All Forum Posts by: Jeffrey Scholz

@Vivian Pena

Welcome! Be careful looking only at cash flow and take the 1% rule as a guideline rather than a hard rule. Looking a yield in isolation is misleading. The better the cash flow (on paper) usually means the tenants are less stable and/or the area has negative population growth.

1% on a house built in 1925 is not the same as 1% on a new construction house all else being equal.

I learned this the expensive way. ;-)

I invest in Fort Worth Texas nowadays. Many cities in Texas have great population and economic growth, but you need to be mindful of property taxes and the fact that many neighborhoods have mandatory HOAs.

Hi Bigger Pockets,

I've seen bits and pieces of information about this in various places, but I'd like to ask people who have actually gone through this procedure.

I anticipate my rental properties will accumulate about 10k in passive losses per year for the next few years (courtesy of of the 27.5 year depreciation schedule -- not due to pre-tax negative cash flow). I'm above the passive loss threshold and subject to the net investment income tax (and I'm in a high tax city). I'm single and don't anticipate marrying a real estate professional any time soon, so those losses are locked up.

Questions:
1) Regarding Net Investment Income Tax... Do my passive losses on the properties offset the stock dividends and bond interest from other portfolios -- such that I can report no net investment income and thus avoid the NII tax? I realize I will still have to pay income tax on the bond interest and long term rates on the dividends, but my understanding is that I can dodge the NIIT surcharge if the bond interest + dividends + rental passive loss is negative. Is my understanding correct?

2) Can I offset the passive losses with an investment in a syndication like what they offer in CrowdStreet? Assuming I am correct about question 1, I would not want to offset all of the losses, just enough to keep my NII close to zero.

3) It seems to me that passive losses are "wasted" if I 1031 exchange the property. Sure, I lowered the taxable appreciation on sale, but that seems to be pointless if I won't pay taxes on the appreciation anyway.

Overall, my strategy would be to balance my investments such that my NII from all my investments is close to zero on an ongoing yearly basis (I realize this is optimistic, but I can at least try to get close). If it comes time to sell a physical property, I want to have accumulated as little passive loss as possible to avoid trapping the loss in a 1031 exchange.

To give a concrete example, if I buy a 200,000 house with a land value of 40,000, I depreciate 5,818 per year (assume cash flow is small due to buying the house with a mortgage). If I have a syndication that effectively throws off 5,000 per year, and my portfolio (stocks + bonds) income is 818, my net investment income is 0 so I pay no NIIT. Effectively, I have tax-free cash flow from the syndications and tax-free appreciation from the physical properties (if I 1031 exchange them before the 27.5 years is up and donate/bequeath them in my will). Also, I wouldn't be paying the extra 3.8% on the investment income -- or at least not too much of it. Over time, I would want to keep these ratios while scaling up to minimize taxes.

(I realize I cannot control the outcome of investments with that level of precision, but I'm using those numbers to illustrate a point).

Feed back would be much appreciated! Thanks!

Thank you for all the help, this was informative!

Don't forget the 50% rule when doing your analysis.

Hello Bigger Pockets, First Post! Thanks for such a wonderful resource!

Question: Is buying a house at retail really that undesirable?

I’m speaking in the context of buying a house for long term rental income, not flipping.

Pretty much every book / resource I’ve read up to this point (12+ books or so) have stressed the importance of buying below retail. Many authors insist one should buy a fixer-upper house, fix it up, and rent it out. I can see how this would make sense for someone who makes a living on real estate, but I am not seeing how this would apply to my situation.

For example, let’s take a tenant-ready house worth $120,000 that rents for $1,200 a month. Suppose instead, I buy the house for $90,000, fix it up for $10,000, and rent it for $1,200. Great, now my annual cash on cash is 14.4% instead of 12%. I saved myself $20,000. Great.

Now here is the problem. I’ve never worked with contractors before, so there is a near-certain chance that I would overspend on the repairs / underestimate the cost. One could say that should have been more aggressive in shopping and tried to buy a $120,000 house at $100,000 (e.g. by flyering or something).

But here-in is the problem. I don’t have the time (or desire) to shop around like that. In my situation, if $20,000 was plunked into my lap, my life would not change very much to be honest. The time I would spend trying to save that $20,000 is quite likely better spent in a consulting side-job that would recover the difference in about 100 hours, for a lot less risk. My thought is that there are thousands of real estate investors who are way better than me at buying below market, so why compete with them at their game? I’d rather spend the time in my area of expertise (software) where I can earn more money per time spent with far less risk.

I’m not trying to make a living off of real estate – it’s more to park cash in a tax-efficient vehicle and remove the temptation to spend it on luxury items (let's be honest, I'm not as frugal as many of you ;-) ). Obviously, I want returns at least as good as the stock market, but I’m not trying to hit home-runs. If I combine the 1% rule with the 50% rule, I get 6% returns per year on an asset that usually at least keeps up with inflation and has a lot less volatility than traditional equity. Those returns are not good if real estate is the primary source of income, but I personally can be happy with returns like that.

I’ve used a turnkey company before. Let’s just say that did not go well and I sold the house back to the turnkey. This time around, I want to do it myself. I’m okay with spending time finding a manager and doing the random tasks that turnkey companies overcharge for, but I don’t want to spend dozens of hours trying to buy below retail.

Basically, I want to pick a new-ish construction house off of the MLS, negotiate to roughly retail price, do the due diligence, get a managing company, and get on with my life. I'm leaning towards a newer house because I don't want to deal with big-ticket repairs right off the bat.

Has anyone been in my situation and can provide an opinion? Thank you so much!