Buying properties to simply break even?

[Account Closed]

Hi all! 

I know what you all are thinking.."investing for 0 cash flow?" but looking at the current market in my area that's how the numbers seem to work. 

In my area, Phoenix Arizona (specifically Tempe, a college town) I'd be extremely lucky to find a 3 or 4 bed for 150k that needs work. Now, with a 30k rehab totaling 180k I'd be looking at rents around 1800 per month. Just to note, I haven't yet used the driving for dollars method which may change my outlook. (I will be doing this when I'm closer to buying)

So it looks like I'm just barely making that 1% rule of thumb marker. 

So for a easy example lets say:

Property: $180k 

Mortgage: $990 

Monthly rent at 1.1%: $1980

Annual income (minus 50% as a rule of thumb): $11880

Annual MTG Payment: $11880

Net Annual profits: $0

So here at 1.1% I'm breaking even, assuming 50% going to vacancies and expenses.

My long term goal isn't to cash flow necessary in the short term, but to have ~15 properties paid outright in 20 years while I work. 

That being said, would you recommend this as a model moving forward? Is that break even margin too close that I could actually move into negative cash flow?

Looking at 200 dollars negative cash flow for one property isn't a huge deal while the note is being paid down but 10-15 properties gets into the 20k-30k losses per year. Yikes!

Other considerations - were nearing peak market and these properties could go through a correction leaving my early investments underwater and rents lower adding to the potential for negative cash flow.

Thanks!

[Chris Mason]

Hi @Account Closed

Very high income persons will sometimes purchase break-even real estate because real estate is tax advantaged in the United States. 

Let's suppose your scenario numbers are exactly correct at $0 net, but it also yields $4500 of your income not being taxed due to the famous depreciation write-off, that otherwise would have been taxed at 40%. That would actually put you ahead $1800/year, in addition to whatever equity and appreciation gains you might have.

Let's scale that up, pretend you are a real estate mogul who runs for president and proudly declares that you pay "very little" in taxes. Maybe that $1800/year is more like $180k/year that you otherwise would have had to give to the IRS. And maybe you get too aggressive with this, and end up with a bunch of bankruptcies. But, I digress.

Back to normal person reality, in the Bay Area this isn't super unusual, but I have no idea what is and isn't normal in Arizona. Perhaps one spouse is a senior software engineer earning $400k/yr, and the other spouse's $60k/yr is going to be taxed at 40%, putting that spouse at $36k/yr net after taxes. Maybe, instead of busting his butt 40 hours a week for $36k, he instead does all the property management and real estate acquisitions, to help shelter his wife's senior software engineer pay of $400k/yr from taxes as much as possible, while still enjoying appreciation and equity gains.