First purchase...Did I screw up?

77 Replies

If the numbers you run make sense, then it's a numbers game. I agree with some comments in here that one thing is what you see on the paper and one thing is what you actually can earn. Can you reveal the exact address or area?

Good luck

With any deal you won't know how good the tenants are until they are your tenants, but from a sheer numbers standpoint with the info you provided things would have to go really wrong for this deal to not be worth it given the cash on cash return you are projecting. 

If your NOI is truly $8k - congratulations, you just made a +20% cap rate investment! That is stellar. Naturally, you won't reap the full tax benefits associated with interest but you do gain that cash flow now and you still have depreciation as a slight offset. I would not sweat this too much, you bought a cash cow!

Remember, if you are getting taxed, you are making money!

Lets review the rules in order to see if it was a good deal:

50% rule - 50% of gross income should go towards expenses minus mortgage payment

  • Expenses include:
    • Property Insurance
    • Property Taxes
    • Maintenance/Repairs
    • Utilities
    • Property Management

                You have no mortgage pmt since you paid cash so that is a plus

                $10,800 annual income * 50% = $5,400

Based off 50% rule its a deal.

lets try the 10% rule - Annual rent / purchase costs 

10,800/35000 = 30.85%

Based on 10% rule its a steal

Now lets try the 1% rule

rent/purchase price*100

900/35000*100 = 2.57%

You found a deal.

Remember that much of the expenses other than the tax interest can be tax deducted.

Great Find 😁

Thanks for all the input/advice. I feel like it's a good deal that makes sense, but obviously several others on here feel differently. I agree there is always risk with tenants, the quality of the rehab work, the area, taxes in that area, etc. I think I covered my bases by calling the assessors office to get accurate property tax info, had a home inspector go through both units thoroughly since I could not be there, and also found a local PM that said these units should be easy to re rent if the current tenants left. Also, the current tenants have been there for 3 months so far and the inspector said they had been keeping the place very neat and clean. One tenant is a disabled veteran which I like because it means guaranteed money for rent. Again, my real original question with starting this post was about whether its a good idea to pay cash for a deal from a taxation perspective. But as many here pointed out, taxes are inevitable, and if I'm paying them then it means I'm making money.

@Craig Dieterich what people lose sight of is loan interest is something you pay. That money is out of pocket anyway. You need only ask yourself about opportunity costs. Would you have made more with this money elsewhere. Maybe you could have leveraged for a more expensive property but it is a choice and this it seems meets your goals. Unless it will lose value that you need to consider.

Yes paying more taxes means you are making more money.  I would rather make an extra $8k and pay taxes on it than make $0 extra to avoid paying taxes.  You would still be making money just not as much as the pre-tax amount but certainly more than $0.  Consult with tax professionals to minimize how much you pay.

Keep in mind what others on here are saying about the risks and maintenance but don't sweat the taxes.

This is a good deal if you have little/no deferred maintenance. $900 a month in rent and $35,000 purchase price (even if all paid for in cash). You could try to find a small local community bank within South Carolina that may lend on it. You might even be able to get all your cash back out of the deal if it appraises higher on an income approach. $8,000 net on $35,000 invested is 23% Cap. I personally would invest in this all day long.

You're going to depreciate based on your purchase price (less the value of the land), not based on the appraisal.

You will have a tax shield from that depreciation. You will pay more in income taxes because you will have more income due to the lack of losses to mortgage interest. You should still have more money after taxes than if you had debt on the property.

Don't forget to track your mileage to and from the property and any and all operating expenses.

If you're going to be buying real estate cash and are concerned about your income taxes, you might want to talk to a financial advisor about setting up a self directed IRA or 401k and buying the real estate within that account.

Numbers look pretty decent. To many others point about maintenance cost and such - all very true. But all in all consider it a win (even if you break even and just learn). Keep it rolling. Congrats!

That sounds like a great deal if your numbers are correct. Net $8000/year so you'll pay this off in 4.5 years, thats a wicked return even paying full cash.

Ok to answer your question about tax efficiency, you always want to leverage bank's money to buy where possible when interest rates are low as you can use the cash elsewhere for better returns (ie. stocks or other REI deals)

Yes you won't be able to write off any mortgage interest expenses but other than that, you can still write-off depreciation, expenses etc. so its not a huge impact. The bigger concern you should have is that instead of only putting in 7K into this deal you had to put in 35K, but that being said the returns if your numbers are correct and you've accounted for expenses and maintenance appropriately are HUGE

Originally posted by @Craig Dieterich :

Thanks for all the input/advice. I feel like it's a good deal that makes sense, but obviously several others on here feel differently. I agree there is always risk with tenants, the quality of the rehab work, the area, taxes in that area, etc. I think I covered my bases by calling the assessors office to get accurate property tax info, had a home inspector go through both units thoroughly since I could not be there, and also found a local PM that said these units should be easy to re rent if the current tenants left. Also, the current tenants have been there for 3 months so far and the inspector said they had been keeping the place very neat and clean. One tenant is a disabled veteran which I like because it means guaranteed money for rent. Again, my real original question with starting this post was about whether its a good idea to pay cash for a deal from a taxation perspective. But as many here pointed out, taxes are inevitable, and if I'm paying them then it means I'm making money.

 

@Craig Dieterich seems like a good deal to me. You can still write off depreciation and small repairs. I’m sure I’m not the only one who has said this but if you don’t want it- I will buy it! Lol.

I invest long distance and have lower income tenants. For the four properties I own, the rent is about 2x all the fixed expenses including utilities, management, and PITI. I turned a profit last year and as others have said, it just means I made money. I met the neighbor of one of my buildings and she runs my properties and it works out great for both of us. If you can find someone local to help out and give you an opinion, it would be really helpful.

I would take that deal you have all day. With lower income tenants, you have to be consistent and follow through on threats. If you say you will evict, do it - you’ll get better results.

@Craig Dieterich

You should keep buying properties.  Throw them together into a portfolio loan if you really want the interest deduction.  The entity, or lack thereof, would probably have an impact on how you are taxed.  

Find a CPA, then an attorney.  Pay for both to get the piece of mind.  Plus I'm fairly certain some of their fees are deductible.  If you are a reader I would recommend Rich Dad Advisors: Tax-Free Wealth by Tom Wheelwright.

I'm not a tax expert, but even without loan interest write-offs, you can still depreciate the home and see tax benefits there. Talk to a CPA about the income taxes. 

So far I don't see anything wrong. You're bringing in over $600 a month in cashflow on a property you own free and clear. 

The biggest questions I have, are do you have a strong property management company in place who you've vetted with multiple people, and are you setting aside enough in expenses? 

@Craig Dieterich - Well, it's not something I would have done given how far you are from the property meaning you'll have to hire a property manager to re-rent

the property if/when your existing tenants leave. That's a lot of work and expense for a $35k property. Additionally, the property is in a depressed are so appreciation will probably be non-existent

However, your cash on cash return is roughly 20%/yr., which is nothing to sniff at and you’ll have your investment capital back in roughly 5 years.

So long as your tenants stay and pay you are fine. If they don’t, its going to be a bit of work and time to get the property rent ready and rented.

Good luck with it!

Jon

Originally posted by @Jon Ladd :

@Craig Dieterich - Well, it’s not something I would have done given how far you are from the property meaning you’ll have to hire a property manager to re-rent

the property if/when your existing tenants leave. That’s a lot of work and expense for a $35k property. Additionally, the property is in a depressed are so appreciation will probably be non-existent

However, your cash on cash return is roughly 20%/yr., which is nothing to sniff at and you’ll have your investment capital back in roughly 5 years.

So long as your tenants stay and pay you are fine. If they don’t, its going to be a bit of work and time to get the property rent ready and rented.

Good luck with it!

Jon



@Jon Ladd

Thanks Jon. Yeah, I understand it's not likely to appreciate much being in it's area. It's more about paying myself back, then collecting passive income. And doesn't every rental investor hope their good tenants stay forever? The good thing with this, is that since I paid cash, if it sits vacant for say 2-3 months, I'm not paying on any mortgage. The months it sits vacant just ad to the timeline of collecting my full amount back. That's just my logic anyway.  lol. And yes, I factored in property management into my costs.