All Forum Posts by: Bill B.

@John Gillick. Yes. You can use it as a downpayment on a property over $450k and use leverage tax free. I “assume” they meant you wouldn’t defer all your taxes if you used leverage on a $450k purchase instead of “spending” all your cash.

I assume you would have to pay cash, because you have to spend all cash received to avoid taxes. Your cost basis would be ALMOST zero if you ever sold. So you wouldn’t get any depreciation on your new purchase assuming you only spent the $450k. You’d be better off spending $600-$900k+. That way you’d still really cash flow and you’d have some depreciation, but that’s your hypothetical call. 

@Christopher Morris

To add to what @James Hamling said, it also depends how much you need every last $ of income, how much more money you can make doing something else (W-2), or how much you value your time. 

I added a PM when I bought my 4th property. At the time I could make more money working (Even at only $60k/yr) than managing the properties. Plus, I’m not a “people person” and I know my weaknesses. When I retired 15+ years ago I valued my time more than the extra income. The $20k+ I pay a PM means with a dozen properties I literally spend less than an hour a month on a dozen properties. And 1/2 of that is accounting that I could farm out too, but I enjoy it. 

Some people look at PM fees as “wasted” or something they could do themselves. But using that mindset, so is landscaping, plumbing, or clean out during turnover. And the are people that are so poor they have to do that work, and some that enjoy it. Like I do the accounting. But there are some that just can’t see it’s a waste of their time. They’re buying themselves a job. (I used to own some franchises like James talked about. Computer Renaissance, also based out of MN.) You can’t believe how many franchises are started by people who need a job for themselves or their kids. 

Ps. Side benefits or PM besides free time. They keep you legal in regards to screening, notices, and so on. They have vendors that count on their business as a large portion of their business. So repairs are done at a fair price the same day/night. You don’t have to deal with the repair calls or the sob stories. They probably do a better job of screening than you would. They charge and collect the late fees you might let slide. They raise rents more often than you might/would. They have a better finger on the pulse of “market rent”. Tenants tend to expect to get away with stuff when dealing with an owner/manager they wouldn’t try with a property manager. To me, it’s money well spent. 

Pps. Because of special circumstances I have one property I self manage. It’s on MN (out of state to me.) and I had to get a pair of garage door springs replaced. A simple easier like that sucked. It took me 5 calls, 2 days, and 2 different vendors to go out before I paid at least market rates. When they’re done in Vegas I see a line item on my PM statement. It broke day 1, it was fixed day 1, here’s a bill for 75% of what I paid to handle it myself. 

@Dave Foster

Are development rights “real property”? Can he do a 1031? If so what are his loan requirements? I assume zero as he would have to reinvest all cash received to avoid all taxes, correct? Interesting question if nothing else. 

When you mentioned selling and other investors being involved. You asked about doing a 1031 of "your portion". I was suggesting that if you wanted to do a 1031 of a property held in a LLC, they would be forced to also do the 1031 exchange. You can't only 1031 your portion of the LLC's sale of the property. Whereas if you and the other investors held ownership as TICs (Tenants in common) then you could sell your portion and do a 1031 of your portion while others did something else.

@Zach Howard

All 1800-2400sf, 3-5bd, 2-7 year old (when I bought them), stucco sided, tile roofed, SFR without lawns. Basically zero maintenance. With a dozen properties over 25 years I have yet to spend a dollar on a roof or painting a house exterior. (Other than wood trim.)

People move in and they stay 6-12 years. It’s their home. They have a yard, they have laundry and a garage. Apartments aren’t an alternative to these people. My vacancy is probably under 1/2 of 1%? (A couple weeks for 1 property every year or two? (5 tenants are original tenants, having been in the homes since I purchased them 9-12 years ago when I was doing more buying.)

My last purchase was a 1031 exchange in September of 23 for a new build. 

Hey Christopher, congratulations on making it through that mess. 

I have a dozen properties. They generate about $300k in rent, I get to keep about $250k of that in cashflow. But, ON AVERAGE those properties appreciate about $325-$400k per year. No, I do not extract that income to live on because I don’t even need the $250k to live a pretty extravagant (To me a boring Midwest guy who never made more than $60k/yr while working. Plus with no state income tax, cheap insurance, and very low property taxes, I’m probably starting $20k ahead of most people, and that’s a tax free $20k.). Then think about writing off your cellphone, your internet, you car, your home office, your tax prep, etc etc etc.  And there’s another $20k tax free head start I have over the “worker bee”. 

It’s like I have a bunch of clones out earning money for me. (Others would be more boring and say it’s just my money earning money. But it’s also saving me taxes. :-))

But yes, I could take a $200k or $300k tax free loan every year on the appreciation if I couldn’t manage to make ends meet at $20k/mo. But to me that would be a spending problem, not an income problem. 

Imagine something as simple as deciding tomorrow to spend 3-6 months in Australia because it’s too cold here, or I haven’t been, or a friend dared me. Most people couldn’t afford to do that. Either they don’t have the money, or more likely they don’t have the freedom. They’re a slave to their job. If they stop going the income stops. More importantly to me. Most of the people who could would just do it, leaving their home empty.  I would rent out my primary and end up making more than I spend living in Australia. And it wouldn’t even be ONLY profit motivated. To me, having my home sit empty is wasteful. It’s the reason the lake front “retirement” home I bought on Lake Minnetonka in MN has had a tenant in it for the last 10 years. The idea of it sitting empty caused me emotional damage. 

I think a lot of it is mindset, or personality or whatever it is that controls how you act in certain situations. My classic example is:

The richest man in the world works harder and longer hours AFTER becoming rich than almost anyone else is willing to work to become rich. It has to be a personality trait. People talk about being a rush to retire early on $1-5-$10 million. Here’s a guy with 400,000 billion working his butt off. And the world’s a better place for it. Don’t be wasteful and try to make the world the better place while generating income and it won’t even seem like work. 

And I’ve rambled on again. Hopefully you found a nugget in there somewhere. And congratulations if you made it to the end again. 

Ps. Can you believe how much time and information Tax, 1031 exchange, accounting, and financial experts give away here? Many of them have already “made it” and do it just to make the world a little better. So I try to thank them every time for providing information I would have to pay for, if I knew who to ask and who to trust. They are a more local and relatable example. 

I tried to skim most of the replies so I wouldn’t repeat what’s already been said but here’s my response to OP about real estate and retirement. 

Treat it like a retirement plan, in fact I replaced my retirement contributions with real estate. This means…

Don’t count on it to cashflow, your 401k or your ROTH doesn’t cash flow, they never have. And yet every retirement expert tells you to sink every dollar you can afford in to these accounts. 

From 2015-2020 everyone on BP was cash flow, cashflow, cashflow. Cashflow is guaranteed, Appreciation is gambling, blah blah blah. Then in 2020 it turned out cashflow wasn’t guaranteed, the government could burn your cashflow to the ground and you could lose everything. To me this was always a false narrative. All my rentals were in Vegas during the Great Recession. You tell me a market that was hit harder than Vegas? Well.  I never made more money than that time period. Rents were skyrocketing, 10-20% annually. I had waiting lists of tenants for the first and only time in my career. 

Personally I don’t think you are ready or that you should buy real estate if you NEED the cashflow. Especially if it’s less than $1,000/months per property. It’s just too easy for it to go away. In fact I went out of my way to get 15 year mortgages because I knew that even if I had zero or even negative cashflow I was literally making more money as my interest expense was lower. I care about income waaaay more than cashflow. I sank every dollar my rentals provided back in to paying off debt and acquiring more properties. (You know, zero cashflow, just like a retirement account.)Even today with only paid off properties generating a boatload of cashflow I generally make more every year on appreciation. 

Sure, it took almost 10 years to retire, but compared to the 30-40 year plan most people use it was a dream come true. And none of that counts the 10’s of thousands in tax advantages I reap without any advanced skills or planning, the government just hands them out. 

It’s not a binary on/off choice. Not convinced? Buy a new primary every 2-5-10 years, whatever you can afford. Keep it as a rental and I GUARANTEE your life will be better in 20-30 years than if you ignore me and the simple get slow plan. After all, if your 5% down properties only double in 20 years you’ll have 40x your money. And that extra $40-$50k a year will be life changing. Every single new investor wants to say it was easier “back then” or “it’s too hard/impossible today” so they don’t have to start today. When I was buying 1/2 price homes not ONE person I talked to said it was smart. EVERY single one said “aren’t you afraid they’ll keep dropping?”  Now they tell me I was lucky I bought back then. I was buying homes for $100k with $25k of my money, and the mortgage was paid off by the tenants. Did they really think 3 year old Vegas homes would drop below $25k? Now they’re hoping they’ll drop below $525k. 

You’re surrounded by a support group I never had, and that’s a positive. But I also didn’t have all the negative Nancys (sorry Nancys of the world) saying it was too risky too late or couldn’t be done. Maybe that’s why it was easier doing it alone. I literally didn’t know a person that owned 2 homes, much less a rental. I just did the math and it was obviously better than stock account retirement. And experts said that was a good idea. So if this was better it couldn’t be a bad idea. Get started and look back on today in 5-10 years with all your new knowledge. Keep asking questions. And Good luck. Sorry again to rant but I never plan my response beyond the first paragraph and I’m sure it shows. 

I WAS going to say you’d be setting yourself up for a large tax bill on that $200k, assuming investment. BUT, you face another problem. If an appraiser says it’s worth $400k, then that’s all you should pay. So either you’re going to ask them to lie or you’re going to overpay. Do you plan to live there forever? You’re saying a primary home buyer won’t be able to buy it. And if you convert it to a rental you’ll be facing a $200k taxable gain. 

I think you’d be better off getting a true appraisal. (Churches are surprisingly low value structures. Our huge brick church was sold for about land value.). Maybe you can talk them in to seller financing with a big downpayment?

11%? You plan to outperform the experts that do it for a living?

Obviously you jam it all in the stock market for 11%. Heck, you should mortgage your home to the hilt, and borrow every single dollar you can at 6-7% and crush it on the arbitrage. Heck. Sell your car and get a loan on a new car. Use that sales money to buy more stock. 

In 6 years you’ll have $1m, in 12 years $2M, and you can withdraw $220k/yr. Forever. You’re set. 

 Or. if you can’t wait that long. Invest for 6 years and then you can withdraw $110k/yr forever. I don’t see any real estate competing with that.  Especially after capex, vacancy, management fees, etc etc.