I found a small, fully remodeled duplex for $35k in a depressed area of South Carolina with good renters in place bringing in $900/mo in rent, but it had to be a cash deal because it was slightly over appraised price and I also could not find any lender willing to lend that small amount. It will bring in $10,800 in annual rent, but after all expenses (property tax, management, water, and insurance) it will net about $8000 annually. Am I going to get screwed on taxes because I don't have anything to write off (loan interest)? Was it wrong to pay cash for this? What should I have done different? I live in California, so am I going to have to pay South Carolina income tax as well as CA? Is there anything else I didn't think of?

Have you read David Greens' book on long-distance REI? How did you analyze the deal? Seems like your ROI number is good to me.

@Craig Dieterich What area in South Carolina? Curious is there any upgrades you can do that would be a tax write off and help appreciate the value of the property?

No upgrades needed. It's totally turnkey and will not need anything for awhile. This property is not likely to appreciate much. That's not why I bought it. I bought it to have passive income.

@Craig Dieterich

Buy it, stop over analyzing.

Hey man, your numbers look good to me. I’m still learning, but with limited financing options I think you did the right thing buying it cash.

@Craig Dieterich

Sounds great! Congrats! I can connect you with people who buy notes if you ever need but great numbers!!! I’m also in SoCal and would take that scenario all day long!!

@Craig Dieterich when we make money we have to pay taxes no way around it.

@Craig Dieterich

You need a great Cpa as you build your empire and be sure to get extra insurance such as an umbrella policy. I hope you didnt buy In Your personal name. Time to look into your options there ; ) LLC, trust, scorp.

20% coc (3x grm) with no large improvements seems cool to me. 

As long as there is no large unknowns/risks (renovation done right, no title issues, not built on ancient burial site) I would call it a win. 

It seems like f area and the 3% rent to purchase price indicate it. 22.8% cap rate, coc, roi(home run numbers) 

You must look at the rent roll to see if the tenants really pay this rent. 

The condition of the house is crucial to find deffered maintenance so you don't have huge repairs and capex(inspector mandatory) 

Are  you paying for pm as well. You need good one to prevent vacancies. 

Deal seems good as long as you can keep the rent that high. You can't avoid paying taxes on the money you will make. You will have depreciation as an additional write off. You'll end up with approximately $6,700 * (1 - Your tax rate) as your after tax annual return.

From first glance, the numbers look killer.

I would not worry about getting screwed on taxes because you still have the 27.5 yrs of deprecation to factor in. (I would go find a good RE accountant).

Don'y over think it. The #s look good and it cash flows, you will figure out the rest as you go.

Congrats!

@Craig Dieterich

Looks like a home run to me. 35k with no improvements needed and your COC is off the charts. I would bury my cash in that kind of sand box any day. Way to go!!!

@Craig Dieterich how much over appraisal value are we talking here?

My cheapest ever property I paid 25k for and it too was a duplex, that rented for 820 a month (total), so very similar to you.

What I learned and what you’ll learn too, is maintenance will kill you. It’ll eat all your rent. You’ll still cash flow some, but the return doesn’t justify the risk, given these are in bad areas. Mine was in a terrible area. I sold a year later for 38k (with no rehab) and had no major maintenance issues while I owned it, so my total return was quite good.

If you own this long term I am fairly confident in saying you’ll make no money, because you’re a long distance owner, and managing these types of properties is best left to locals

@Craig Dieterich - I like @Cindy Bacigalupo 's comment.  Talk to a CPA, figure out your plan, work with an attorney for entity set up (if you need it, when you need it and how you need it) and don't plan for today, plan for tomorrow!

Originally posted by @Blaine Alger :

From first glance, the numbers look killer.

I would not worry about getting screwed on taxes because you still have the 27.5 yrs of deprecation to factor in. (I would go find a good RE accountant).

what is the 27.5 yrs of depreciation to factor in?

Also, for others concerned about the property condition. It was rehabbed (new windows, new roof, new floors, new water heater. The whole thing is only 850 sqft. It's build out of brick and has no HVAC system to worry about. Just wall heater/AC units which are also new) and I had an inspection done. He found 5 minor issues and the seller corrected them. This property should not have any maintenance costs for awhile. Another good thing is one of the tenants is a disabled veteran, so his income is guaranteed. 

Originally posted by @Craig Dieterich :

Originally posted by @Blaine Alger:

From first glance, the numbers look killer.

I would not worry about getting screwed on taxes because you still have the 27.5 yrs of deprecation to factor in. (I would go find a good RE accountant).

what is the 27.5 yrs of depreciation to factor in?

Also, for others concerned about the property condition. It was rehabbed (new windows, new roof, new floors, new water heater. The whole thing is only 850 sqft. It's build out of brick and has no HVAC system to worry about. Just wall heater/AC units which are also new) and I had an inspection done. He found 5 minor issues and the seller corrected them. This property should not have any maintenance costs for awhile. Another good thing is one of the tenants is a disabled veteran, so his income is guaranteed. 

 

Thoughts, in no particular order:

1. Time tends to even out mistakes in real estate. People who get burned are usually people who have to sell, not those who want to sell.

2. Your description sounds like a decent little rental without a lot of costly systems. Central heat & air are expensive both to repair and replace, so if you have units where people are decent and satisfied with wall units that is a win. Frankly the place sounds like a good find based on what it is (brick, small footprint, etc).

3. You won't get much tax help on this. Let's say your basis is $36k - you paid 40k and the property basis is 90% - your annual depreciation is $1300.

4. Paying taxes, after you've exhausted all legal deductions and other advantages, is a sign that you're making money. Plain and simple. 

Originally posted by @Caleb Heimsoth :

@Craig Dieterich how much over appraisal value are we talking here?

My cheapest ever property I paid 25k for and it too was a duplex, that rented for 820 a month (total), so very similar to you.

What I learned and what you’ll learn too, is maintenance will kill you. It’ll eat all your rent. You’ll still cash flow some, but the return doesn’t justify the risk, given these are in bad areas. Mine was in a terrible area. I sold a year later for 38k (with no rehab) and had no major maintenance issues while I owned it, so my total return was quite good.

If you own this long term I am fairly confident in saying you’ll make no money, because you’re a long distance owner, and managing these types of properties is best left to locals

@caleb Heimsoth My concern is with taxes on my profits. You seem to be the only one here who thinks this is a bad investment, and I'm very curious as to why. I paid $35k for it. (It was appraised at $31k). It is fully rehabbed with brand new everything. There should not be any maintenance for a long time. I factored in a local PM at 10% which is only $90/mo.

If I net $7k/year after expenses, then it pays for itself in 5 years and everything after that is passive income for the entire time I own it. I'm not concerned with appreciation of the property. Please explain where you're coming from. What am I missing? Thanks

@Craig Dieterich

Taxes, water, management, and insurance is only $2800/year? And $450/month rent per unit? There’s some cheap areas here in Pa, but I haven’t heard of $450 rent in years. I’d keep it until you pay yourself back from rents, then dump it. Especially not being in the area.

Originally posted by @Matt M. :

@Craig Dieterich

Taxes, water, management, and insurance is only $2800/year? And $450/month rent per unit? There’s some cheap areas here in Pa, but I haven’t heard of $450 rent in years. I’d keep it until you pay yourself back from rents, then dump it. Especially not being in the area.

 @Matt M.  Why would I spend 5 years paying myself back, then dump it without ever benefitting from the passive income it will generate? Also, this property is not in PA. And $450 for a 1/1 side of a duplex is not expensive.

So much conflicting advice here! LOL

@Craig Dieterich you say it was rehabbed, does that include the roof and plumbing and all that? When was it built? For example, your roof goes out, that’ll cost you 5k. That’s around 6 months of rent.

What if your tenant leaves? It’ll cost you 2k or more to rerent it. That’s 2-3 months rent. Anything major eats up months of rent because your rent is so low.

Originally posted by @Caleb Heimsoth :

@Craig Dieterich you say it was rehabbed, does that include the roof and plumbing and all that? When was it built? For example, your roof goes out, that’ll cost you 5k. That’s around 6 months of rent.

What if your tenant leaves? It’ll cost you 2k or more to rerent it. That’s 2-3 months rent. Anything major eats up months of rent because your rent is so low.

@caleb Heimsoth   The condition was explained. Yes, brand new everything including a roof, water heater, etc. There will not be any maintenance expenses for quite some time. Also, I paid cash for this, so even if it's vacant for a month, I'm not losing money by needing to pay a mortgage without tenants in place. Anyway, this thread got a bit off topic. My point of creating this thread was concerns about taxes with no write offs due to being a cash purchase and trying to find ways to save on taxes or other creative ways to find write offs, etc. What are the pros and cons of buying with cash vs loan? I think I need to contact a CPA that specializes in Investment properties as advised by some of the other members.

@Craig Dieterich “There will not be any major expenses for sometime.”= famous last words. The numbers look good on paper but what Caleb is saying, based on his personal experience in this exact market segment, is that cheap low rent properties often end up being paper tigers because one or two unexpected issues can easily devour several years worth of cash flow. I hope it works out for you, just make sure to budget for some maintenance and capex plus vacancy/tenant issues because you will have some for sure and the rent isn’t a lot of money when it comes to maintaining a property over time, especially if you’re out of state. I personally wouldn’t finance this even if you can find a lender, as the mortgage payment will just make it even harder to achieve positive cash flow. The saying “cheap is expensive” pertains to properties like this. There’s no way quality work was done on all the items you mentioned with a purchase price of $35k unless the seller took a major bath. Price to rent ratio is great, but there’s a high probability this falls into the “too good to be true” category. Hope Caleb and I are wrong, but we both have experience with low end properties and they rarely turn out well over time unless the owner is a local who is hands on. Being out of state you’ll probably lose any potential profit on maintenance/tenant/capex issues. Good luck!

@Craig Dieterich Numbers look great on paper. But with such a low price point for a fully remodeled duplex, I can't image this being in a decent area. Cheap properties are cheap for a reason. But im not too familiar with the market, so I could easily be missing something. But if this is in a depressed neighborhood like you stated, just make sure you're comfortable with the downsides of investing in places like that. Good luck!