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.

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.

Syndications (done correctly) do provide 15+% returns along with the tax benefits. If they did not, most of us would not invest in them.

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..

@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 :)

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.

@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.

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.

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.

What to do with 700,000 ? Pay down , leverage or stocks

Joe Chirdon

Real Estate Agent · Harrisburg, PA · Member since 2016 · 159 posts · 82 votes

5y

I'd buy a few BTC...

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Jay Yoo

Investor · Seattle, WA · Member since 2019 · 139 posts · 54 votes

5y

@Mike Bianchi

Hi Mike, Im happy to discuss your options and tell you about my recent experience in investing multiple different assets. Pleas feel free to DM me to connect! Thank you

What to do with 700,000 ? Pay down , leverage or stocks

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