All Forum Posts by: Clayton Coombs

Sorry @Clayton Coombs, I can't answer your question, but my question for you is... How did you get a line of credit against a tenant occupied rental property? I assume they are owned free and clear?

Mine are not, so when I've inquired about getting a line of credit against my rental properties secured in second position, my best responses to date are when they say NO before starting to laugh, as it is annoying when I must wait for them to stop laughing hysterically before being told NO.

@Clayton Coombs

@Matt Ward

@Eamonn McElroy

@Luciano A.

I do want to congratulate Clayton on having a really great year!

First, I wanted to thank everyone here that offered advice that I did not @ Mentioned. Of course, however, that the reader of this thread really needs to understand this is a very complex topic and not all advice should be taken, but all should be researched thoroughly.

Second, I mentioned Luciano mainly because I do understand where he is coming from when he mentioned that the advice of buying for low cash flow AND high appreciation hurt him or others who have followed that strategy in the past.

Rest assured, there will be others that will be hurt by the low, no or negative cash flow AND high appreciation strategy in the future. BUT there will equally be those that will be hurt by buying high cash flow and NO appreciation as well. There is no monopoly of hurt by buying with the no cash flow high appreciation strategy. I personally know quite a bit of people who have been hurt by buying cash flowing properties where the cash flow suddenly disappeared when unemployment skyrocketed.

Now, many of us got into the Real Estate game one way of another and many of us will encounter Rich Dad, Poor Dad. While I don't really think of his advice as fantastic, he makes some really good points, including this one:

Note where the Self-Employed quadrant is. Note how he is dressed on each side.

The funny thing is that should you follow the advice from this diagram, and you actually make your way into the Investor quadrant, not only does your Money work hard for you (and you get to play a lot of golf), but you will AVOID paying a lot of taxes until you sell the Investment, and in the case of Real Estate, you can exchange until you die, or hand it down to your children at a stepped up basis.

Flipping to me is a job. Buying sound, good, quality Real Estate where you don't do much work because it's highly desirable, where the job market is very strong even in a down market, AND you hardly have to put any time into it because it runs like a well oiled machine, puts you in to the Investor's Quadrant, paying very little taxes until you die.

Over my 21 years of buy and hold Investing in Real Estate, while I was doing this before reading Rich Dad, I always understood that the way to avoid paying taxes is to be in the Investor's Quadrant. Unfortunately, many people either confused or ignored the concept of what an Investment really is.

The MORE you work, the more your Investment is a Business. The LESS your work, the MORE your investment IS AN Investment.

I mentioned Eammon and Matt here because they gave the advice of low cash flow, high appreciation as a tax avoidance strategy. In this case, that IS what I have practiced over 21 years. What they gave in theory is what I do in practice. AND IT WORKS.

The one gotcha is the dangers of a down market. This is why you have to be very smart and use the gift you have been given that separates you from the animals.

OR... even if you don't want to separate yourself from the animals, then think like a Squirrel!

Squirrels know that if they don't put away their nuts for the winter, by the time the winter comes, they may not make it through.

The Squirrel needs to think about the FUTURE because he isn't gathering his nuts to eat it NOW. It's this thought that allow him to weather the winter.

Us INVESTORs (by the way, I don't consider too many people Investors if they are owning Real Estate but are doing a LOT of work for it, those people have a job), in order to be good, need to think about the FUTURE, in my case, at least 10 years out, and always saying to myself, how many NUTS do I have to put away to weather the intensity of the WINTERs that I see in the FUTURE?

Since I'm from NYC and I buy in quality neighborhoods, over the several Economic WINTERs that I went through, the NUTS (Investments) that I have GATHERED have done so well, I slept like a Baby in my little squirrel hole, AND, I have successfully avoided paying a lot of Tax by utilizing the tax loopholes (think 1031 Exchanges, holding onto the Investments as you get taxed only if you sell, etc.).

I don't want to change the topic, but to me, Flipping is at BEST a business, and businesses pay Tax, which is unavoidable.

INVESTMENTs are you tax shelters.

You decide which quadrant you want to be in.

I'm surprised nobody else brought it up already: Bonus Depreciation.

@Jay Hinrichs mentioned it in the context of buying a airplanes, but there are actually many other ways to take advantage of it.

Firstly, for the houses you bought this year, you can take the full 5,7,15 year depreciation schedules *this year*.  Depending on that cost basis of your rentals, that could be a very big paper-loss. Since you would easily qualify for as a "real estate professional" according to the IRS code, there is no limit to how much depreciation you can take.

This will require to pay for a cost-segration study. Previous to this year, this strategy was typically not recommended because the cost of the study often outweighs the benefits for SFRs. However, you can do a low-cost "residental" study. That coupled with the new bonus deprecation rules probably change the cost/benefit ratio in your favor. Check out kbkg for the residential study.

Secondly, you can buy a car. If you buy a regular passenger vehicle for business use, you can get 18K deprecation this year. If you buy a larger vehicle (6K+ lbs), you get the *whole enchilada* in depreciation. That's right: then entire cost of the vehicle. Of course it doesn't make sense to buy a car just for the deprecation (or an airplane for that matter), but if you were thinking about getting one in the next couple of years anyways, now's the time to act.

Thirdly, and it may be a little late in the game for this: you can invest in multi-family syndications. Cost-segs may or may not work for SFR, but they almost always work for larger MFRs. A knowledgeable syndication lead can commission a cost-segregation study, and pass the depreciation straight through to the passive investors.

Please keep in mind those are 2-3 sentence descriptions of very complicated and new tax rules, so don't go off half-cocked and try to implement them without getting some real advice from a tax pro. And speaking of which, if your CPA isn't already talking to you about bonus depreciation, then you need to find a new CPA asap. I had a CPA for 15 years whom I absolutely loved, but he wasn't a REI specialist, and he didn't know about stuff like this. You *need* a specialist for your field.

Disclaimer: I'M NOT A CPA AND THIS IS NOT ADVICE! :)

Hope that helps!

James Kojo

Yeah that's what i'm referring to. It depends on how aggressive you want to be on your return. The key is finding a syndication company that do them right. I have multiple clients getting an ROI of 40% to 80% on these easements and the most the IRS has disallowed was based on the valuation and they only lowered it 20%.

For this guys situation and depending on his comfort level, this would make the most sense for 2018 at least 

Hello. I am new to this site but have been investing in both flips and long term holds for the past 14 years. Own over 30 properties and own a couple of businesses. To buy a property in hopes of appreciation sounds like the same advise I heard from everyone while living in CA back 2006. Back then the so called next door investor whether it was the waitress at Dennys or my Mailman everyone was telling me how they bought a house in X city, with little or no money down and is loosing $500 per month while renting it out but that was not a problem because they felt it was a small price to pay given the upside in appreciation. All they had to do is sale in one year and they would make $50-$100k. I never considered that investing. Investing in my option is to make money the day you buy. Sure there is value play and other methods but in this market it is just too hot to think values will keep going up. One day and it can be 3 months or in a year but there will be alot of investors left standing when the music stops during musical chairs in this market. 

Buy, Buy, Buy.. who cares if you dont make any cashflow because you are banking on appreciation. I have always treated Appreciation as a bonus and never bought a deal in hopes of appreciation. What Flippers need to know if you sale more than 5 in one year you will be considered a Dealer. IRS taxes the heck out of you thus many dont realize they loose alot of their "profits" to taxes. As a Flipper you have gotten yourself a job not a business. I like that you are cautious and dont want debt but real estate is a leverage play. If you talk to any SUPER successful old timer who has over $10 million net worth you will hear they used some leverage but did not bet the farm on any one deal. They did not over leverage. In real estate you make your money on the purchase. If you buy correct and are well capitalized you can push through the down markets. Some good points made here about using S corp to reduce SS and employment taxes. I would suggest getting a small mortgage on your investment properties no more than 60-70% thus giving you some cushion if the market goes south. Another strategy might be to do the BRRRR method as that will give you conservative loan to value but you dont sale you keep and make monthly cashflow from each deal while increasing your net worth. The bank looks at your Financial Statements to determine your risk. FS is like the adults report card when they come into adulthood. Having a high net worth helps to open doors. Having high income from flipping is not always a good thing for bankers. Also another option that I have been hearing but I personally dont use is using self directed IRA. The money has to go back into that account including profits but you might be able to pay yourself as a Project Manager thus giving yourself a good salary while growing your cash from one flip into another and thus building a great retirement account. You can always dip into it and pay the taxes/penalties as you take out so not like you cant access until you are at legal retirement age.

Sorry for the long response but just think people forgot what happens when markets turn and all this easy money goes away. It was not long ago that all the over leveraged, banking on appreciation investors walked away from their investments when that play was no longer feasible. 

One last point, as many others said you have to do smart tax planning ahead of time to do it right and legit. Trying to do after the fact is tough. If you end up paying the taxes just remember you are a business and not employee so you can take all the deductions to run the flips. 

Keep up the great job and keep finding yourself great deals that you can make money from.

L