All Forum Posts by: Scott Trench

Sorry @Scott Trench but this isn't quite how depreciation works:

For one, you can only depreciation the improvements, not the full cost.  With the 80/20 rule of thumb (there are better ways to do this), the improvements would be $288K.  You depreciation residential properties over 27.5 years, not 30.  Those two offset vs. your calculation, so the net result is about the same.

But you are correct that the depreciation you take each year reduces your tax bill.  But if you sell after 27.5 years, your remaining basis will be only $72K.  So, say you sell it for $720K (doubling in value after 30years).  You would have $648K in gain.  Of that, $288K would be subject to the recapture tax at 25% and the remaining $360K would be subject to long term capital gains at 15%.  So while you're saving 28% each year as you hold the property, you're paying a big chunk of that back if you sell.

And that assumes tax law remains unchanged.  That's definitely a bet I won't take.

Not to say that deferring the tax bill is bad.  Its not.   But depreciation is less valuable than many gurus and sellers make it out to be.

And its often slapped on crummy rentals as lipstick.  Say you're just above break even with real expenses.  You subtract depreciation and you get a passive loss.  No problem, says the seller, you can use that to offset other income.  Yeah, right.  If your AGI is under $100K you can do that, up to $25K in passive losses.  Over $150K (that's for a couple, too), you cannot.  In between it phases out.  Now I know that's a lot of money but I would say many people who are investing in rentals are relative high income.  So, this is a consideration.  And one that's often overlooked by people selling crummy rentals.

@Scott Trench thanks for coming up with this topic.

I believe in getting a really good financial education, learning about money.  The danger today is too many people are ignorant as a good financial education is not provided in school.  It is up to us individually to improve our own financial education.

Depending upon how one uses your 401(k) plan it could be really beneficial (what I mean by this is maximizing the $52,0000/year self employed individual 401(k) and buy discounted notes with the money) and lower your taxable income, or it could just be a savings plan that makes the institutional account holders rich that distribute your income among various mutual funds.

For those seriously interested, I highly suggest reading the book '401(k)aos' by Andy Tanner.    I have learned a lot about the deception and ignorance one should realistically expect from 401(k) plans.  401(k) plans are savings plans, not investment plans.  The plan operators lie to the saver by claiming it is your fault you can't retire because YOU didn't put enough money away for retirement.  Well, suppose you maximize your plan or may that may be true - you did not maximize your investment money, however the real question is the 401(k) plan the right vehicle. 

Now it takes no skill or financial education to put money into an 401(k) plan;  you put it away and forget about it.   Let me put it to you this way, in Las Vegas you can chose to gamble on many different slot machines, all of which the casino keeps a percentage of every dollar poured into the machine.  Everyone knows there is more money going in than is coming out.

Just like the slot machines, the 401(k) system is a very simple machine.  It' a machine that consistently transfers money from your account to a financial institution that sponsors the plan in which you are enrolled.  Like the slot machine, this plan is completely legal.

Also, in a 401(k) plan the saver is financially dependent upon on an institution to provide financial security.  401(k) plans have created an entire generation of people who think they are 'investing' without any understanding.  It is good to have financial advisers and other trusted experts in your life, I do have a CFP and they have a place in my overall plan, however, when one hands over decision-making power we are handing over our financial independence.  The individual needs to be the ultimate decision-makers.

How many peoples 401(k) were wiped out during the 2000 dot-com bubble, or cut in half?  Who was told they were diversified?  From this point on, I'm against mutual fund investments, it's not for me as I understand how vulnerable we really are in mutual funds.  All while fund managers pushed to invest in their mutual funds to help manage risk and diversify to prevent big losses, when clearly the opposite was true.  Why does this happen then?  The simple answer is money; there is A LOT of money in the 401(k) mutual fund business.

This is another reason I have chosen real estate & not RE through self-directed 401(k) investments either.  There are so many benefits of owning real estate.  We know it's a tangible valuable asset.  When I buy real estate I buy insurance for to protect it.  Now ask your financial adviser if you can buy insurance to protect your 401(k) investment and they'll think your nuts.   

Man, this is a long post, but worth it;  

Let me give you one last example:  Page 119-120 from "401(k)aos" by Andy Tanner.  "Age 20 investor with 45yrs to go to accumulate retirement, and then another 20 years to go before death mercifully brings an end to his or her own life.   So this is 65yrs of investing putting $1000 at the begining of that time earning 8%.  That $1000 will grow to $140,000 in a 65yr period.   Now, enter the financial system (the mutual fund system)  they will take 2.5% out of that return so you will ha gross return of 8%, but a net return of 5.5%, and over the same time period your $1000 will grow to $30,000.   In other words, $110,000 goes to the financial institution system, and $30,000 to you, the 'investor'.  Think about that."

- For Wholesaling obviously credit does not matter.

- Fix and Flip, its a 50/50 .. but it can definitely be done with less than great credit depending on the lender.

- Buy and Hold credit is very important.

Also, as far as I know .. FHA loans are only for owner occupied properties.

The credit card companies can and do cancel credit cards that are inactive or when you experience an adverse event.  That credit line you are counting on may disappear at exactly the time you need it most.  It is NOT an emergency fund.

I disagree with your assessment of bank financing.  It is the most difficult and time consuming to secure.  If you qualify, have time and are willing to jump through the hoops you will probably secure a lower interest rate than you would with a private lender (certainly lower than I loan at).  If you are putting 20% down on your deals you will have access to many types of lenders.  

Most of my borrowers (partners) could easily qualify for bank lending at much lower rates than I charge.  They come to me because they know that if I say I will fund that they can count on it.  I have a couple borrowers with whom I have done more than 6 deals.  I sometimes forget to ask them for comps when they ask for another loan.  I have closed deals with them in 10 minute conversations.  They need fast commitments to secure their deals--they can't get that from the bank.  Yes, they pay a high interest rate but they are usually in and out of their deals quickly and they find great deals--they earn much more than I do.  I sometimes joke that the banks take 30 to 45 days to deny a loan--I can do that in 5 minutes.

@Scott Trench 

401k early withdrawals are 10% and then it is counted as income another 35%.  gee wish i weren't very knowledgeable about this topic.  & you are pretty much getting your arse kick since you are into your emergency fund for an emergency.

@Scott Trench 

"credit on a credit card line of credit. I typically count that as part of my liquid emergency fund personally."

CC companies are a bunch of insert explicative. 

Let's say you buy $10,000 on your CC and your current rate is 10%.  When I was late on a few payments, I have had CC companies bump mine to 30%.  Not going on new purchases but on the $10,000 I bought in the past. 

@Scott Trench with liberal 401k rules for the self employed and those over 50?(55?) - A 401k can really suck up tons of your income.

Owning my own company with my wife as an employee, we could legally put over $80,000 per year into a 401k.  It may even be higher now.  I know we actually pulled of a $77,000 year a while back when we both had busy years.

The active real estate investors here cringe at that amount of money being dumped into index funds and not being available for down payments, etc... where they may likely produce much higher returns.

With that much piling into a 401k, the Roth vs. Traditional gets squirrely as well.