All Forum Posts by: Nick Eckemoff

I suppose you're right. A good point is I qualify today but perhaps I wont qualify tomorrow because my situation will change. Maybe I'd talk myself out of it lose all my money in stocks. Who knows. :)

My home is paid for and my debts are really low. I'm not stretching myself and can afford a loan, but my concern is that a correction would cause me to go bankrupt. I guess for this to happen you'd have to be really over leveraged on debt, where you can't get past the correction. 

I wouldn't mind paying cash, but numbers show that 30 mortgages is better ROI. Its best to start the timer of tenants paying off the mortgage sooner than later too.

Oh gotcha. That's a good thing to consider.

Right - I don't want to bank on appreciation. I want to assume there will be none and if there is some, great!

My numbers show that while you could gain 80% of rent (20% expenses) in an ideal situation, 40% expenses is a better realistic buffer. The numbers look okay for 20% expenses, but not 40% in my market, and I don't want to bank on optimism (or rather I want a 20% buffer).

I've been debating on getting my first rental property, however having experience with investing in the stock market, I understand the critical nature of 'getting in at the right time.' Sometimes that isn't an easy call because prices continue to go up and you really don't know if the trend will continue or reverse. I'm sad to report that I have been burnt buying stocks on top days before they crashed down, so now I'm hesitant in doing the same in real estate. At least with stocks you can cut your losses and move on, but not so with a mortgage.

In central NC, there is a lack of supply and high demand, especially now during the summer. Properties are selling fast and way too much for what I'd consider a good investment...if anything, you'd be lucky to break even because there is little motivation to sell for less. I don't take appreciation into consideration and maybe others do, but how do they know prices wont come crashing down? I'd buy and hold, but being upside down in a mortgage and where rent doesn't even cover it is my fear.

What comes to mind is Trump tax plans. The impact of is said to send prices down quickly by 15%. Seems its best to wait for that to happen?

Researching the topic, many think 2008 to 2014 was a good time to buy, but since then prices have been going out of control with a steep uptrend, but now  peaking trending lower in the future or at best flat. Now many are selling to cash out and it feels like I'd be buying at the peak of prices to benefit an investor if I were to buy today. 

The stock market has lots of talks about valuation. Many companies are trading outrageously high due to potential earnings that may never materialize. Even if a company has positive earnings, their stock is still dropping because it wasn't good enough considering all the speculation and expectations investors had many months before where the price got set! Smart investors continue to ride the wave, but are quick to pull out or ready to profit from it. The recent tech sellouts are a tell sign that potentially a crash is coming to get prices back down to realistic levels...some of these tech company's stock price is trending up, but actually have negative revenue or haven't even sold ANYTHING yet. Tech bubble all over again anyone? Maybe this has nothing to do with real estate and a reason I should get out of stocks.

Mortgage interest rates are really low still and projected to continue to rise now that the market is past recession. This is a good opportunity to lock in a low rate still.

Please let me know if I'm just trying to convince myself to wait or there are any real merits in doing so?

I have a similar concern, however I concluded I it doesn't matters too much. A deal is a deal. There are single family homes that might profit more than multi family and visa versa. It depends on the property and location.

As mentioned, traditional banks will only give you up to 10 mortgages. Cost of each one does matter as to whether you qualify for more, however for the sake of this limit, there is an advantage of having each mortgage a larger $ amount opposed to many with a smaller $ amount. 

Personally, I find that in NC, town home or multi family building seem more appealing as an investment rental properties. The idea ties in well with the narrative of what people want - to rent a cheaper place with reduced 'home maintenance' worry, in a good location (school zone), maximize their money's worth, as to while they are saving up to one day buy or build their dream house. Single family homes are being bought quickly by first time home buyers and often sold over market value because there is a shortage of supply.

One more thing I left out...

5) You can use a 401k exchange to trade properties and defer tax liability. For example, you bought a 100k house years ago and today its worth 200k. Instead of selling for the profit and being liable for 100k of capital gains, you can use the 200k of equity to buy a 300k house (paying only 100k additional). You would not have to pay the capital gains tax doing this and there is no limit on how many times you can 'trade up' for properties like this. Once you die, the debt dies with you and your children can sell for the full profit and pay no additional taxes.

I have been investing into stocks and have no real estate at this time, however I did a lot of research in regards to taxes because this is an important expense consideration. Here are my findings:

1) Capital gains tax applies to real estate. For example, if you buy a property for 75k and sell it for 100k after less than 1 year, you'll be liable to pay capital gains tax on 25k. This rate depends on your tax bracket and if you hold it for more than 1 year, the maximum tax rate will be 15%-20% on the gains (and 0% if income is low enough).

2) Rental investment properties expenses and income are filed in Schedule E. Many will end up with what appears to be a loss on paper due to everything that is deductible (including deprecation) even if they have positive cash flow. This means that they will not pay any Federal income tax on gains from investment properties.

3) If you file for mortgage interest deduction, you are susceptible to Alternate Minimum Tax (AMT). With the current rules in place, this means if you file married and make over 160k, you could end up paying more taxes due to AMT and not qualifying for the exception in the AMT brackets.

4) Unless you are a 'real estate professional' (your job is full time in the field), you can't use more than 2k of losses to reduce your day job income tax liability. 

In summary, 'tax benefits' of real estate is kind of a misnomer. There is no magic that simply owning real estate mean you get out of paying taxes, government pays you, or it somehow allows you pay less taxes on other investment income. The key point is 2), where passive rental income isn't taxed if you file correctly...this is the real benefit and often what people mean when talking about 'tax benefits.'

As sure as you're alive, I guarantee IRS will get whats due and there is no (simple) legal way around it.

Sorry this is first time digging into taxes associated investing in real estate. All the stuff I posted was under the assumption the property is purchased as a primary house which would be on schedule A, however earned income for real estate investments must be on schedule E as mentioned.

I read up on schedule E. Essentially what this means is you list all the expenses as deductions and calculate a total income gain or loss that then goes on your 1040, which has your total. If you had a gain, you'd be taxed on that additional income. Due to all the allowed expenses and things like depreciation, I guess most will be reporting an income loss on their properties even though they might have had positive cash flow the whole year. This basically means you will not pay federal tax on passive income from real estate unless the expenses were very low and the rent you collected was really high.

If you make less than $100-150k and actively participated in the real estate investment, you can actually use up to $25k of losses as a deduction on other income that wasn't passive (day job etc). Real estate professionals don't have this limit because their income isn't considered passive (their day job is real estate), so they can claim many deductions and the loss per property could be used as a deduction on their income.

In summary you don't really pay federal tax on passive income from real estate investments if you file your taxes right and keep track of all the expenses. The mortgage interest deduction helps with that, but it's possible other deductions on schedule E will net a loss without it (the mortgage interest deduction would just be exta loss that aside from recording every year, wouldn't actually do anything). You will always pay property tax though.

States tax differently, but I think you are also able to use expenses to offset passive income. Will look into how it works in NC...

Reading about Trump's tax plan...

1) Mortgage interest deduction retained

2) Doubles standard deduction 

Home prices will drop and less homes will be sold to people as a primary residence. I don't think the price of rent will be impacted. Great opportunity for investors! Lower prices and less competition...not sure how it is in other areas, but central NC is a seller's market. For buyers, its hard to compete because people are willing to overpay on a house to be used as a primary residence instead of an investment. Maybe the changes will help turn this around.

Ran numbers again and found that 40k of itemized deductions (instead of accepting the standard deduction) would save 6-7k on federal taxes at a $150-160k income. This is assuming two $120k houses rent for $1200 each, with about a (mostly interest) $600 mortgage payment each and you have additional personal expenses to deduct. The additional deductions would be only 14k just from the mortgages interest deduction, where 26k is from other expenses. What this means is that you save about 3k from only the mortgage interest deduction. So with this situation, you are saving about 20% on the mortgage payments.

If can claim 100k of itemized deductions including mortgage interest expenses, there will be no gains because of AMT (or you might even owe more taxes). For example, with 160k income and 100k itemized deductions, you'd pay 5k of federal taxes normally, however under AMT guidelines, you have to pay 15k. This is long as income is under the 160k threshold to allow a 84k exemption...if income passes the threshold, you lose the exemption and have to pay significantly more taxes (flat 26% or 28% instead of the regular tax brackets). 

The bottom line is the mortgage interest tax deduction can be very beneficial under the right conditions. I'm no tax pro so don't take my advice on this though...there are lots of variables and people have different situations.