Continuing to learn about rentals - taxes?

Question

So I have been around BP for about a month now. Every day I learn something new, but I don't get to post a lot because I usually look at the site on my Android device. Unfortunately, it doesn't work so well with BP for posting purposes.

I have also listened to a podcast at least five times a week. I'm up to show 42 and have learned some new stuff about real estate and about being an effective leader as well. I can't thank @Joshua Dorkin and @Brandon Turner for these valuable tools.

Onto my question...

So there has to be added benefit to a rental beyond the $100/door I typically hear about. I understand the tenant is helping to cover all of your costs and everything, but it just doesn't seem to me to be a good way to earn a living until you get up into the high numbers of units.

I'm really curious about the tax benefits that a rental might hold. Just some rough estimate about how these figure into the whole equation. I remember one podcast talking about using rentals to offset earnings on wholesaling... How does that work?

Appreciate the insight and the great site!

Ron

Brandon Turner · Answer

See- this is why I rely on these guys for my investing knowledge @Ronald Perich ! Well, I only rely on @Ben Leybovich for fashion tips and @Darren Sager on "getting ripped" tips. But in this case, they are right on the money. :)

Darren Sager · Answer

I would also add that there's a large tax benefit to doing cash out refi's because the gov't doesn't look at it as you taking your profit out.  The reason being is that you're borrowing the money.  Its a loan and "technically not your money" even though you have the cash in hand.  In essence its like getting a tax free money to use.

Ben Leybovich · Answer

@Ronald Perich

@Brandon Turner is wrong again - this is a position familiar to him (I am mad cause he said he'd call today and he still hasn't...lololol)

1. The income from passive cash flow (landlording) is not subject to social security tax.

2. Income is assessed at your bracket rate, but only after depreciation, interest, and other deductions effectively shelter (or tremendously lower) exposure.

3. It's not how much you earn, but how much you keep.  By lowering effective tax rate with the above, you essentially do not have to earn as much to keep the same...

4. This is why $100/door, while it doesn't seem like a lot, is actually the same as someone with W2/1099 income earning $150 or more.

5. $100/door is fool's game, unless it is coupled with expandability to force it higher.  CapEx will eat $100/door in a minute...

6. When you own lots of rentals, due to the nature of how they are taxed you may be in the negative at tax time (on paper).  This is when you have a choice - you can take a refund, or you can go out and flip a house to create a profit in the magnitude of the paper loss.  If you do this, you won't pay income tax on the flip, which is wise considering that flipping income is deemed Earned and therefore social security and Medicare apply .

Hope this helps Ron, and Brandon - how was the trip?

Ben Leybovich · Answer

Haha Skip to Podcast 61 :)

Ronald Perich · Answer

@Ben Leybovich

Glad you don't hold any punches :) It's great to get these two different perspectives, because I can then work this into my plans should I choose to go into the buy-and-hold model of investing.

@Darren Sager I knew this was a possibility, but I have been thinking to fit into a 15 year retire-on-the-beach plan I might want to pay-down so I can have greater cash-flow at the end. Still working the details. I can certainly see how that could really be useful in building the portfolio.

@Brandon Turner I really appreciate your insights here, too. I have been listening faithfully to every podcast (up to 56 right now) and just got my copy of 4 hour work week. And I hope to be past page 28 soon (has @Joshua Dorkin finished it yet?)

Brandon Turner · Answer

Hey @Ronald Perich thanks so much, and great question.

Here's my thoguhts:

It's hard to say exactly what the benefits will be for any one person, cause it all depends. However, I know that when I was doing just real estate investing, I never had to pay taxes. Like, I wrote off so much that tax time was easy. However, this year I had BiggerPockets income, and my tax bill was WAY more than ever before, despite the fact that I made much more from my real estate.

However, the tax benefits, in my opinion, are not the main reason I invest. Yes, the $100 per door isn't real great either. I mean, it's good, but is it worth it? Depends I guess. For me - it's the concept of getting a better ROI than anything else I could do, and using that ROI to grow wealthy over time. I mean, if I can average a 20% ROI through real estate, I'll be a LOT more wealthy when I grow old.

Also -I love the abiity to create cash flow from nothing but creativity.  You can't do that with stocks or other investments. So that's another appeal.

Finally, the other thing is even at $100 per door - a 30 unit apartment would provide $3,000 per month in passive income. That's just with one purchase. Each month the loan gets paid down, each month the property rises in value - and my investment is secured against inflation. Not too shabby.

Those are my thoughts anyways!  I wonder, though, what @Ben Leybovich would say about this? Or @Darren Sager ?

Continuing to learn about rentals - taxes?

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