Investing in Break Even Properties

[James H.]

Wanted to discuss the investment strategy of a long time successful RE investor. He's a BP member and I've enjoyed reading about him. He lays out a very simple investment strategy that, on paper and over the long term, makes sense to me. However, when purchasing property, it's tougher to execute when the numbers aren't stellar cash flow wise (10-15%). But the properties are in strong areas with great curb appeal with increasing rents. Here's the strategy in his words:

What do you look for in an investment?

I look for good investments that will benefit over the long run. I’m mostly buy and hold for long term. I do buy foreclosures and keep some and sell some to turn over the money. I’m not one that is adamant on cash flow. I think that is an area that has negatives to many true investors. No tax benefits per se, usually older dumpy properties with little hope for appreciation and don’t afford much depreciation. I suggest most new investors try to buy break even properties, and just like Monopoly, buy as many as you can. Keep them, refinance and buy more. Keep your main job for the income end and build foundation of properties first. Cash flow will come as rents increase, but don’t sacrifice growth option at desire of cash flow to begin.

There are too many gurus out there preaching cash flow and “replace your job with real estate income”. I’m the opposite of those. Cash flow just happens, in time, but not worth sacrificing acquisition of additional properties by having to put more down to obtain cash flow.

There are 4 main benefits to owning real estate:
1. Appreciation
2. Depreciation leading to tax benefits
3. Principal pay down
4. Cash flow

Charts will continually show that #1 and #2 are the keys to creating “TRUE WEALTH” in real estate, and far out distance the last 2 in the short or long term.

Thoughts?

[Jeff B.]

#2 Depreciation credits is a pipe-dream. Yes, you claim them as long as you continue to operate the facility. Theory is this is an offset to the impact of your CapEx. Part of the end-game however, is the dreaded Capital Gains and the Depreciation Recovery.  So, if you take double declining balance depreciation and hold some time and then sell, the chickens come home to roost.  If you hold for limited time, use straight line method and the Recovery will be less painful.

The only winning strategy is a Living Trust, depreciate like heck, hold forever and the kids then get a setup in basis and a zero cost RE investment.  If they disdain operating a rental, they can sell immediately and have zero capital gains.