All Forum Posts by: Brad Rondeau

I bought a condo in Laguna Niguel CA in December 2009 (7+years ago).  I lived there one year then bought a bigger home with my new wife.  I continued to own and rent the condo.  Cash flow in coastal CA is very hard to get because property is very expensive and rent is low in comparison.  I started with a small negative and currently have a small $170 positive cash flow per month.

I bought for $365,000 (then added around $17,500 in improvements) and currently could sell with a realtor for about $550,000. 

Well over $11,000 per year of principal is being retired on the 20 year loan.  Same great tenant all these years. He now wants to buy it and I am checking it out.  He wants to buy at about $520,000 which would be fine because I would save on realtor fees and would not have to paint, replace carpets etc (no need to fix up to show the property).

I've saved lots from the $13,635 depreciation per year (13,635 * 7 years = 95,445). But I never knew about the Depreciation Recapture rule. When I sell it I will get a check for about $300,000. I thought all profit/appreciation would be at 15% long term capital gains rate. But it sounds like I will have to pay closer to my ordinary tax rate (25% fed + 9% CA) on the $95,445 that I have already depreciated.  Wow!! Does this sound right?  If so I may retire now to put me in a lower tax bracket for this 2018 sale.  Then maybe start a business in 2019 (I'm currently 58).  

This property was great with the price appreciating and using the depreciation rules to lower my very high taxes. But now it seems if I sell I will have to pay back all the money that I saved from depreciation because of the recapture rule.  Can anyone shed more light on this rule?

I would like the $300,000 but don't really need it.  But the time is right because with these rising interest rates fewer buyers will be able to afford this property in the future.  On the other hand if I keep it for ever I never have to pay back the depreciation savings.  But this will leave me with my small positive cash flow until the 20 year loan is payed off in 13 years.  At that time I will have a huge positive cash flow but do I really want to wait 13 years for that?  

Last year I bought my first mid-west property - Burlington KY (northern KY), this is really a suburb of Cincinnati. I do like the cash flow, I may do another one or two in same area this year.  If I re-invest my profits from CA in new properties in mid-west would that save me from having to pay the depreciation recapture etc?

Any thoughts or insight is appreciated. 

Just checking back in.  I continue to own the condo in Laguna Niguel.  Currently at a small $170 cash flow per month but the property has continued to appreciate nicely.  Well over $11,000 per year being retired on the 20 year loan.  Same great tenant all these years.  He now wants to buy it and I am checking it out.  I've saved lots from $13,635 depreciation per year (13,635 * 7 years = 95,445).  But I never knew about the Depreciation Recapture rule.  When I sell it I will get a check for about $300,000.  I thought all profit/appreciation would be at 15% capital gains.   But it sounds like I will have to pay closer to my ordinary tax rate (fed + 9% CA) on the $95,445 that I have already depreciated.  

Wow!!  Does this sound right?  Rentals in CA are great with the depreciation but now that I have to pay it all back, not so much (still I can't complain).  I would like the $300,000 but don't really need it, maybe just never sell it so I don't have to repay the money saved on depreciation.  Currently renting for $2,530 but I will increase the rent a large amount if I don't sell.  Loan will be payed off in 13 years and then I will finally have cash flow like in the mid-west.  

Last year I bought my first mid-west property - Burlington KY (northern KY), this is really a suburb of Cincinnati.  I do like the cash flow, I may do another one in same area this year.

Any thoughts or insight (especially on depreciation recapture) is appreciated. 

Hi, I've invested in residential properties but not Commercial Land.  My mom inherited 8.68 acres right off 10 fwy in Indio CA (Riverside county) years ago.  I don't know all the details - she sold the property 10 years ago a it's peak price to some savvy real-estate investors that seem to be the commercial experts in that area.  Unfortunately see financed the sale and is receiving payments.  Around 2011 buyers were going to default and mom had to re-do the deal in favor of the buyers or they would have defaulted.  Last year they asked for more concessions and mom extended loan another year and reduced interest rate.  But made buyers sign a quitclaim deed that says if they don't pay the remaining $645,000 by 5/15/16 they have defaulted and property comes back to mom.  As the date is approaching the just emailed that they could get enough cash to settle this today with a cash payment of $500,000.  They have already improved the property by getting utilities in the street etc.  Mom doesn't want to hassle with the property and is inclined to take the lower amount again.  

I see the property is currently listed for 1.3 million.  I don't know the area and want to get an appraisal.  I'm told that the buyers (a real estate development company) do most of the commercial appraisals in that area.  Any ideal where I would go to get an unbiased commercial land appraisal?  I don't want to find a firm in the area and find out they just appraised there own property - and gave me a bogus price.  Any other thoughts on this deal would be appreciated. 

Hello, I have been investing in Orange County single family homes for a while. In the midwest I can buy a house for $100,000 and immediately have a great positive cash flow. In orange county it's almost impossible to buy an single family home and have a positive cash flow.  The price of the home vs the rental price just doesn't work out.  I'm wondering about multi family units in Orange County.  For example is a 4-plex in Anaheim as good for investors as say a 4-plex in the midwest?  Can we expect a similar cap rate as say the midwest?  I've never thought about multifamily units but maybe it makes sense in Orange County?

Hello, I was searching tulia, zillow etc for houses to buy in a town I am considering moving to.  I came across one that was being marketed by auction.com.  It says opening bid 65,000 and that 102,000 is owed. I googled auction.com and it seems most people feel they are a scam.  I'm interested in the home if I could get it for around 110,000 (zillow shows 200,000) but don't know what kind of issues it would have.  I have the address.  Does it make sense to write a letter to the occupant and see if they are the owner, and would they want to sell for 110,000?  It seems that maybe the bank now owns it any occupant is just the foreclosed owner who may be living there for free.  How do I find out if he has the right to sell?

Any thoughts would be helpful.

Thanks for the great info.  So is capital gains tax 15% (federal) and 9.3% (State)?  So a total of 24.3% on my gains?  I have shown losses on my tax forms for several years so hopefully I will get all that back when I sell (I have not been able to benefit from the losses yet, I believe my income was too high).  Also the depreciation has been reducing my taxes but I did not know that I would have to pay money back in Albert's example.  Any more info on this would be great.

I've considered the 1031 as a way to get cash flow property and delay paying taxes on my gain.  I guess it would make sense if I found a great cash flow multi unit property out in Riverside county (away from the expensive coast).  I'm not sure yet whether I want to deal with multiple tenants that will not be as good as the ones I have now in my condo.  Would the proceeds have to be invested immediately on the 1031 or is there some type of waiting period.

Hello, My property is in Laguna Niguel CA. I purchased a 3 bdrm condo for $365,000 in Dec 2009 with 20% down. I now have a 4% loan but pay $280 in HOA fees monthly. I did about $16,000 in improvements - paint, carpet, remodel kitchen, new AC etc. I lived in it for one year and then started renting in Jan 2011. I started renting at $2,175 and now the rent is $2,330. In December 2012 I got a new 20 year 4% loan. I have a small cash flow now but was negative for the first 2 years renting. Each month about $800 is retired from the loan. According to zillow the property is now worth $542,000 (costal property big appreciation).

My tennants lease will be up next year at the end of April. Currently I am leaning towards selling at that time but I am concerned about taxes. Since I did not live in it for 2 years I assume that all my gain will be capital gains. I think my tax bracket is normally around 28%. But what if I have an additional $120,000 gain from the sale next year. I'm assuming that would kick me up a tax bracket. I'm considering taking time of my job - maybe don't work all of 2015. Then when I sell in 2015 my only income would be about $20,000 from interest/divedends and the $120,000 gain from the condo sale. Does this make any sense? I'm not that savy when it comes to taxes. Any thoughts on how to save some tax money would be great.

I spent all day yesterday looking at cash flow properties in other markets - Texas, Memphis, south east. The properties/neighborhoods seem rough with much larger management/tennant issues. I'll cotinure to look. As I think of my situation - I really don't need cash flow or more income at this time. All my assets continue to grow (mostly stock market) and continue to generate wealth - this is what I am after. I am well protected against any dips or downturns.

In the menatime I will take my $39 cash flow and add $100 to it each year with rent increases. I realize that my 20 year loan keeps my cash flow low but that is ok as debt is being retired much faster. My 4+ years of owning this property show expenses to be low and predictable (of course anything can happen and I am well prepared financially). If appreciation and rent increases stop today I'll continue to retire $10,000+ of principal each year thanks to my great renters. Since I bought at the bottom of a huge dip it is unlikely that a large chunk of my appreciation would be wiped out.

Guys, thanks for the great replys and different perspectives. I've had friends/family members that thought they were making money in businesses only to find out years later they were losing everything. That's why I like to analyze this from every angle to see if I am missing something.

I especially like the input from the other CA investors as they understand what I am going through (things are definitly different here - the google busing story made me laugh when I read about it a while back). I feel my 20 year 4% loan gives me a huge andvantage. I know appreciation will not continue for ever but I still feel ok with my tennant retiring 10K of principal each year and each year I will have $100 more cash flow as I continue to raise rent. Also if cash flow were the only important thing I would refinance - into a fourty year loan and have plenty of cashflow (my principal retirement would now be almost 0 for many years but I could at least say that I had cash flow).

Local experts are expecting 5% appreciation for each of the next 2 years and then it should level off - maybe time to sell at that point or do a 1031 tax exchange for income producing property in mid-west or Texas or South east. I'm going to talk to memphisinvestmet about buying cash flow properties remotely. The "remotely" part scares me but who knows - if I can get good property management maybe I will sell stock market investments and buy cash flow property. Again I don't need the cash flow (my job as SAN engineer produces plenty) but it might be nice to have more assests that produce passive income. Of course I would be trading in the huge gains I have made from my stock assets.

All good info and I will cotinue to educate myself. I want to get out of the corporate rat race at some point and aquiring solid assets seems to be a good way to get there.

I keep hearing about cash flow and I've been beating myself up because my condo rental has only $39 cash flow each month. The property is in Laguna Niguel CA. I purchased a 3 bdrm condo for $365,000 in Dec 2009 with 20% down. I now have a 4% loan but pay $280 in HOA fees monthly. I did about $16,000 in improvements - paint, carpet, remodel kitchen, new AC etc. I lived in it for one year and then started renting in Jan 2011. I started renting at $2,175 and next month the rent will be raised another $95 to $2,340. In December 2012 I got a new 20 year 4% loan.

Two years ago the roof leaked and did $2,500 in damage to walls and ceiling. But HOA fixed roof and insurance paid for repairs, the contractor covered my deductable so there was 0 out of pocket for me. Each of the 3 years I have rented it I have had between $300 and $400 in repairs each year (usually plumber and maybe pest control).

Since I have been renting it the condo has appreiated by 30% (over $100,000). Subtract my $16000 in repairs and I have $84,000 in real appreciation. Looking at my loan - $800 in principal is being retired each month (by my tennant). If I consider $28,000 in real appreciation per year plus $9,600 principal retirement each year - then this tennant has been adding $37,600 of wealth to me each year. This is $3,133 per month - am I missing something?

I beleive my risk is managed somewhat as HOA will pay for any issues related to roof, structure, grounds etc. I beleive repairs will stay around $300-$400 per year. I put in a new AC and kitchen along with bathroom faucets etc 4 years ago so the place is solid.

Even with a reasonable appreciation of 3% per year and 3% rent increase along with $9,600 of principal retirement increase, I will add $24,900 in wealth next year ($2,075 per month). Things will get better as time goes along because with my 20 year loan, principal retirement will escalate (all paid by my tennant).

Also, my tennants are great - treat the property like it is their own, never ever late on rent etc. They can't quite afford to buy so they will likely be there for years. So I still wonder if I am missing something. If my tennants are addding $2,075 (consertive) of wealth each month how can I go wrong? There is no need for me to find excessive cash flow as my job pays all my bills and allows me to save 20% of each pay chaeck. Of course my cash flow will sky rocket in 18.5 years once my tennants pay off my loan.