All Forum Posts by: Paul Doherty

Bill G.  What do you suggest for education on the subject?  I have until November before I act - that's when the lease is up on that property.

On the existing house?  So to do that I'd do what, list it for sale by owner?  How does that work?

If I'm going to sell a property do you think I'm better off avoiding the taxes and investing 100% of it into 2 or 3 additional properties, or would I make more money by simply paying the capital gains tax on the proceeds and invest the remainder in notes?

"But that's not really the note business, look up the term "velocity of money" that will tell you that your discounted loan is to be paid off as soon as possible and reinvest that money again. That will burn your calculator up if you have payoffs within 60-90 days of buying your note!"

Thanks @ Bill G.

If you could pay the note off in 60-90 days doesn't that seem to imply you could have just bought the note with cash to begin with?  How is that being accomplished that differs from doing it with cash up front?

Thanks for the replies so far.  If either of you feel up to it, please modify my scenario and make it realistic WRT the way note investing actually works.  I'd like to see the comparison done realistically.

I'm looking at doing a 1031 of a property later this year into 3 new properties and have been toying with the idea of instead simply paying the taxes on the proceeds and investing in notes.  That got me to thinking about comparing the two scenarios in a simple way.  

So let's say I net $150k after taxes for notes, or $170k in 1031 (tax-sheltered) for buying three new properties to replace the one I sold.  Here's a rough approximation of how I see both going down (I'm near-completely-ignorant on notes so help me out here):

- 1031 for property

Put 56.6k down on each of three 175k houses = 3 mortgages at about 118k each. At about 4.75% for 30 years I show a PITI of about $959 (or $1262 for a 15 year note). These will rent in my area for $1300-$1500 so it will cashflow either way.

So, at the end of the mortgage term, let's say we now have three properties, each worth $225k (from their original 175k value).  The cashflow seen during the mortgage can be considered a wash, from maintenance expenses, vacancies, etc.  The end result is for 170k down, we now have three properties free and clear that are worth $675k.  That's a 390% return!

- pay taxes and buy note(s) instead

Pay the taxes and net $150k from the property sale.  Invest that into one or more notes that earn 10-12% interest annually.  Just for simplicity's sake I'll assume I got one note at $150k.  By the time that note is fully paid off (assuming it all goes according to plan) I may have collected (here's where my note experience makes the math fuzzy) a total of 325k or so from the owner.  Making for a profit of 175k on the initial 150k investment, a 116% return!

So it seems houses have won.  Or have they?

Notes seems to be a better idea as you near retirement, as they avoid tenant issues, unanticipated maintenance expenses (when your income is less since you're not working) and they also keep you from the snowballing of costs as the number of properties rises (more rental houses equals more chances for things to break).  But they also carry with them the threat of the buyer defaulting and you having to "take steps" to either get them realigned in an adjusted note or take them to court and repossess the house.

I'm 49 now, and will be 50 by the time I go to do this move, so I want to make sure I've considered everything and make a good decision that sets me up for entry 10-15 years from now for retiring.  Any help/feedback appreciated.

If I've never done a 1031 or notes how bad/hard would it be for me to try to liquidate a house (I'll net about 170k) and use my QI to hold the money and obtain notes instead of new properties?  I assume this is a valid use of the 1031, since it can be used to swap houses for land, commercial buildings, etc.

Would there be a problem finding the notes within 45 days?  What does one look for to get a good return on the note but not get a second-position note (or is that OK)?  Does anyone on here specialize in arranging such a transaction?

Are you sure?

http://www.forbes.com/2010/01/26/capital-gains-tax...

"8. If you receive cash, it’s taxed.

You may have cash left over after the intermediary acquires the replacement property. If so, the intermediary will pay it to you at the end of the 180 days. That cash–known as “boot”–will be taxed as partial sales proceeds from the sale of your property, generally as a capital gain."

If I sell a property I own completely (worth 175k after realtor's fees) and want to keep 50k of the proceeds and 1031 the rest into 2 or 3 new properties how do the tax consequences play out?  Do I pay 15% on, say, 58k (paying about 8k in taxes) so I end with 50k?  Or is the amount of taxes paid based on how much I actually gained?  I originally bought the house for 89k in 1996.  I didn't know about mandatory depreciation and I've been renting it almost 10 years, so I only started depreciating it on taxes a few years ago.  Would the taxes owed on the 58k (or whatever amount) I keep out from the sale be taxed differently based on the cost basis of the house (what I paid minus what's been depreciated)?  Can someone help me make sense of this?  To summarize:

- Sell house worth 185k, netting 175k.  House was bought for 89k in 1996.

- Keep a net of 50k after whatever taxes are owed.

- Invest the remainder (~117k) into two or three other properties.

Thanks for any help/advice!

Thanks for the reply, Nick.  :-)

Here is what I got from them for 2013:

http://powerusers.info/images/misc/2013statement.j...

and here is what I got for 2014:

http://powerusers.info/images/misc/2014statement.j...

I also see that the deed transferred October last year at roughly 1 million.  So someone grabbed the property at 1 million, made improvements (added security gates, repainted, redid interiors of units, etc) and now is trying to get a premium price for it.  The unit was built in 1958.  I'm not sure what would qualify as class A or B+ but I seriously doubt this would qualify as A; I walked it yesterday and took videos and photos and it's in a bit of a "barrio" feeling area - not (1/2 mile) far from much nicer apartments that rent for around 1100-1200 for 750sf or so places.

Any help appreciated...