Investment Rules of Thumb

[Dustin Johns]

I think its a good idea to compile a "rule of thumb" list for investment purchases. For example, the .02% rule, or you max purchase % based on ARV. This would be a great resource for me and other investors, new or seasoned. Thanks in Advance for any contributions......

[Jon Holdman]

Here's two that will serve you well:

Operating expenses plus capital expenses plus vacancies will average 50% of the gross scheduled rent.

and

If you buy and fix up a fix and flip for 70% of the price you sell it for, you will net a profit of about 15% of the selling price.

Those will only go so far, though. Once you have something that passes those initial sniff tests, have a more detailed look.

Tax rules of thumb.

First, get a CPA. If you're too cheap to pay for a CPA and trying to do real estate taxes with TurboTax, TaxCut or by yourself, you're very likely missing out on some of the benefits.

Any income that doesn't involve actually owning a property is ordinary income. Brokering, wholesaling, birddogging, and anything like that are all ordinary income and subject to income tax at your ordinary rate. They may also be subject to self employee tax. But you can deduct all your expenses.

If you actually own the house, you're subject to capital gains. Either short term, at ordinary rates, or long term.

If a deal looks bad without accounting for the depreciation deductions, its a bad deal. If some tries to smear on some deprecation lipstick and convince you the "negative tax" on a crummy rental is a benefit, run away.

Don't forget about depreciation recapture tax. The IRS gives with one hand but takes away with another.

On another "silent partner topic".

Avoid HOAs. With an HOA a property is never paid for. An HOA can have input on every decision you make for a property.