Q for CPAs. David G once mentioned doing a loan every 15 yrs

[Melissa Jones]

Hi CPAs, David Greene once mentioned taking 15 properties where you own them free and clear and doing a loan on one every year for 100k for a 15 year term and every year doing this with one of your properties to live on 100k of tax free money indefinitely.  My question is does this make the best sense?  If you just lived off the rents instead of doing a loan you'd be paying tax on the rents but if you did the loan you'd be paying interest to the bank instead of taxes.  Assume a 24% federal and 6.27% WI state income tax.  Of course I should ask are rents taxed at income tax rate?  Also if you did the loan figure 2k of closing costs & 5.5% each time as well.  (doing 5.5% since investment property is a bit higher and we arent likely to stay at these ultra low rates forever).

Thanks for your thoughts!

~Melissa

[Michael Plaks]

Our starting point here is 15 free and clear properties worth at least $125k each (to get $100k loans). In other words, we have $2 Mil in unencumbered real property. Not that many people are there yet, so if you're not there - it's an empty conversation aka pipe dream.

If you are there - congrats! You should be getting at least $1k rent from each house. This is $15k/month or $180k/year rent. Subtracting local taxes, insurance and upkeep - we already have $100k/yr to spend. Yes, taxes will eat some of it, but not that much, considering depreciation, 20% QBI deduction and no self-employment tax.

Can you increase your cash flow by borrowing against these properties? True, borrowing is tax-free in the sense of not having to pay taxes on the $100k loan proceeds. But you do not get to just spend $100k magical windfall. It is a loan that has to be repaid. Every penny of the $100k plus interest plus origination charges. Tax-free is not the same as free. It is not free money by any stretch.

So does it make sense as a long-term strategy? Depending on your entire financial situation - maybe. But it takes a real analysis and not just an easy mantra from the Internet.

And, if you have that much equity, maybe you should think about leveraging it to grow your portfolio instead of looking for ways to milk it for spending money.

PS. My use of "you" is not directed personally at anyone, it is generic.