All Forum Posts by: John Carbone

A lot of people get caught up in expanding too quickly and getting in over their heads. Think about it, if you already have 4, how much more does it do for you to add a 5th at this time? I’m all for scaling when it makes sense, but with scaling comes exponential risk especially since you are buying at todays prices and rates. It’s not a smart business decision to just use profits from your other 4 to offset potential loses on a 5th more expensive deal. 

In general people looking to expand need to look at the utility of their portfolio relative to the increase in risk being taken. For example, if you are making 250k with a very low risk (single digit bustout risk) portfolio, does it make sense to increase that 250k to 350k with compressed margins and more exposure to a downturn? Maybe it does, if you have a lot of reserves to back it up, but the utility of the extra 100k which is taxed at a higher marginal tax rate may not be all that worth it in this environment. I'm a big believer in fully optimizing your existing portfolio to be the best it can be in this new STR world then carefully leg into a new property. Expansion isn't always about adding more "doors" as fast as possible especially when rates are this high.

Most investors just see dollar sign potential by expanding and they do not care, or are not capable of calculating how much additional risk a new transaction exposes their portfolio. 

Capital gains are reasonable now, and near the low but you never know when that could change. It has varied between 15% up to almost 40% over the years. You just never know where it is going to go, especially with the state of govt debt. They could decide that capital gains is a good way to help pay that down.

 I agree, but it also wouldn’t surprise me if they end up means testing Roth distributions at some point in the future. Income above “x” Roth distributions are “taxed”, sounds crazy, but if government gets desperate for tax revenue, that scenario wouldn’t seem all that crazy. It would be an easy “sell” to the electorate too. 

Quote from @Michael Baum:

Don’t you have to pay tax to load it in a Roth? Roth IRA seems like a scam to me. 

 It isn't a scam at all. It is a government approved long term retirement vehicle.

If you open an Roth IRA, you fund it with POST TAX money. You pay the normal taxes via your paycheck or whatever. Then the money grows tax free. You don't take a hit when you start to pull from it.

If you have a traditional IRA, you could convert it to a Roth IRA. You just have to pay the income taxes you would have paid in the first place. Then anything grows tax free. Even if you fill it with performing real estate. Every penny is tax free.

Even when you go to sell it. The entire proceeds go to your Roth IRA and it is tax free.

Here is a BP Blog post about it - https://www.biggerpockets.com/...

 But you are front loading your tax bill to pay for the tax now to have it grow tax free. You are missing the part of the equation of instead of paying taxes now, you take the money you would pay in taxes and invest it into something that will pay taxes when you liquidate in the future. As i said, capital gains tax rates are extremely favorable, and with depreciation and 1031’s, you can go a lifetime without ever even having to pay a dime in tax on your asset with no restrictions on RMD’s. There is a cost to doing a Roth, and it’s actually a pretty large cost when you calculate the lost growth potentially from voluntarily paying tax now instead of later. 

Quote from @Don Konipol:

Quote from @John Carbone:

Quote from @Account Closed:

One reason is you don't have to pay capital gains in an IRA. You have to pay ordinary income taxes eventually when you withdraw but it makes a lot of sense until then in some markets.

Aren’t capital gains tax rates more favorable than ordinary income when you decide to sell, plus flexibility to 1031. The whole ira owning a rental where you have virtually 0 control doesn’t sit well with me.

Roth retirement account. No taxes ever paid on any income

Don’t you have to pay tax to load it in a Roth? Roth IRA seems like a scam to me. 

Quote from @Todd Goedeke:

@Nancy Bachety it should be filed on schedule C. (Business income or loss)

 Not if substantial services were not provided 

Quote from @Account Closed:

One reason is you don't have to pay capital gains in an IRA. You have to pay ordinary income taxes eventually when you withdraw but it makes a lot of sense until then in some markets.

Aren’t capital gains tax rates more favorable than ordinary income when you decide to sell, plus flexibility to 1031. The whole ira owning a rental where you have virtually 0 control doesn’t sit well with me.

Quote from @Michael Baum:

So I have been studying the rules on IRA/Solo401k and self management. I still haven't found a definitive answer on this.

Most CPA's say that active management doesn't mean taking bookings etc. What you would call paper work.

The IRS guides are not clear on it at all. What they are clear on is personal use, using family to manage it etc. 

I never understood owning a rental in an ira. Why not just withdrawal from the ira, take the depreciation with the cost segregation against the income you took out and get a mortgage with some leverage on the property, and then you can still manage it yourself. You take a 10 percent early penalty hit but that’s a one time hit. 

Quote from @Zeona McIntyre:

I also suggest speaking with a CPA. My big tax savings with my STRs have come from doing a Cost Segregation study. I suggest looking into that. It gives you 80% bonus depreciation this year and beyond. 

 Isn’t it 80 percent this year, then going 60,40,20,0 each subsequent year later?

Quote from @John Underwood:

Are they Airbnb people per chance?

 Yes indeed 

The way I handle guests who ask for a discount is i wait a few hours to reply, and either increase price or block off their dates so it can’t be booked. then the next day I open the day back up if I blocked it. I don’t want people like this staying at my properties for this exact reason.

Just today I raised my pricing yesterday due to high demand for summer and a guest messaged complaining the price went up and demanded I lower the price to what it was when they saw it last week. My action? I added another $100 to the night for the days they requested.