All Forum Posts by: George Pauley

I've been at this for 12 years, and have used a Well Fargo (my personal bank) checking account for the entire time with no problems. 

Oh God, my first investment?  I'm embarrassed to talk about it.

Brand new spec home.  4k sq ft.  $450k.  Oh and I closed on it early January 2008.  Needed $2700/mo to break even.  I was lucky to get $1800.  Had to ride that, almost instantly, underwater property for 6 years before I was able to dump it for $420k.  I was SO happy to see it go.

That said, I learned a lot.  Today I have 15 properties, all cash-flowing around $200/mo each.  And I wouldn't be where I am if I hadn't bought that first turd of a property.  I like to tell new investors that the are going to make mistakes ($$$), but they can't let that keep them from taking the plunge and investing in that first property.  The mistakes, and the lessons learned, are part of the process.

Key lessons from first property...
1.  Medium size 3/2's rent much better than giant 4k sf mini-mansions
2.  The IRS does not allow non-real estate professionals to deduct rental losses from their W2 income.
3.  Property managers, as a class, are usually horrible, but a good property manager is essential.  (Keep looking!)
4.  Rent, lower than what you want/need, is better than no rent.
5.  Underwater properties aren't really a loss until you sell the property.
6.  When you have a bad property, you can buy good properties to help make up the cash flow deficit.

Phoenix is definitely an appreciating market.  And it's HUGE.  Over 4M people.  It takes more than an hour to drive across it, on the freeway, with no traffic, speeding.  As such there are poor areas, rich areas, growing areas, declining areas.  I've lived here for 20+ years and wouldn't even pretend to give you market analysis by area.

One thing that Phoenix does have going for it is a strong and active Real Estate Investor Association. Check out AZREI, and it's sub-chapter Phoenix REIA, to hook up with lots of local investors, agents, contractors, etc. and good market analysis.

I use a property manager.  The primary reason why is because I need expertise.  I don't know how to properly screen tenants.  I don't know how to properly advertise and find prospects.  I don't know how to analyze the market to select a rent value.  I don't know how to properly (legally) handle late payments, evictions etc.  I don't know who the best contractors are in an area.  etc.

Yes I could learn those things.  But it will take me a long time to develop the level of expertise that the property manager with years of experience, who does this for a living day in and day out, has.  I have properties today.  And I need that expertise today.

I do agree that the majority of PMs are unbelievably bad at the job.  I consider finding a good one to be the hardest part of being a real estate investor.  In fact, I won't invest in an area until I have found such a PM who can service that area for me.  Once I have that PM, I usually run my prospective properties past them for approval before buying.

I'm not saying that having a PM is a requirement.  You do what's right for you.  But there are plenty of good reasons for using a PM, other than laziness and ineptitude.

I would add that I think these forums are self-policing.  If you have a bad experience with someone, post about it.  Word gets around.  If you are thinking about doing business with somebody put a post up asking everyone what their experience has been with that somebody.

I've noticed that, whatever the situation/need, it seems like there are 2-3-4 people who get recommended by everyone for that situation.  Those 2-3-4 people are usually top-notch players.

Originally posted by @Kaiser Saeed:

@Basit Siddiqi, Thank You.

For depreciation purposes, going with tax value of the property is appropriate? 

No, the depreciation value is the basis value of the property, which is accountant speak for how much did you pay for it.  :)

Also depreciation, coupled with 1031 exchange, is in my opinon, the single largest benefit to real estate investing.  First you get the depreciation benefit, which at 3% of the purchase value is not insignificant.  At a minimum it will likely keep you from owing taxes.  The drawback is that when you sell the property the IRS taxes you on all those years of depreciation in one lump sum (oversimplification, but basically correct).  But then enters the 1031 exchange.  When you sell the property, use a 1031 exchange and the depreciation on the property being sold is rolled over into the new property.  No tax.  Of course, when you sell the new property, the tax bill is even bigger.  But you can 1031 exchange again, and again.

Now for the coup-de-grace.  When you die, your heirs inherit the property, and the IRS resets the basis value of the property(s) to current market value (e.g. zillow).  In other words all that depreciation history just disappears in a puff of smoke!  Ever heard the phrase the rich get richer?  ;)

I'm in 4 different markets and have explored many others.  My experience is that neighborhood grading is a very imprecise activity.  I've seen it based on % of dwellers who rent vs own, median income levels versus surrounding area, crime levels, and my personal favorite... (we'd love to live there, my family is safe there, my family can go live with her mom while I live there, and I'd feel safer under the freeway overpass)

Anyway, when dealing out of state, I first focus on finding a competent property manager that I trust.  Then I ask them what neighborhoods I should be investing in.

There's a lot of different types of investing.  What are you looking for, appreciation, cash-flow, flipping, other?

You have "acquired" a home.  May I ask how you acquired it?  If you inherited it, then the basis value is reset to the value on the day you inherited it.  In other words there won't be profit to tax, as far as the IRS is concerned.

If that $400-500k is actual profit for you, then I don't see how you don't 1031 it into other property.  Like Bill Brandt says you are leaving ~$150k in taxes on the table!  

Why do you not see yourself buying replacement properties?  What is the obstacle?

You have "acquired" a home.  May I ask how you acquired it?  If you inherited it, then the basis value is reset to the value on the day you inherited it.  In other words there won't be profit to tax, as far as the IRS is concerned.

If that $400-500k is actual profit for you, then I don't see how you don't 1031 it into other property.  Like Bill Brandt says you are leaving ~$150k in taxes on the table!  

Why do you not see yourself buying replacement properties?  What is the obstacle?