All Forum Posts by: Christian D.

Christian D. has started 4 posts and replied 26 times.

Originally posted by @William Walker:

i would keep it.
for me it’s hard to find good rentals right now. Everyone is acting like you can find a great rental at the drop of a hat. If you sell it you’re going to have to pay realtor fees, spend time finding a new place (sounds like you don’t have time), pay closing costs, etc. yes you’ll have to keep 20% if you refi...guess what...if you buy a rental you’ll have to put 20% down.
you know the current capex expectations and the area, sounds close enough to manage yourself. I’d keep it and keep the cash coming in. If you find another rental take the equity out of this thing

Thanks for your input!

Yes - this is my thought process...we've lived in the house for 12 years, have remodeled the entire thing top to bottom, so I know what's coming in the near future. Granted smaller things break and so forth, but I have a great picture of the cap ex.

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Originally posted by @Jacob Sampson:

Originally posted by @Christian D.:

Originally posted by @Jacob Sampson:

Originally posted by @Christian D.:

Originally posted by @Jacob Sampson:

Sell. There is too much value in the equity. Plus people rarely purchase their personal residence for a price that makes it a good buy and hold, although in this case yours is pretty close. Still, even if this thing cash flowes $200/month vs selling and clearing $100k you are getting nearly 42 years of cash flow up front. Sell.

Thanks for the input!

However, at the current mortgage terms, the house will be paid off after 8-9 years (or before), and then (using a quick 50% rule) I should see $750/m in cash flow? Shouldn't that be considered?

I know this is against the math in many ways...not utilizing leverage is very conservative and doesn't coincide with the math here any in many schools of thought. However...the cash flow would equalize MUCH sooner than 42 years with this approach.

Also a side thought - I could always do a cash out refi on this and utilize the equity to purchase another property down the line, when my personal time allows for scaling of my rental business. Is this a good/bad idea?

Absolutely, you should take into account all data points. It is a critical to good decision making. I think you are in the enviable position of having many reasonable positive options.

Another, item to look at is that, yes, in 8 years you now have greater cash flow. The question is can you take the 100k and deploy it now and generate even more than $750 in cash flow 8 years from now? Plus, as was mentioned above, your current return on equity is sh!t.

Additionally, even at $750 in cash flow 100k is 11 years of that cash flow all up front. Which still makes it a sell to me.

Yes you could get the cash out via HELOC, another reasonable idea. But at that point your property is probably in negative cash flow territory.

Just random thoughts.

Appreciate the thoughts man!

See my last post above in regards to the move and taking in my ailing mother...

Right now, I definitely don't have the time to scout out and analyze properties, and dive into making a purchase, renovation, and all of that. So selling this property would undoubtedly lead to a pile of money sitting and earning nothing in the next several years, and not being redeployed until I'm ready and have the time and energy to devote to starting a real business out of this.

Additionally there's another factor...the bank of mom is going to be loaning (gifting, essentially, as an early portion of our inheritance because more than likely she'll be fortunate enough to leave my brothers and I money when she passes way too soon due to this horrific disease) us money for the down payment on the new house. This is taking place because we haven't saved up enough yet for our next down payment, and our whole family agrees we shouldn't be *forced* into selling our home before we're ready to, just so we can take on this impossible task of caring for her. Granted my family will be all hands on deck to help, but being the ones taking her in and uprooting our lives, we will likely be bearing the biggest brunt of it all.

I am sorry to hear about your mother, that is heartbreaking. Aside from that, like I said, you are in an enviable position. A whole bunch of reasonably positive options for you to choose between.

Thank you for the kind words. Definitely has been a hard hit to the family.

And - yes - we are definitely aware that we're in a fortunate position. We got lucky and bought the house cheap...granted prices fell further in 2009 after we bought, but we were still in a good spot having bought after the collapse was already underway.

I guess having looked at this...I had already formed the opinion that it's not 100% the best business move when you look strictly at the math. You guys are right...that would be selling and using all the tax free liquidity to purchase a 2-3 other properties with a lot of leverage to maximize ROI.

But the problem is with a sick parent I don't have the time to devote to that...finding those deals, renovating, etc...that's going to take a lot of time. Someday I'll be ready for this, and I can cut my teeth learning to be a landlord in the meantime.

I suppose I was looking for validation that it isn't an idiotic move to keep the house and just rent it until I'm ready to deploy that equity and scale. The ROI isn't great I know, but it's better than basically nothing. And knowing that the money would just sit if I sold it because of my time constraints, it seems like a viable option to bide my time and deploy it when I'm ready.

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Originally posted by @Jacob Sampson:

Originally posted by @Christian D.:

Originally posted by @Jacob Sampson:

Thanks for the input!

However, at the current mortgage terms, the house will be paid off after 8-9 years (or before), and then (using a quick 50% rule) I should see $750/m in cash flow? Shouldn't that be considered?

Absolutely, you should take into account all data points. It is a critical to good decision making. I think you are in the enviable position of having many reasonable positive options.

Additionally, even at $750 in cash flow 100k is 11 years of that cash flow all up front. Which still makes it a sell to me.

Yes you could get the cash out via HELOC, another reasonable idea. But at that point your property is probably in negative cash flow territory.

Just random thoughts.

Appreciate the thoughts man!

See my last post above in regards to the move and taking in my ailing mother...

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Originally posted by @Jaysen Medhurst:

@Christian D., if you hold until it's paid off and cash flow $750/month you'll have a property worth nearly $220k (assuming 2.5% appreciation) with a 4% ROE. Still not great.

If you cash out refi, it's very unlikely you'll cash flow with your new ~$670 monthly P&I payment (30-year). Go with another 15-year mortgage and you'll definitely be in the red. Plus you will have to leave 20% equity in the property, leaving nearly $40k off the table.

What's your real hesitation to selling?

I guess my hesitation is a few things:

I feel like the house is a great candidate for a rental (math aside for right now) based on location, high demand and low supply of rental homes in the area, etc. It's "ready-made" in my mind, as it's already renovated and basically ready to go.
Bringing the math back into the picture, I think it would benefit me to hold a rental property NOW, even if it hovers around zero cash flow. More details here...the reason we need to move is actually that we'll be taking in my ailing mother (devastatingly, she was diagnosed with ALS recently). She'll be paying us rent in the new house to take her in and help with her care, so I will have rental income to declare, and keeping the current home that should net a loss on paper for the next several years w/ depreciation and stuff, will allow me to offset the rental income I'll be getting on the new house. Of course if the rent stays below the gift tax threshold, we could also maybe go that route and it could fly under the radar. I need to talk to a CPA on all of this for sure.
I was thinking leveraging only *part* of the equity could be beneficial too...for down the road when I'm ready to scale. This house could be a tap for me. For example, pulling $100k of equity out would still allow for good cash flow, and could give me funds to buy another property, or 2-3 depending on how the financing is structured, while still keeping cash flow in the green.
As a worst case if I decide I never want to scale...a paid off rental provides good steady cash flow. This is only a small blip in my investment portfolio...so maybe I'll only ever want the one. Who knows! lol. I know the ROI is smaller, but so is the risk there, right?

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Originally posted by @Jaysen Medhurst:

@Christian D. a few things to think about here.

Be very sure about your rent expectations. Homes with values above ~$150k rarely make good rentals because the rents don't keep up with values. Why? Anyone who can afford $1500/month rent can easily afford a $150-180k home.
What are your taxes and insurance? My math shows you with $450/month BEFORE those bills are paid.
The biggest issue is going to be your Return on Equity (ROE). Even if your house cash flows $250/month, which would be solid, your ROE on $115k of equity is 2.6%. That stinks.

Personally, I'd capture that equity now, while you can avoid the CG tax, and redeploy into a cash-flowing MFR.

Thanks for your input!

My current T&I are $262/m. I expect this would increase slightly with the homestead exemption going away.

I realize this would only be call it $100/m cash flow for a few years, but then when it's paid off (or refi'd) the cash flow could be substantially higher. Is that a bad school of thought?

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Originally posted by @Jacob Sampson:

Thanks for the input!

However, at the current mortgage terms, the house will be paid off after 8-9 years (or before), and then (using a quick 50% rule) I should see $750/m in cash flow? Shouldn't that be considered?

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Hi All,

Quick backstory: I'm currently in the process of learning/preparing to be a buy and hold rental property investor. I've been reading, saving money to invest, etc, and had the goal of obtaining my first investment property in 2021. However, personal circumstances are requiring my family to move from our current home sooner than expected. Now, I'm wondering whether it would be "a good deal" to keep my current home and rent it out, or if it would be smarter to sell it.

Here are some details on our current home / things to consider:

Purchase price: $106k
Current value (approx): $180k
Current mortgage: $65k, 10 years left, 15 yr fixed @ 2.875% ($599/m PI)
Home is updated/remodeled throughout, with good bones, and some robust materials used (hardwood floors, porcelain tile, etc). Need to do a more detailed analysis here but I would expect relatively low cap-ex in the next 10 years.
Home is in a good area (on a quiet street but still walkable to restaurants/bars/parks, schools are average to above average)
Expected rent would be about $1500/m based on quick analysis of current listings
Our new location we're moving to will be about 10-15 mins away
I would like to manage this property myself but budget for property mgmt anyway
If I get into this and HATE being a landlord, or decide owning rentals isn't right for me, I have 2 years to figure that out and at that time could still sell the home and not pay any LTCG tax on the proceeds

Short term goal: Since my personal situation will inhibit my time and ability to pursue scaling a rental property business in the short term (say 5-10 years), the goal of renting this property out will be to pay it off as quickly as possible and let it sit there providing good monthly cash flow, or possibly refi to lower monthly payment and increase cash flow if the payoff timetable isn't short enough.

Long term goal: I would tentatively like to scale into owning maybe 10 or so rental properties at my time of retirement (say 20 years from now) to provide good cash flow in early retirement, and to keep me busy. I rather enjoy owning/running a business.

Can anyone advise on whether making the move to convert our home into a rental makes sense?

Thanks all in advance for the help!

1 Vote

Originally posted by @Natalie Kolodij:

No- it's not a tiered impact like with your ordinary income brackets.

With ordinary income if you make $5 more which push you into that next tax bracket only that $5 is at that higher rate.

If your ordinary income bracket puts you in the 15% cap gain bracket then the entire cap gain is at 15%. There is no portion of tax-ability at the previous 0% amount like there would be with ordinary income. Regardless of if the gain is what pushed up your ordinary bracket which determined the cap gain.

OK...and if it doesn’t? Then the LTCGs ARE taxed at a tiered rate.

Say a retiree collects $20k in IRA RMDs, and some social security. The standard deduction and whatever else exactly offsets the social security in the made up example. So this person has $20k total of ordinary taxable income. They also sell a bunch of stocks and the LTCG total amount is $100k. You're saying they're not taxed 0% on the first $20k of those capital gains? If you are then that's wrong.

Here’s article saying the same thing:

https://www.google.com/amp/s/w...

It's also worth noting that if you're on the cusp of one of the brackets, not all of your capital gains will necessarily be taxable at the same rate. For example, if you're single with $38,000 in taxable income and a $5,000 capital gain, the first $2,000 will be tax-free (0% rate), but the part that brings your taxable income above the $40,000 threshold for the 15% bracket will be taxed at that rate.

In this case, the OP is saying he has no ordinary taxable income. Thus, he will have a portion of his capital gains taxed at 0% (whatever’s below the $40k threshold).

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Originally posted by @Natalie Kolodij:

Originally posted by @Christian D.:

Originally posted by @Natalie Kolodij:

You're also mixing up the ordinary income tax treatment with capital gains.

If your total Taxable income puts you in the 15% cap gain bracket- your entire cap gain is taxed at 15%

Respectfully, this is wrong. There is a good article (linked below) that explains and shows examples of how LTCGs are stacked on top of ordinary income, how the taxes are calculated, and how one can work to avoid marginal tax rate "humps". I don't come from a RE background but this is the same as with managing any investment portfolio in terms of how LTCG taxes are calculated. Your LTCG tax exposure increases as ordinary income increases.

Here's the link: https://www.kitces.com/blog/lo...

EDIT: I'm still unclear as to how the recapture fits into this...need to learn more there!

Respectfully- that's not what this article is stating.

It's literally backing what I said earlier that your gains go into and determine your ordinary income tax bracket, which in turn, determines your taxable.

So generating capital gains can BOTH increase your ordinary bracket which then in turns increases your capital gains bracket.

"The significance of this phenomenon is that, similar to ordinary income tax rates, generating “too much” in capital gains can drive the household up into higher capital gains tax rates. And because capital gains income stacks on top of ordinary income, even just increasing ordinary income can effectively crowd out room for preferential long-term capital gains rates. "

The recapture has no impact on the calculation- just what PORTION of the gain is taxed at a different and higher rate. It doesn't generate ordinary income tax, it just utilizes the same rates.

If you have $50k of capital gains- and you're in the 15% cap gain bracket, and $20k of that gain is generated due to your depreciation reducing your basis...$20k is taxed at your ordinary rate instead of 15%

Sure! This makes sense. Totally on the same page.

Where I disagree is you said “if your total taxable income is in the 15% bracket then your entire cap gain is taxed at the 15% bracket.” That’s not true. Only the portion of cap gains that are pushed over the 15% threshold (by ordinary income, higher cap gains to report, whatever) get hit with the 15% tax. Right?

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Originally posted by @Natalie Kolodij:

You're also mixing up the ordinary income tax treatment with capital gains.

If your total Taxable income puts you in the 15% cap gain bracket- your entire cap gain is taxed at 15%

Here's the link: https://www.kitces.com/blog/lo...

EDIT: I'm still unclear as to how the recapture fits into this...need to learn more there!

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All Forum Posts by: Christian D.

Christian D. has started 4 posts and replied 26 times.

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Moving, should I sell or keep and rent out my home?

Post: Calling all CPAs - Depreciation Recaputure Tax Rate

Post: Calling all CPAs - Depreciation Recaputure Tax Rate

Post: Calling all CPAs - Depreciation Recaputure Tax Rate