All Forum Posts by: John McAuley

I see a lot of people saying things like "My cash on cash return is 12% on this property and that's a lot better than my mutual funds have been doing in the market."  I get the impression that they are comparing a 12% return that isn't compounded, with an 8% or so return that is compounded and thinking they are a lot better off.

If you bought a $100K rental property, put 20% down, and generated a 20% cash-on-cash return with that property for 10 years, you would end up with about $60K total ($4,000 x 10 years, plus initial investment).  If you took that same $20K and invested it in the market, you would need to generate a compounded return of a little over 11.5% to reach that same amount.  The point is that the two are not comparable and I hear a lot of conversations among real estate investors (maybe newer investors) where I don't think many of them understand that.

Obviously for this example I didn't include any rental income that would be reinvested, which essentially is where you would get your compounding from. But you need to make sure you really understand that difference to truly evaluate the opportunity cost. If you are going out there and buying rental properties with a target of a 12% COC renturn and planning to supplement your income with the rental profits instead of reinvesting, you might as well go put it in a mutual fund with 8% returns. It stresses the need to go for much higher cash-on-cash returns, which means putting the work in to find the truly great deals.

Disclaimer...I know we didn't consider appreciation, pay down, and tax savings here.  Just trying to make the point of making sure you really understand cash-on-cash if you are going to use it as one of your determinate metrics.  I'm not an accounting or finance guy so I may have my terminlogy wrong, but am I right in general here?

I haven't seen another post about it so I thought I would start one.  I've read the 9 page tax plan summary.  Although very vague, it provides a framework for what they are going after and mentions several things I thought could have significant impact on real estate investors.  I'm primarily a long term buy and hold investor who is not a tax guy by any means, but loves tax strategy.  So I thought I would ask you all to weigh in.  I'll start with a few points.

1) Mortgage interest deduction.  Raising the standard deduction will virtually eliminate the need to claim the mortgage deduction for many homeowners.  This is why the National Realtor Association is mad.  But as a real estate investor, would this really have much impact?  For rental property, is mortgage interest actually deducted as a normal expense like any other loan or is it leveraging the mortgage interest deduction?  The reason I ask is because many speculate that raising the standard deduction is just a baby step towards eliminating the mortgage interest deduction later....if most people aren't benefiting from it they won't notice when it is gone....goes the logic.

2) Corporate tax rate reduction.  Seems like this could be very good for different business types.  Again, I'm not a tax guy, but if the corporate tax rate gets lowered to 20%, would it make sense to move all flipping activity into a corporation?  For people with high W2 income, where flipping (or any active business activity) gets added right on top of their current income, 20% is a whole lot better than 33% or 35%.

3) I saw some wording about not allowing interest expenses for corporations, or restructuring it...or something.  I'm not exactly sure what the impact of that would be.  It sounds like it could impact the ability to write off interest on loans.  Could this impact the interest write off as mentioned earlier?

OK, that's it.  Sorry if this has already been posted so just delete it if there is already another thread going on about this subject.  I just couldn't find it.  Thanks.

@Jerry W.@Dave Foster

Thank you both for bringing that up and addressing it.  I've been reading over the 1031 information for the past hour and found these points addressed but not answered.  So the timing is perfect.  Completely understood about it becoming a pattern and am used to that in my other businesses for different purposes.  Thanks again for all the help here.

@Dave Toelkes

Great idea Dave.  Thanks for putting that out there.  I have no idea why I didn't consider this before.  I guess I had in my mind that I would utilize 1031s later down the road to "trade up."  

These aren't negative cashflow.  They just don't cashflow as well because it takes so long to get tenants in this price range plus the turnover on the larger homes are so much more.  We got them all at bargain prices (we have about 50% equity in each one, putting 20% of our own money in).

We have been able to roll all the profits right back in and that's what I want to continue doing, building up my buy and hold portfolio.  If I can make the timing work though on a 1031, that fits right into my goals perfectly without giving up the taxes.  Thanks again!

Thanks Steven. Yes, I had not planned to move the rentals out of the LLC. I was considering the option of creating a separate corporation and then transfer the properties to the corporation from the LLC (if that is possible). At a minimum, I was considering buying some of our future properties in the corporation for flipping and continuing to hold my long term rentals in the LLC.

I definitely need to read more and consult with a savvy CPA as you say.  I have probably read 50 real estate books over the past year but did not pay attention to these discussions because it wasn't applicable at the time.  Learning "on the job."  Thanks again.

Hey Everyone,

I am mainly a buy and hold investor and have purchased our first 6 properties over the past 5 months.  I had not intended to flip any but am now considering that given the huge equity we have in them.  These are nicer homes that rent in the top range of my market, making it harder to find tenants who can qualify.  So my thought was that instead of a refi on a harder to rent home in my area, flip into two or three lower priced homes that rent well.

My question is on tax treatment. I hold all of these in an LLC currently. I've seen several things recently that indicate for flipping, an S Corp could be better to help avoid/reduce self employment taxes. I currently hit the ceiling on FICA through my W2 job, which is the largest part of self employment taxes. Based on limited research, am I right to assume that the only tax advantage for the S Corp vs LLC is to potentially save or reduce the medicare portion of the SET?  Since I would not be paying anymore FICA anyway, that was my thinking.

I know I should run this by my CPA and I certainly will.  Just asking for some thoughts on this from the team here.  Thanks!

John

We do month to month for several reasons.  First, in NC, there are several reasons you can evict.  A few are below:

1)  Failure to pay rent.  In this scenario, the tenant can show up at court with the rent and fees.  They pay it and stay in the house.  Many landlords simply use the court system as a collection agency and count on doing this every month (primarily for your cheaper homes/areas).

2) Criminal activity.  In this scenario, you could learn about criminal activity but if they are not charged/convicted, they can argue that you have no substantial proof.  The magistrates in NC tend to rule in their favor in these cases.  If you go to court and suggest that you think drug activity is occurring, the tenant can argue that you have no proof and are speculating.  They are correct, you lose.  They know how to play the system.

3) Lease hold-over.  This is the easiest way to evict in NC.  The law is on the landlord side and you simply have to give 2 weeks notice on a month to month.  You walk into court, say that the lease is expired and you want the property vacated, and the magistrates rule in your favor almost 100% of the time.  You don't have to show proof of anything.  The lease has simply expired and you want it vacated.  As long as you gave your proper notice, you are good.

Hopefully you never run into this situation due to your good screening, but if you do you want the fastest out possible so you can move on.  That is why we do month to month.

I also agree with the post above regarding notice.  If they are on an annual lease and need to leave, you may very well not get rent one month and go to the home to find it completely vacant.  With month-to-month, they have no incentive to hide the fact that they need to move so at least you get some notice.

As a high income earner, I have suspended passive losses accumulated from previous years.  As we buy more and more long term rentals (we have purchased 4 in the past 6 months), my wife will be able to claim the Real Estate Professional for tax status purposes as she is handling all of the management of our real estate investments.  My question is this.  Let's say I have accumuldated $100K in suspended passive activity losses and next year, my wife qualifies as a Real Estate Professional.  Will I be able to then take those suspended losses against my active income for that year?  I realize for that particular year, I would be able to take the losses against my income.  I'm just not sure if that would also trigger the ability to use those suspended losses in the same year as well.  Thanks. 

Thanks Kim.  I had someone from Rently reach out so I've got a contact now.  I'm curious to know why it didn't catch on in your experience.  If people want to see a property and you say that is the way to see it, were they refusing?  Or was it that you think you got less calls because it seemed cumbersome to potential tenants?  My rentals are higher end middle class neighborhoods so I would think it would be ok for me, which is obviously why I want to try to automate this part of the management.  Thanks for any feedback.

For those that use Rentec, do they have any integration with any of the self showing services like Rently?  I've posted this question directly to Rentec but have not gotten a response.  I am going to start using one of the self showing services like Rently, and I see where they tout integration with property management solutions like Appfolio.  But since I use Rentec to manage my properties, I'm trying to see if anyone knows about integration with Rently or another self showing service.  Thanks.