Re: Why limit your options? - Posted by Gene
Posted by Gene on August 03, 2009 at 22:14:04:
Just noticed the article is from 8 years ago.
Re: Why limit your options? - Posted by Gene
Posted by Gene on August 03, 2009 at 12:29:13:
Kindof making my point for me. These companies were on the right side of the trend. For leveraged companies (like individuals) the pain can be compounded during periods of deflation.
The other side of the story is…you can find thousands of examples of leveraged companies benefiting from leverage during periods of inflation.
The best plan for today might not be the best plan for tomorrow.
Here is comparison for you…how did better:
A)
guy in 1997 that purchased a 100k house for cash in riverside CA and rented it for 800 a month and sold it for 250k in 2005.
B)
guy in 1997 that purchased 5 houses for 100k each with $20k down and fixed rate 8% loans in riverside CA. Each was rented for 800/month and all 5 were sold for 250k in 2005.
Again the plan needs to change depending upon the trend. I do not think that “one plan is always best”.
Again…I agree that your debt free plan is best right now…but if we experience inflation, it will be far from ideal.
Re: You Must Be Reading My Mind - Posted by Dave T
Posted by Dave T on August 02, 2009 at 15:50:23:
Assuming that you are in the 25% income tax bracket. For the strategy you are proposing, the federal income tax hit on your flip profits will cost you around 45%. If your state has an income tax, then your total tax hit is even higher.
Re: You Must Be Reading My Mind - Posted by Vic
Posted by Vic on August 02, 2009 at 15:11:22:
Hey Light Walker,
I listen to Dave Ramsey often. I’m not sick of the banks because he says - I’m sick of the banks because I’m sick of how they can just change the rules at any point in the game. Well come to think of it, I guess that’s one of Dave’s points too. LOL
At this point, I think I’m just fed up with rentals, even the ones I own outright with no mtg on them. I’ve always said that I’d rather be in & out of them as fast as I can & be done with them. But somewhere along the line I ended up keeping some of them for rentals, thinking I’d just keep them for a couple of years & then sell them. Before you know it, one thing leads to another & you end up keeping them longer than you want, & then you get stuck in this kind of a mkt.
All of my rentals cash flow very well, so it’s not that I’m losing money on them, it’s just that I’m tired of dealing with them on an ongoing basis. That’s why I think you’re on the right track.
When you own rental property, it’s a 7 day/24 hour a day job, no matter what anybody says. You may not be there physically 24 hours, but you are certainly there 24 hours a day mentally, worrying about ins. going up, rents going down, taxes going up, repairs that affect your bottom line, tenants that don’t pay & so on.
After 14 years of being in this business, I’m now of the mindset that I’d rather just buy the house, fix it up one time, sell it & then be done with it & move on to the next deal.
As far as what to do with your money. The answer is it really doesn’t matter. Until you get more than you need to buy houses with, you can just keep it in a regular savings account. Do you really care if you get 3% interest or 4%. The savings acct. is only a parking place until you find your next deal.
Once you have all the money you need to buy houses with, I think then I’d look at loaning some of it out as hard money & maybe doing some other things.
When paying all cash for houses I’d probably do an LLC, just for liability purposes, but even there you run into complications. For ex. you may not be able to extend liability ins. from your homeowner’s policy to cover an LLC. In real estate, it seems like every time you solve one problem, it creates another problem in a different area. LOL
Vic
Re: You Must Be Reading My Mind - Posted by nancy
Posted by nancy on August 06, 2009 at 23:21:43:
I am buying in a above average blue collar neighborhoos, with good curb appeals… I really would like to get into true lower income blue colar neighborhood but the tenants there seems to be more destructive and I had a few of those, the turn over cost is pretty high… I had to do a lot of clean up and more ware and tear… I am buying in places where I feel safe driving there at night by myself… and where AC condensers won’t be stollen when the home is vacant… (I typically just give out combo code when ppl wanna to see th house)
I am also buying homes that’s build not earlier than 1975… most of them are around 1985 range… (Cash flow around 300-400/month with a loan… thought I could do better if I get older homes… I just think 30 years later… older homes would lose more of their values… by the time I am ready to sell and retire ?? I am 34 now… do you think I should be worry about the age of the homes?
what are some advice on finding some good helpers and setting up a system? i have a hard time finding a good trusted team to do make readys and rehabs… outsourcing to a company is expensive… individual handymay are often slow and not reliable… I don’t have enough homes to keep them busy full time… … that’s the problem I am facing now. (I manage around 14 SFHs now…not enough to hire a full time handyman)
nancy
Re: You Must Be Reading My Mind - Posted by LightWalker
Posted by LightWalker on August 02, 2009 at 11:01:36:
You ROCK Celeste-fl. It doesn’t take much my friend at $500 a pop. Not many at all. I CAN SEE… I CAN NOW SEEEEEEEEEEEEEEE!!! (LOL) =^) I’m having a sort of “personal revolt” against ALL Banks!!! =^)
Re: Cashin’ out … NO MORE BANKS ??? - Posted by Vic
Posted by Vic on August 04, 2009 at 13:44:22:
Gene,
But the rising interest rates will have a negative effect on people’s ability to qualify. Higher interest rates mean people qualify for less, which means that you won’t be able to sell the house for as much money. If you can’t sell it for as much money, then your equity will decrease. Somehow I’m not putting all the pieces of this puzzle together. I know wages will raise, which will allow people to qualify for more, but somehow I don’t think it would be enough to offset the loss in resale value. What am I missing in this equation?
Re: Cashin’ out … NO MORE BANKS ??? - Posted by Celeste-fl
Posted by Celeste-fl on August 03, 2009 at 15:11:43:
No, his books made him wealthy.
Re: Why limit your options? - Posted by LightWalker
Posted by LightWalker on August 04, 2009 at 07:06:40:
Sorry for the old link. The “debt free, no bank” concept is what I was shooting at. Here’s something from '07
There are tons of “debt free” companies out there. Some, we will never know about because they are privately held.
Gene, I think that you would agree with me that at the end of the day it’s much better to be out of debt than in it. In my opinion, the smarter companies operate out of profits and avoid banks altogether… just my opinion…
Re: Why limit your options? - Posted by Celeste-fl
Posted by Celeste-fl on August 03, 2009 at 14:41:41:
A guy in 2006 purchased 5 houses at 150k each with 20k down and fixed at 8% and was rented at $800 a month until 2007 and then he had to drop the rent and deal with vacancies,all 5 were sold at 40k each by the bank in 2009 after he lost them to FC.
Re: You Must Be Reading My Mind - Posted by brandoncbsre
Posted by brandoncbsre on August 02, 2009 at 17:57:20:
How the heck do you figure 45%…isnt it treated as ordinary income or short-term capital gains?
Re: You Must Be Reading My Mind - Posted by LightWalker
Posted by LightWalker on August 02, 2009 at 17:46:37:
Hey Dave T, that’s one heck of a hit… (LOL) … What’s the best way to mitigate? … Set up a Corp and take a salary? … or is that just simply the cost of doing business… Expect the Govt. to take 45% + …
Re: You Must Be Reading My Mind - Posted by LightWalker
Posted by LightWalker on August 02, 2009 at 18:07:51:
I hear ya…, but I was sort of thinking like Celeste-fl. Build up cash, and then buy decent rentals for ALL cash to create a passive income stream. How will you generate a “passive” income stream? Plus Dave T just said that we’re looking at a possible 45% hit on each deal if we’re in the 25% Tax Bracket. How will you mitigate that? … or can we?
I’m thinking we need some rentals… no? I would say get rid of the ones that suck, and keep the ones that don’t… Maintenance on my properties is really not bad at all. My properties are well maintained. I do inspections, and if they’re slobs, their lease will not be renewed. When I buy, I FIX EVERYTHING. Tenants are responsible for the small stuff, and I take care of larger items (unless they caused it outside of normal wear and tear) …
I think rentals are a key piece to the puzzle, unless you move to paper.
Quote: “In real estate, it seems like every time you solve one problem, it creates another problem in a different area. LOL”
Ain’t that the truth… (LOL) … =^)
So what’s your strategy for passive, and for the 45% Tax hit at the 25% Bracket?
Re: Cashin’ out … NO MORE BANKS ??? - Posted by Gene
Posted by Gene on August 04, 2009 at 16:28:22:
Study what has happened in past inflationary periods. I cannot find one example of a period of moderate to high inflation where RE values didn’t rise.
History is the key to the future.
Re: Cashin’ out … NO MORE BANKS ??? - Posted by Gene
Posted by Gene on August 03, 2009 at 15:53:16:
You don’t think leverage can be a good thing when used correctly?
Re: Why limit your options? - Posted by Gene
Posted by Gene on August 04, 2009 at 09:32:00:
Your last statement is not really a fair statement.
If you are saying it is better to own a 1 million dollar house out right rather than having a mortgage for 800k…of course I would agree. But that’s just because your argument is really “its better to have 1 mill than 200k in equity”.
Having debt on a profitable deal or gererously cashflowing property is not a bad thing.
I would never have been able to quit my job and invest in RE full time if I didn’t use leverage. I do cash deals now because the type of property dosn’t qualify for traditional lending (MH on land, small commercial properties) but these deals have at times cost me much larger deals because I was illiquid and couldn’t move.
And as I said in previous posts…if we experience inflation you would be much better being leveraged out with fixed rate financing.
As far as companies goes…I think smart companies are smart enough to employ leverage when its needed. Smart companies wouldn’t limit their options.
Re: Why limit your options? - Posted by Gene
Posted by Gene on August 03, 2009 at 15:51:55:
Exactly.
What works best in part of the market cycle will destroy you in another.
Re: You Must Be Reading My Mind - Posted by Dave T
Posted by Dave T on August 02, 2009 at 23:42:04:
The profit from property flipping is ordinary income, not capital gains. Since property flipping is an active income business, self-employment income taxes could also apply depending upon the business entity used.
Ordinary self-employment income taxes (25% in my example) plus 15.3% for social security and medicare, plus state income taxes starting at 5% gets you to 45% or higher depending upon your state income tax rate.
Re: You Must Be Reading My Mind - Posted by Dave T
Posted by Dave T on August 02, 2009 at 23:51:09:
You can mitigate the self-employment income tax bite on your taxable profits by doing your property flipping in an s-corp and taking a reasonable salary.
If you are just going to focus on taxes, however, you are going to short-change yourself. Your real estate investing goal should be to have the highest income possible for your business. Even if you give up to half of that to the tax collector.
Why not dream that one day you have a $1 million tax bill. When you do that, you will probably have had $5 million in revenues that year.
Re: You Must Be Reading My Mind - Posted by Vic
Posted by Vic on August 02, 2009 at 22:12:35:
Hey Light Walker,
Well for passive income you could become a hard money lender or a note buyer.
Let somebody else deal with all the headaches & stress of rentals. In my opinion, rentals are not passive income anyway. It’s very active income. Mentally active that is, often times physical too. Somebody has to show them, run ads, call utility co’s to have power turned on in your name, deal with ins., evict non-payors, get grass cut & so on. With rentals you’re always worried about something. It seems like everyday there’s something to have to deal with - even if you own them outright.
I really don’t know where he got 45% from. If you keep the properties for 12 mos. you’re only looking at cap gains. If you keep them less it’s ordinary income. Rental income is ordinary income too - you just have the depreciation deduction.
To me when you factor everything in, buying & selling is still the best, quickest way to earning money in real estate.