All Forum Posts by: Account Closed

Originally posted by Tim Wieneke:

Shhhhhhh! Mike you're not supposed to tell them that you can "reside" for next to nothing in flyover country and use so much more of your income to travel to any paradise you want and live like a king without paying king's taxes.....

Well galdum we don't have no steak round here, just Bubba burgers. :lol:

Really, LOL! I love fly-over country some of my best deals come from there.

Originally posted by Tim Wieneke:

Taz funded his investments with the operation and sale of another company.

Absolutely not correct and if I gave that impression you have my sincerest apology. I have been investing in real estate since the summer of 1984 and it has been self funding and maintaining since day one.
The proceeds of that company went into a brokerage account and is still there today. It is invested in stocks, ETFs and bonds. It is in no way connected to the completely separate real estate investing business I built in parallel.
I'm sure you believe this but I can almost guarantee I could sit down with you and in five minutes show it is not the case.
I'm glad to see you have a plan.
Actually, my business model there was to ramp up as quickly as possible and that meant having technical consulting talent to bill and customers to bill them to. I did some of the higher dollar consulting with some clients but most of it was by leveraging the labor of others.


Yeah, not so much love there. I am a very pragmatic business person. I would've built some other kind of business if the metrics had pointed in that direction. I found a niche and filled it. Simple as that.

Now, I will share a secret with you. There is something I absolutely LOVE doing. That is creating value where none existed before. That is what I did with the consulting business, the software publisher I still own and oversee (notice I did not say "run") and my investments of which real estate is a part. Creating value for my shareholders is the thing I really enjoy. I will do whatever I need to do to accomplish that and to be honest, if it really did make more financial sense for me to plunge toilets and swing a hammer, I'd do it. But, I can't maximize shareholder value doing that.

This is so incredibly true. The happiest people are earth are those who can find a way to make a living doing what they love. It sounds like Tim and perhaps Mike have done that. I know I have.

Are you seriously comparing what is happening now to the Great Depression?

I have a few questions for you.

How many banks have failed in this current down turn?

What is the percentage of homeowners in default?

How has that percentage of defaulting homeowners changed over the last five years, ten years and twenty five years?

How many banks failed in the down cycle of the early 1990's?

How many banks failed in 1929/1930?

We are not entering another Great Depression. Granted this is one of the more unusual downturns because the cycles of interest rate, stock market, commodities, core inflation, consumer prices and employment have not followed the "normal" course. Normal meaning what has been observed before. But to claim this is the largest financial collapses in centuries ignores the historical facts.

I agree the Fed will almost assuredly cut the rates at their next meeting. But, as we have seen over the last couple of months, there is much more than just US interest rates affecting the US dollar in the world market.

The most interesting thing about the current financial situation in this country is the amount of debt consumers continue to hold. Because of that one difference between now and the late 1920's if the financial problems ever do get as bad as they were then we really will see a world-wide financial crisis unlike anything you can possibly imagine.

If that happens, the investors who have positioned themselves will be in a great spot to pick up bargains at sub-pennies on the dollar.

I wouldn't hold my breath though, it is not likely to happen.

People have been predicting the financial collapse of this country for as long as I can remember. Look up Howard Ruff for one of the more extreme doom and gloom loonies.

Originally posted by Michael Rossi:

I guess I'll be finding out in the next couple of weeks. My 2007 taxes should be done in the next couple of weeks (they're on extension).

Wow, you mean with those "dozens" of properties you haven't been nicked by the AMT?

Very, very interesting.

Originally posted by Jonathan Ockletree:

A bank wont lend on my free and clear property cause it has been gutted out and is inhabitable.

If they write construction loans they will.

Ask your bank for a construction loan to purchase and rehab. Many will then do an automatic rollover to final financing without a second closing once the certificate of occupancy is (re)issued.

The interest rate on the construction loan will be high so you will want the rehab completed and the CO issued as soon as possible.

Yes, of course the marginal tax rate only applies to the last dollar earned.

But, I would not characterize my numbers as "worst" case. The worst case from the standpoint of the owner/landlord is at the 35% marginal rate which pushes it even further in favor of the investor and takes the delta down to only $36.75 each month. This means the investor only needs one and one third as many units for the same cash flow.

And at those levels it is a huge cash flow that no owner/landlord doing everything for themselves could ever hope to achieve. We are talking about adjusted gross income in excess of $200K for single filers and $400K for married ones.

Now, Michael, if you are making that kind of money and doing it all yourself in only 16 hours each week, I will be delighted to buy you a steak dinner anywhere you want; with adequate proof, of course.

According to the IRS, most landlords fall into the 25% bracket with the 15% marginal bracket the next most populous one. That is why I chose the 25% bracket for my example.

If you are living off the income stream and want an adequate standard of living it is not likely you are in the ZERO or even the 10% income tax bracket. Even if your write-offs get you to that point, the AMT kicks in and takes your tax obligation back up. That is what it is designed to do and it hits passive income and expenses much harder than it does earned income and non-passive deductions. Depreciation gets wiped out first and the fastest followed by interest on mortgages all based on the AGI.

Originally posted by Michael Rossi:

So, without anything else, we have earned $122.50 per unit per month by doing the management and maintenance (including rehabbing) ourselves. With a typical cash flow of $100 per unit per month, you can see that you more than double the spendable cash per month by doing these tasks.

Not unless your marginal tax rate is ZERO.

Spendible cash = AFTER TAX cash.

So, using your numbers and a marginal Federal tax rate of 25% your spendible cash if you hire out the maintenance is $75 + 30.65 = 105.65. If you do it yourself, your spendible cash is $75 + 91.87 = $166.87.

That does not take the state rates into account, but as you can see you are only increasing your spendible cash by $61.22 a month by doing the work yourself.

If your state income tax is 6%, like mine, you are only saving $46.55 a month. So, the question becomes, is that $47 a month worth your time?

If we extrapolate out to a hypothetical investor with 10 properties and a landlord/owner who does their own work with 5 properties both in the 25% Federal bracket and a 6% state bracket...

The investor is netting $106.98 x 10 = $1,069.80 a month in spendable cash by managing the manager, as you put it.

The owner/landlord is netting $153.53 x 5 = $767.65 a month in spendable cash by doing it all themselves.

Over the course of one year the investor is netting $3625.80 MORE than the owner and that does not even take into account the investor is getting double the appreciation, depreciation and other write-offs.

If we are talking 100 units verses 50 units the numbers skew even more in the favor of the investor because the Federal marginal rate would be 28% instead of 25%.

In fact, if my goal was to ONLY make the exact same net spendable cash each month as an owner/landlord, I only need one and a half times the number of properties.

In other words, 75 units will net me the same spendable cash as an owner landlord with 50 units but I still get 50% more appreciation and write-offs.

No matter how you slice it if your goal is to maximize your investments you are always better off leveraging the labor of others.

Originally posted by Michael Rossi:

ntokb3,

I think your analysis is a good one. However, I would throw in one more thing. Managing and maintaining the rentals yourself also allows you to have the same spendable income with less than half the rentals needed with paid management and paid maintenance. In addition, even with paid management, you still need to manage the manager. Been there, done that.

Mike

Mike

Mike, that just reinforces his comment. As an Owner doing your own maintenance you end up with a similar cash flow with fewer properties. I disagree that it is half, but we will use your number for discussion sake.

However, by having only half as many properties as an Investor whose assets generate roughly the same cash flow stream, you are giving up half of the appreciation and other upside benefits.

He really has nailed it. I am an investor and have no problem sharing the cash flow stream because I don't live off of it.

Let's take an example, okay? To make this real simple let's assume each month your tenants pay their rent on time they are paying off $1 of the underlying loan amounts. Just a buck. Let's also assume the value of your properties will on average increase by $1 a month. Yes, I know, they pay off more than a $1 each month and some years there is no appreciation. But the historical averages are more than $1 a month anyway and this is for simple illustration.

Now, let's assume you have 50 properties generating a cash flow each month. You are doing all of the maintenance, showing the units, any rehabs, taking care of late rents, evictions, etc.

Now, using your half number above, I have 100 properties in my portfolio generating roughly the same net cash flow. I don't do the maintenance, I don't show the units or do rehabs, late rents and evictions are handled by the manager. Yes, I do have to manage the manager, but managing people is easy once you know how.

Each month the value of your portfolio increases by $50 due to principal payments paid by the tenants and $50 due to appreciation. For a total of $100 a month.

My portfolio increases by $100 on the loan pay down and $100 on appreciation for a total for $200 a month.

We are getting the same cash flow but I am building wealth faster. Granted it is not liquid, but it is an asset and down the road if I marked my equity asset value down 20% for a quick sale I still make more on my portfolio.

This is not a swipe against the way you do it. It is just further talking about the differences. I am looking for long term growth, you are looking for income.

In reality, I am rolling my income from my properties into new properties for a rolling snow ball advantage as time goes by.

ntokb3, you are exactly correct. I hope you don't mind if I borrow it and cite it in an article. I'd like to give you recognition for it if you will send me how you would like the attribution to read to me via PM or I can just use the nick.

Originally posted by Mike Fajen:

Hello, I'm at a financial crossroads where I either need to leave my "permanent" corporate Information Technology job and return to higher paying but less predictable IT contract work - OR - find a supplemental source of income such as birddogging or wholesaling. Am I dreaming to think I can take this on at around 8-10 hrs/week on top of my current (50 hrs/week) workload?

Thanks so much for any input!

Originally posted by Mike Fajen:

For clarity sake... in a few years of doing REI on the side, I would then plan to make a decision to either go full-time in REI (my preference at this point) or continue at my place of work and possibly lighten up on the wholesaling/birddogging, hoping that 1-2 promotions (and better budgeting!) would bridge my current gap.

Oh, and I've got a wife and 3 teenagers. Any advice on the feasibility of weaving all this together?

From what little you have provided here I would encourage you to go back to the IT contract work AND learn what you need to know about investing and create a plan. Then, when things calm down a bit you start to put your plan in place.

If you are actually working 50 hours a week now, by the time you add on lunches, commutes, getting ready to go to work etc. You are expending more than that.

In addition to your "work time" which is probably at least 60 hours a week total because of the above, you have a family. Unless you are willing to completely ignore them, you do not have 108 hours left in the week to yada yada yada...

Anyway, were I in your shoes, I'd do the contracting work, get things stabilized and then move on to other things.

One important point, when doing the contract work, either work through a company offing a 401K or some kind of tax deferred retirement plan or set up your own. A big mistake many contractors make is not saving for retirement because they think they can continue to earn the big contracting bucks forever.

Of course, another option would be to keep your current job and do some contracting during those additional 8-10 hours a week. The return would be faster simply because you already know how to do it. There should be less ramp up before it became profitable.