All Forum Posts by: Kevin McGuire

Some great advice here, especially in understanding your risk tolerance and your ability to execute on a deal. 

Seems you need to consider the following factors:

1: Where do you want to live? I gather you want to stay in SD but for how long?
2: Have you decided you want to be a landlord? I gather “yes” but then the question is “how big”?
3: Timeline. You have the cash and want to do something with it. But is that an opportunity or something accelerating your decision process?

It may be helpful for you to separate out the three issues.

For example, you could decide to rent in SD (gives you a place to live, allows flexibility of moving in the future, doesn’t tie up your capital), put the money in bonds or something else with low volatility, don’t sweat the low return it’s an opportunity cost, and start researching property investing out of state. This strategy takes all the pressure off and you need breathing space to properly execute on this. Also, I’m guessing you just went through a life event, so even more important to give yourself some space to decide. Real estate is “get rich slowly”, be patient (with yourself!) and methodical, that’s the core of my advise. Good luck to you!

@John Teachout Good points. My cap rates are compressed about 1% since I purchased, they were already thin, and I’m not sure I’d buy at these prices since they don’t meet my initial investment goals, which says I should sell. But then I asked, “Ok and do what with the money?” and there’s the rub. I now regard the properties as a store of money, more stable than the alternatives (stocks, gold,…) and better returns than cash equivalents as you noted. At this point my main concern is inflation and it’s side effects, and the properties seem the better store than anything else I can think of.

@Cara Powers That was super helpful, it helped me understand why when I used locations and then moved to classes the balance sheet looked so different (and confusing!). It never occurred to me to tag by customer and skip Plus, I’ve discovered I have that turned off in the UI. In my case I don’t care to track cash by property, maybe one wants to do that if they’re in different LLCs. However, I am able to generate a seemingly ok balance sheet by creating equity accounts per property and tagging by class. But maybe I’m doing it wrong still.

I think my biggest gripe with QBO is that it models accounting, not the business, and so much of this discussion ends up being trying to figure out how to map your business concepts to the the generic capabilities in QBO. And that’s really difficult for folks here to do, since you need to learn both the business of rentals and how to think like an accountant and then how to translate between those. That’s a lot! As a simple example, there’s no lease object in QBO, there’s recurring transactions. I might try some of the other solutions mentioned here like Rental Hero but then at the same time I like using QBO exactly because it’s the defacto standard for running a business and connects to my accountant’s systems for year end tax prep.

Anyway, thanks Cara for increasing our learning here!

It’s the recommended best practice. Think of it this way: you’re running a business, that business should have its own bank account. You should also have a separate credit card just for rentals, which you pay out of the dedicated bank account. As others noted it makes it easier to track expenses and file your taxes, but more fundamentally it shows you how the business is doing.

@Terri Haley and @Anish Tolia made great points, as did others here. My question is: are you systematically building a future or are you escaping dentistry? As others said, if you're miserable than do something else for sure. But my tendency is to be more methodical around such a big change. My advise in short is to build your REI skills and portfolio while maintaining the safety net of the dentistry.

My story is around working in high tech, great income but getting burned out. Four years ago I started buying rentals so that I’d “have an out”. I now have 12 doors, left my W2 job in the new year. In time I may go back to it since I do like the discipline just not crazy about the industry and the stress. Or, not: my days now start with coffee in the backyard listening to the birds and watching the dog run around. The point is, I now have a choice, and that in itself is hugely valuable in instilling a sense of control over your life which contributes to lower stress. But I built that while I had the security of the W2 income and ability to qualify for loans.

As others advised, I wouldn't bother with a real estate license as a path to REI, it's not needed. If you're a continuous learner then by all means, but I think your time is better spent reading and analyzing deals.

Best of luck! Change is hard and only the brave attempt it!

@Diego LLerena I suggest you take the Capitalization Rate (cap rate). It’s net income per year / purchase price. Net income is yearly rent - operating expenses. It doesn’t include financing. Think of it as dividend yield, it’s the amount of free cash it generates as a function of amount invested.

@Matt Camilliere Others have covered the decision matrix and as noted it depends on your goals and other financial circumstances, but I’ll throw my in 2c, which is that cash flow manages risk but appreciation builds wealth.

My decision process is in this order:

1: I ensure cash flow is sufficient to cover operating expenses, vacancy budget, cap ex budget, and has a higher cap rate than the mortgage. This manages risk; the business will remain cash positive and not require me to feed it from W2/savings. Since my portfolio is for retirement, my goal is > 4% cap rate which matches safe withdrawal rate but of course there’s no actual withdrawals so it manages risk of running out of money.

2: Tenant pays mortgage which builds equity. I may extract equity later through sale or refi.

3: Hopefully property will increase in value but I didn’t model it in since past returns don’t indicate future. That said, I think it’s a lot of work to only make a few percentage spread on the mortgage rate, why be so leveraged then? You’d think I’d be focused more on cash flow given my retirement goal but leveraged appreciation is how wealth gets built and that’s the long term game changer.

Yes I was referring to top marginal plus provincial. But to your point, “if done well” is critical. I think mostly people are distrustful of government and, while of course we’d all like to pay less taxes, feeling that the money goes to some good helps. That said, given the social challenges and massive debt, I suspect we’re just rearranging chairs on the Titanic. 

Hi Dan,

It’s been a decade so my memory is likely inaccurate but I recall that Federal plus Provincial was a bit over 50%, and yes I was top marginal tax bracket. I definitely noticed more money left in my pocket having moved to WA. Agree on healthcare, it can be a financial burden even if you have insurance and can ruin you financially if you don’t. Which is why I’ll likely move back to Canada to retire. 

@Anthony Wick

@Anish Tolia

@Shiloh Lundahl

You’ve all made good points. Here’s my experience as a Canadian living in the U.S. for ten years now. For additional context, I’m a permanent resident but not a citizen, so I’m neither Republican nor Democrat (why only two choices?!) and “don’t have a dog in the race”, yet am taxed without representation, which I read somewhere is a bad thing, but I digress.

In Canada I had much higher income tax which kicked in at lower income brackets. And since I live in WA, I don’t pay state income tax. It’s a very regressive tax scheme (using the economic term) which has benefitted me personally. That, combined with more job opportunity (high tech) has dramatically accelerated my net worth. I had a job opportunity in OR which I didn’t take for one because of taxes: WA is regressive and OR is progressive (state income tax but no sales tax). I’m an example of how those at a certain level reduce their taxes through mobility.

I hated the high taxes in Canada. I’d pay more than half in income tax, higher sales tax spending it, and again when I made money on my savings through capital gains. The capital gains in particular really irritated me because it felt like, after the pennies left over from taxes I then had to pay again.

But I never worried about my fellow human in the way I worry about them here. The U.S. is a really great place to make money, I did. But it’s a terrible place to be poor. There’s not much in terms of social safety net compared to Canada. So now I see what those taxes were paying for. Look we all want to pay less taxes and every government, here or in Canada, does a poor job of spending it. And as a “rational economic player” I will seek out and ensure I receive all the advantages that the tax scheme allows, that’s what the government wants me to do. But you get the society you pay for and we need to be very careful about the incentives and disincentives we set up. Much as I’ve benefited from the U.S. tax system and the opportunity it’s provided me, which I am grateful for, I see the signs of social erosion everywhere and a legitimately disaffected populace. The trend lines aren’t good, the system needs a reboot.

As a starting point, I think we should get rid of the 1031 exchange. In a previous post on this thread I suggested grandfathering existing holdings so they can make one final exchange as well as primary residence to avoid inhibiting mobility. I’m not against tax deferral, I just think it shouldn’t be geared towards one special interest group (us). The arguments about leaving money in the system to make more money should be applied more broadly through increased ROTH limits. That said, I’m not a believer in trickle down economics, so my tendency is to want to decrease sales tax to make the system more progressive, and move tax revenue from income tax to capital gains to allow the lower / middle class to more easily graduate to the “investor class” which we here are all a part of, with ROTH as the tax deferral mechanism to incentivize entry to the investor class. Oh, and while I’m pontificating and waving my magic wand, transfer payments from federal tax to municipalities since that’s where most of the services that affect our daily lives are provided, reducing reliance on property tax which is uncorrelated with ability to pay and thus one of the most heinous taxes devised.