All Forum Posts by: Mackal Smith

Hey there Jesse,

Great to see you reaching out with your first post. Like @Peter MacKercher responded above, I also invest in South City St Louis (primarily around the Dutchtown area) and again like Peter, I tend to look more at small multi-families. In fact I don't have a single family in my portfolio. St Louis is a great market for small multi-family units and personally i like the fact that even if I have a vacancy in one unit it is unlikely that all units will be vacant at the same time. In addition, so far I have been able to acquire these properties such that a single unit would virtually cover the entire debt service so it gives me a lot of "cushion". Although I have some in my portfolio, I prefer to try and stay away from single bedroom shotgun style 4 families. My personal preference are 2 bedrooms with better layouts (although those are harder to find in 4 family... I have more luck getting something like that in a duplex). 

All said though, I like the STL area. Compared to property prices I have seen in other parts of the country, we are really lucky here. Rents are great, prices are good, deals are plenty. Although the market is heating up, I still find deals on the MLS which is more than can be said in lost of other areas around the country.

Best of luck to you. Keep reaching out. People here genuinely want to help...

I'm following your thread here @Matt Mitchell. I'm not real happy with the CPA I used this year...

@Daniel Dietz

To answer your questions:

 1) how old you are now : 55

2) how long before you envision needing these funds for income : That's kind of hard to say... My current plan is to retire when I'm 58. I have about 700K in 401K funds that I will be able to access at 59 1/2. I have about 1M in mutual funds, company stocks, and individual stocks outside of that. My currrent RE income is about $28K/yr. I figure i can live comfortably at about $90K per year when I retire but I'm not planning on taking social security until 67 (maybe 70). If my RE plans hold out, by the time I'm 58 I should have close to $60K in income from rentals so the rest of the $90K/year I'm looking for (30K) would come from the mutual funds, company stocks, and individual stocks until I'm 59 1/2 and can access the 401K stuff.... I know.. it's confusing and I wish my financial advisor knew more about real estate rather than just stocks and bonds...

3) what is your approximate tax bracket on these stocks you are cashing in (assuming long term gains) which can vary by state too : The company stocks I have been using are long term gains (so 15%), but I'm in the 35% tax bracket now but teetering very close to the 39.6% bracket

4) what type of yearly return do you expect over say the next 10 years if you leave your funds in those stocks ?: That's hard to say too. they have been averaging somewhere around 6 to 10% so for the sake of argument all things staying the same and being conservative, let's say 6%

One last thing too:

I was able to show about a 20K loss this year on my rentals but since I couldn't use it to offset W2 income, it will just carry through until I can use it (hopefully when I'm 58). I assume I will probably continue to show some type of loss on the rental income for the next few years because I'm trying to get the rentals into top shape. They are all positively cash flowing now. Anyway, I should be starting off with some nice losses I can use for a few years once my W2 income goes away.

BTW, this is the first time I have used a CPA. I have always done my taxes myself but as I started acquiring properties, it made sense to me that I needed someone that could help advise me on taxes as well as work with my attorney to help determine the best kind of legal entity. I selected this CPA because she had other clients who were real estate investors. However, as she was doing my taxes and understanding more about my situation, she told me I was in her top 5% of clients in terms of complexity. She charged me about $1700 to do taxes and $300 for a couple of tax consultation type questions I had for her that she had to research. I don't know... seems kind of expensive to me for not getting better advice... but like I said, this was my first time using a CPA...

Thanks,

@Brandon Hall, @Chris Soignier. Great suggestions. I think margin allows me to borrow up to 50% of the value of the stock. Couple of questions about this.

1.) Would it be better (or even possible) to get a line of credit from a bank using the stock as collateral? (or should I just be thinking about margin?)

2.) My stocks are all at Fidelity which in some ways are great (because my financial advisor there doesn't cost me a lot of money) but in other ways is not so great (because they don't understand investing in anything that is not a stock... especially real estate). I'm sure they will have an idea about put options to protect from the downside. Is there a percentage I should think about on the put side? Should it be 10% (or more? or less?)

Ahh geez... that's so obvious! duh, here I am thinking wow, this sucks and not thinking about what to do about it. Hey, that's why I love BP. Great suggestions (in fact there are plenty of folks I work with I can find to do just that). Thanks!

I don't know if I'm asking for advice or just seeing if anyone is in a similar situation. The good news is this is a first world problem. The bad news is I live this first world life so even though it's not like I'm going hungry or deprived of necessities it still hurts.

The big issue is this: My W2 income is so high that no matter what my properties do, the tax savings are really insignificant. For many years, I invested and was granted stock options, stock grants, and Employee Stock purchase stock from my company. I did the prudent thing and from time to time I sold off the stock when it was high and diversified into mutual funds etc. At the same time, I maxxed out my 401K. After years of doing this and being well on the road to retire early I started investing in Real Estate also. I have been a real estate investor for a little over a year and have acquired 13 units so far. Great!

As my net worth has grown, so has my income from wages/bonus/stock grants. When I started investing in real estate, I basically took about 150K worth of any stock  I had held long enough for it to be a long term gain, moved it to a separate account and as I found a property I either wanted to buy cash or finance, I would sell enough stock to cover the down payment or the entire amount.

After already paying the government more than 50K, my CPA told me that because of dividends, and gains from stock last year I am in the highest tax bracket and I need to write an additional check to the IRS for about 22K. My CPA basically told me to quit selling the stock to fund downpayments on properties. So what a quandary! I actually hit the real estate goal I set for myself for FY16 in March but I still have plenty of stock to go ahead and buy another 10 to 15 units. I find deals all the time in my RE market here that would result in great returns on the investment but if I sell the stock to have the cash to get the deals, I'm really hurting myself from an overall tax perspective.

I do have a single property that I paid cash for, so I can always get a heloc for the equity in that one and use it to continue to invest and I suppose I can always look at trying to get owners to take a second on new properties. The real kicker here is that in my situation bank financing is easy. I have banks stumbling over themselves to finance for me but I'm only hurting myself if I sell the stock to get the down payments. I guess this sort of puts me in the same boat as most other investors it's just doubly frustrating because I have plenty of money tied up in stocks to buy anything that comes along.

I don't know. Any suggestions on whether I should just take the tax hit and buy these good deals when they show up? Of course this situation will correct itself when I do actually retire because I won't have a 250K paycheck coming in every year, but then the banks won't be standing in line to loan to me at that point either. I don't want to stop investing because of taxes. What do you guys think?

Great idea Chance. Here's on additional piece of information you may not have thought about. If you get the next house at a decent price, think about a live-in flip (meaning buy it needing work and fix it up while you are there.) The advantage doing this would be that as long as you live there for 2 years, you can sell it at a profit and not have to pay capital gains taxes. This is huge. Consider if you would pick something up for 70K say and you put 30K into it over the next 2 years. If 2 years later you sell it for 150K, you get to walk away with the entire 150K and owe no taxes at all.

- mac

@Karen O.

Yes, I am using property management. I'm just making sure that I include that cost in my consideration when evaluating a property. Take for example that first property (3 family) I bought. Here's how the expenses and income breaks down:

General Info:

Purchase Price:  $122K

Down Payment: $30,500

Monthly Income: $1975

Mortgage Payment: $561

Yearly breakdown:

Yearly income: $23,700

Yearly Insurance: $540

Yearly Property Tax: $470

Yearly Water/Sewer: $1730

Yearly Capex hold back (10%): $2370

Yearly Mgmt Fee (10%): $2370

Vacancy Rate (1 mo): $1975

Yearly Debt Svc: $6732

Yearly Return: $7513.00

Monthly Cash Flow: $626

This gives me a cash on cash return of about 25% - you can't get that at a bank...

@Gino Barbaro

Thanks Gino. No, it won't be a full time gig for me. I currently work for the world's largest software company. I have been here for 20 years in April. To be honest the original goal with investing in Real estate was to diversify out of so many stocks and mutual funds. I had planned on using the income from real estate to fund a couple of trips to Europe per year when I retire. I'm finding however that I get really energized when I come across a good deal and I really enjoy negotiating an even better deal out of it. To be honest with you, I will probably continue to buy a few properties a year after I retire and rehab and hold them. I don't want to get so many properties that it becomes a job. Today I hire a property manager and will probably continue that when I retire but I'm pretty handy so I'll probably act as GC on some wholesale multi-families. Hopefully I can cull out any problem children and still keep the overall number manageable after retirement...

I'm buying in a relatively small section of St Louis. Specifically South City around the Dutchtown area. Luckily I have a great real estate agent who is an investor also and REALLY knows that area. She is a priceless gem!