year being a horrible year for taxable income for that particular property . I’ve engrained it in my mind that I have to keep buying properties every year to reduce it but at some point I won’t be able to do that, so that’s why I posted this to see what other options I have . I just don’t want to end up owing 50-70 million when I retire , just the sheer thought of that gives me stress . I figured maybe some people might have creative ways they handled growing but with a low tax bill each year if possible .
- Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes5y
Originally posted by @Mike Bianchi:
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
How does buying a place for $700k to 1 million reduce taxes?
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes5y
You’re really losing sleep at night over taxes when sitting on that much money? I think your missing the point of getting rich, enjoy it..
- Investor · Milwaukee, WI · Member since 2016 · 20 posts · 15 votes5y
@Mike Bianchi
None of the above.
CASH. A giant cash position.
Stocks are teetering at all time highs, interest rate rise is on the horizon, inflation is already here, state and federal taxes are absolutely going to rise at a level not seen before.
I'm not calling a bubble but in my opinion this won't last and there will be lots of volatility over the next 3-4 years while companies and people adapt to a more expensive world.
- Member since 2021 · 41 posts · 32 votes5y
@Joseph Tjader
I think your right , stocks are over valued . It’s not my forte ans I have no knowledge in it so I will stay away for the most part except certain moments .
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
Originally posted by @Mike Bianchi:
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 .
I have to hold up my SS (short-sighted) flag on this. For every $10k you pay in interest, most only get $3300 in tax reduction. Maybe $4k.
Don't leverage for the 'tax benefits.' I paid off a couple more properties and it feels like I'm paying more in taxes, but that $9500 extra in hassle-free monthly cash-flow takes the edge off.
Carry on...
- Member since 2020 · 437 posts · 675 votes5y
Expand your balance sheet, buy another property and add leverage. You are young and RE is a long game. Keep a decent cash reserve for the rainy day but otherwise just keep buying as longs you don't over leverage or buy crappy assets or vanity properties to impress others.
- Rental Property Investor · Dallas, TX · Member since 2020 · 50 posts · 41 votes5y
@Mike Bianchi, I would pay my CPA for two hours of their undivided attention to discuss what you want to do. I'm in a similar situation and I think I will pay off as many smaller mortgages as I can. But I'm older than you (57 and retired) with 66 percent equity in 4.6M of SFH mostly leased to Section 8 tenants.
- Global · Member since 2019 · 48 posts · 52 votes5y
Personally, I would buy a few properties 100% paid and earn all of that rental income. With that, I think you can earn 6-figures of rental income per year and not stress about finances and mortgage payments. There is a certain level of mental and emotional freedom that comes with not owing anything (including for your properties). One house earning you $3,000+ a month with no mortgage is what some people need 15-30 properties to earn with an exponentially higher overhead. That becomes a type of nest egg you can rely on. Reset your debt to 0, and decide if you want to have any leverage after you have some assets that you own debt free. Every several months, maybe twice a year after you collect rental income, you can use that for a down payment on a new leveraged property if you want.
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes5y
First thing is don't post you have $700k and your income with your full name on a public forum. Change the last name to just the first letter. Too many scammers out there. But to answer questions for sure leverage in class B real estate 75 LTV on safe properties or even 70 LTV. No need for crazy leverage right now.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes5y
Originally posted by @Mike Bianchi:
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
Hey Mike,
So first let's hit the obvious that asking this, here, is the definition of "chumming the water" lol. So when all the hungry fish come arguing feeding them is best.......
I will instead give it to you straight, because I have truth turrets, lol.
The 1st thing you should be doing is a Risk Analysis, that's before anything else. Look at your operational numbers and risk exposure there. Than look at maintenance and cap-x, ask if your properly allocated and collateralized in contingency funds held for that aspect. Than over-all operational, what I call "WTF" contingency funds, this would be for black-swan events like say a world wide pandemic that affects operations. Last but far from least, LEGAL contingency. When you have a few properties no big deal but as a person amasses an empire, and has all that beautiful cash-flow, the lawsuit jackal's will follow. This is asking are you properly insulated, do you have correct layering, is your structure correct, are you advised legally, maybe with an irrevocable trust structure, and of course legal fund at parent level.
That done, you now know exactly where your at for deployable capital. This is not sexy or fun to do all this, but it meets rule #2, never Loose Money, and makes rule #3 happy; Never Forget Rule #2.
After all this, where to best deploy capital, there are more opinions that a person can count and figuring out which is right and which wrong, can take lifetimes. Truth is the vast majority live in a grey zone, as what's right for one person isn't right for every person. What matters is what is right for you, and what will work for you, that's all that matters end of day and nobody knows you better than you, your risk tolerance, capabilities, Achilles heel's, etc. Personally I play in both the Stock Market and the housing market, and it ebb's and flows with the tides of which is the better opportunity of the time. I regularly liquidate one investment to move unto the next, it's a river ever moving, adjusting and evolving. This market cycle i would advise is all about allocating out of capital and into performing assets, because inflation is the capital killer. Solid dividend plays and solid Real Estate acquisitions, my favorite of this time is AAA Strategy.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes5y
Keeping a mortgage to not pay taxes is ridiculous. You pay $1 to the bank to avoid paying $0.3 to the IRS. Doesn't make any sense. Leverage is okay but not for that reason. Its true at higher tax brackets though that you want to try and get future income in as tax efficient a manner as possible. I am no tax pro but struggle with the same issues in managing my portfolio.
Stocks is not a bad way to manage taxable income. If you buy an index fund it will generate almost no taxable income until you sell at which time its capital gains rates. Owning rentals is ok because you still get depreciation which shelters a large portion of the rental income.
At $2.6M debt and 200-400K income you are probably as leveraged as you should be, probably more than I would be comfortable with. Paying off loans may not be a bad idea.
- Real Estate Agent · Winston Salem, NC · Member since 2014 · 486 posts · 303 votes5y
@Mike Bianchi what about a mixture of all of your options with also keeping some of the cash in savings?
- Member since 2021 · 41 posts · 32 votes5y
@Henry Lazerow
Couple steps ahead you . Thank you though
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Mike Bianchi:
@Joe Splitrock
Your correct , i felt like it would be a red flag as well but I asked the engineering firm that did the cost seg a million times , the lady owns a bunch of parks and she said that’s all she does and they offer audit support if that came to be . And yes , we understand about next year being a horrible year for taxable income for that particular property . I’ve engrained it in my mind that I have to keep buying properties every year to reduce it but at some point I won’t be able to do that, so that’s why I posted this to see what other options I have . I just don’t want to end up owing 50-70 million when I retire , just the sheer thought of that gives me stress . I figured maybe some people might have creative ways they handled growing but with a low tax bill each year if possible .
I know they all say they will give you audit support, but ask if they will give you audit indemnification. That means if you lose the audit, they pay the taxes and fines. I think you know what the answer will be, which tells you how much they really have your back. The point is you don't want to be audited in the first place. The audit opens you up to other expenses being questioned. You may think your expenses are legitimate, but better hope you have great documentation when the IRS starts questioning things. When you sign your name on your taxes, YOU are the responsible party.
There are only two ways to lower your real estate tax bill, reduce your income or increase your expenses. Accelerating depreciation is simply taking an expense early, that you would have gotten anyways. So you pay less taxes this year and more in future years. That makes sense if your tax burden is expected to be lower in future years. In other words if you expect your income to be lower or tax laws to be more favorable in future years. I don't expect tax laws to ever be more favorable, so I wouldn't count on that.
If you are not interested in more assets, I would spend money improving the assets you have. As far as where to park that money, consider a mixture of long stock holds and bonds. It is pretty boring, but a safe place to park your money. You could pay the debt down, but it doesn't make financial sense when the yield is higher elsewhere.
Sorry there is no magic way to avoid taxes. That being said with $700K to spend, you will definitely have people telling you they can help you. Keep in mind most of them are actually helping themselves. You are afraid of taxes, but you should be afraid of someone trying to take a cut of that money. That is a bigger risk based on what you have shared.
- 5yCalvin OzanickBusiness MemberProperty Manager · Janesville, WI · Member since 2017 · 707 posts · 297 votes
@Mike Bianchi this is definitely a solid problem to have. I would personally lean towards acquiring more assets. I would also say you could definitely look into other markets as well. We have had clients bring new cash into our market and do extremely well early on. It really matters what your goals are. If you are looking to pay off any and all loans within a certain time frame, then that becomes your focus. Let me know if you have any questions and want to chat some more! Best of luck!
Wisconsin Property Managers4.7413 Reviews - Investor · Kalamazoo, MI · Member since 2014 · 60 posts · 25 votes5y
I think you're focusing on the wrong thing. Debt isn't for tax management (well, it can be, but only in cases such as borrowing your living expenses when you're sitting on tens of millions of dollars), it's for leverage.
Certainly, paying taxes sucks, but you don't pay taxes without income and I'd rather get another dollar of income and pay tax on it vs not getting that dollar of income and giving it to the bank instead so I can avoid paying tax on it...
As some others have said - get a tax pro to look at your situation and maximize that, then focus separately on what to do with the cash.
For the cash, the question is simple to me - what does your written IPS say? Don't have one of those? Then that's the reason you're here on a board asking what to do. Go put one of those together. It's a whole separate subject I won't address here.
In summary, if your IPS says you need more equity exposure, then put your $700k there. if it says you need more RE exposure, then put it there. If it says you should leverage your RE, then use it to buy more, if it says you should de-leverage your RE, then put it there.
Having said all that, it's clear you are uncomfortable with the risk you have, so the my advice without knowing anything about your IPS (very dangerous, for you) is to pay off debt. - Lender · Chicago · Member since 2018 · 118 posts · 66 votes5y
Originally posted by @Mike Bianchi:
Originally posted by @Eric James:
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
Get a new accountant.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.