[surveyor]

Not a terrific option, but if they had extra space and depending on the configuration of the house, they could rent out space for their house to a tenant who could clean up the property and do minor repairs. craigslist seems to have a few of those people advertising for such an arrangement.

Certainly they should be choosy and make sure they do a check on any person who would live with them.

But like I said, not a terrific option.

[surveyor]

However, most homeowners will never see the 20-30% return you’re talking about. Historically, RE increases at the rate of inflation, including increases in square footage or better construction for the typical house.

Not true. You are thinking that I am trying to get 20% or 30% because of appreciation. That is not what real estate investors do. It is very possible to get a return of 20% or 30%. In my projections and calculations, I use only a 4% appreciation rate, which is about inflation. I do not use funny numbers like 10% appreciation. Still, you have to choose the properties that can give you this kind of return, and SFRs/condos are not going to do it for you.

Here is the calculation:

Return on real estate = (cash flow + appreciation + depreciation tax decrease)/downpayment

In my calculations, I strictly avoid using appreciation rates of more than 4%.

As for real estate investing being only for professionals, that is not entirely false, but it is not brain surgery either. All it takes is being able to educate yourself, being patient, and diligent. But yes it is basically a second job. My advice is don’t do the day to day management yourself, just hire property managers.

[surveyor]

A future investor

powayseller: I know you are planning to re-enter the real estate market both as an owner and as an investor at some time in the future (correct me if i am wrong, those are statements you have made). During all this time, I know that you’re educating yourself as much as possible.

And I don’t have to tell you that time is the greatest tool to manage risk in an investment, real estate or not. Time is even more critical in real estate investing. The less time you give yourself, the more risk you take. I do not hold any illusions about convincing you anything about real estate, but you should consider that.

I know that there is risk in the real estate market, but there are ways to manage risk in real estate – by diversifying into other areas of the country, by holding several different types of properties (avoiding SFRs and condos), using time to your advantage, and by being strict in choosing high quality properties (but not necessarily high-priced).

Like I said, I do not think I will convince you of anything nor do I desire to. I’m just backing up what I’ve said in previous posts and giving you a rationale for why I think the way I do. In case you think I’m in denial or delusional about the real estate market.

[surveyor]

Wait a minute…

I think that people who believe real estate will go up in the long run are CORRECT.

Isn’t that kind of thinking heresy here? 🙂

Oh, for perrychase, I think that real estate is a better vehicle to get rich because of the formula below:

Return on real estate = (Cash flow + Appreciation + Depreciation)/downpayment

Using this formula, you can choose properties that can give you a rate of return better than 20%.

[surveyor]

Crazy Talk

I choose not to sell right now even if the market goes down because:

a) the properties allow me to lower my income taxes and let me use my money in a more efficient manner (by using depreciation and the real estate professional tax deduction)

b) the properties themselves are cash flowing.

c) eventually, over the long run (and I am planning on keeping these properties for about 15 to 20 years, assuming I don’t pass it on to my kids) the value will go up.

d) real estate over a long period (10 years or more) gives a better return than the stock market (because of the tax advantages). By my calculations, a 20% to 30% return given by real estate is better than a 5% return given by CD’s and a 12% return given by the stock market.

[surveyor]

Money article

There’s an article in money.cnn.com right now that talks about the housing markets that are likely to drop and those that are likely to go up. It lists Texas and North Carolina areas as places that are likely to go up.

http://money.cnn.com/popups/2006/fortune/invguide_realestate/2.html

It’s evidence of what I’ve been saying that not everyone is on a California/San Diego real estate cycle.

As for commercial, the properties I’ve been investigating cash flow well and that is the sign of a healthy market. I’m not trying to buy billion dollar properties. I’m just trying to buy small commercial properties. The most expensive one was a 12 unit for $775k. For that price, you can buy a house in San Diego, but in other places you can get a 12 unit that cash flows.

And let’s say the 12 unit goes down in value over the next 3 years. It still cash flows. As long the the properties make money, it is ok. The worst thing that happens is that I can’t refi money out of it.

There are opportunities out there if you do a little research. If you instantly say to yourself, well the entire U.S. is going to hell in a hand basket, it will blind you from the steps necessary to make you rich.

[surveyor]

hey i heard my name called…

powayseller, i would really appreciate if you would not misrepresent my positions and statements. I’ve tried to be respectful of your opinion. I would appreciate the same consideration. Your putting words into my mouth borders on a lack of reading comprehension.

If you go through my posts, I have never once said that the current market was a blip. I have never advocated the position that prices would continue to go up after a break of a year or two. I’ve also tried to point out the difference to you between RESIDENTIAL and COMMERCIAL properties, as well as the difference between MACRO and MICRO economics. I have also never implied that my properties are superior in any way or that they were immune to drops. In fact, in the previous thread, I AGREED that they would lose value. In fact, I estimated the next boom to be in line more or less with your 12 year forecast (2016).

Anyways, please consider my request.

[surveyor]

30% of 50% of 100%…

Exotic loans. ATM homes. 25% option arms. Sure. These were available pretty much everywhere in the RESIDENTIAL real estate market. I mentioned above to avoid the RESIDENTIAL real estate market. Do not buy any SFRs or condos.

From what I’ve read of the bubble, it has affected RESIDENTIAL real estate, not commercial (defined as office buildings, 5 plexes and above).

And the reason why real estate is the best way to get rich is simply because real estate is how most rich people have become rich. All of the good tax breaks are in real estate. You can put down 20% to buy a property that you can take advantage of 100%. Simple. This is true in down markets and up markets.

(does this mean you can buy any property and it will make you rich? no, you have to choose well).

(for a person who is good at internet research, the idea that you’re not clever enough to figure out where the possible up markets might be is somewhat perturbing. if anything else, refer to my post above where I mentioned Texas and North Carolina)

I would like to tell you more, but I get the feeling that there is nothing I could say to make you change your mind. Which is cool.

Have fun!

[surveyor]

Real Estate Investing Loopholes, page 199:

“There are two different ways that the recaptured depreciation may be taxed. For real property, the portion of accelerated depreciation that exceeds the straight-line depreciation is taxed at a special 25% tax rate. The portion of depreciation that would have been taken under the straight-line rate will be recaptured at the ordinary tax rate. Non-residential real estate must be depreciated over 39 years using the straight-line method, so only recaptured depreciation will just be taxed at ordinary rates.”

standard disclaimer applies: see a tax expert. talk to a tax expert. feel up a tax expert. 🙂

standard disclaimer #2: disregard “feel up a tax expert.”

[surveyor]

Macro/Micro/We all scream economics…

PS – one of the things i notice about your posts is that you tend to have trouble differentiating between macro and micro economics. Because Roubini (a.k.a. God) says the whole country is going to go through a 30% median decline, you assume that every single piece of real estate property in the United States of America will decline 30% in price as gospel. =shrug= It’s up to you. And I’ll agree that my San Diego properties are going to lose value over probably the next five years.

But you ignore the fact that other states are not on the same real estate cycle as California. There are other places around the country that are actually rising up in value. So it is possible to buy an investment PROPERTY (not house) in a good market and it will not lose value.

By the way, my time frame is not 3 years. If we’re still around, I’ll let you know how the properties are doing in 2016, which by my calculations should be when the next San Diego boom is (more or less). That is when I will sell. We can compare tax analyses then. 🙂

And if the properties decline in value, so what? It’s only temporary. They’re cash flowing, they’re lowering my taxes.

Here’s the thing – you complain about how hard it is to get rich. Well, real estate is still the best way to do it, even in this environment.

Does that mean buying in San Diego? No!

(dunno if I put enough caveats for you all, but i will leave it at that. i know i’ll get reamed for this later. =sigh=)

[surveyor]

2. Don’t assume that an investment strategy that is tax advantageous to someone else is advantageous to you.

I wasn’t suggesting an investment strategy or a lifestyle change. I just stated that there is a way to significantly lower your taxes using certain tax rules.

Also, you wrote that “When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates.” The law is now such that depreciation recapture is a special 25% rate. This went into effect in 1997. Your reference is stale and incorrect.

I do not have the book with me right now, but I believe it did cover the 25% rate. I don’t remember specifically what it said, I believe it stated that the 25% rate is for depreciation taken above the depreciation tables. I’ll look it up when I get home. But my point was that this tax can be avoided by a judicious use of a 1031 exchange.

Also, one of the things I read in the book is that when you do sell, whether or not you took the depreciation, the IRS will assume you did. So you should at least document the depreciation. Even if you make too much, the loss is not eliminated, it is deferred until the next year (and so on).

But hey, playing around with your taxes is not something you should just go off by some guy in a website. You have to research it and talk to knowledgeable tax experts.

But neither of us is a full-time RE professional. If one of us changed our profession we would take a large pay cut and get the depreciation, but that would be a losing proposition.

Read the book and take a look at what the IRS qualifies as a real estate professional. It does not require that you become a full-time real estate professional. It just requires that you spend more time on that job (real estate professional) than you do any other job. It also requires a minimum of 750 hours a year spent on that work. That’s 14 hours a week.

I bet powayseller spends at least that much time reading this website… Under the book, that might be considered one of the activities that a real estate professional would do…

Anyways, my point is that if you take the time, you can find a way to make the tax code work for you, instead of working for the tax code. Maybe they will change the taxes to make it more fair, or increase taxes or whatever. You have the power to take action now and make full use of your money instead of giving it to the U.S. gov’t.

[surveyor]

From “Real Estate Investing Loopholes”, page 36:

“If you can qualify as a real estate professional, then 100% of your real estate losses can be used to offset your other income. Otherwise this real estate paper loss is limited to $25,000 if your income is less than $100,000, and begins to phase out as your income increases. At $150,000, the $25,000 real estate paper loss is totally disallowed… One way around the paper loss limitation is if you or your spouse (if filing jointly) can qualify as a real estate professional. ”

The book also states a test as to how you can fulfill IRS requirements that you qualify as a real estate professional.

page 54

“When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates. You then pay the capital gains rate on the difference between the basis and the sales price (less costs). Or you can delay the tax through a like-kind exchange.”

So yes you have to recapture the depreciation when you sell it, but if you keep doing 1031 exchanges, you can essentially avoid paying it (which was my plan). Also, if you do have to pay taxes on your depreciation, you can at least arrange your depreciation to be paid at your ordinary income rate, which in the future should be lower if you have planned it out right.

[surveyor]

PS – one word: depreciation…

See, there’s an interesting tax deduction where if you qualify as a real estate professional, your ability to write off losses against your taxes is almost unlimited.

So if you buy enough real estate and assess depreciation against them, in Uncle Sam’s eyes, you are losing money, but it’s only depreciation.

If you have a way other than buying an asset losing 10% of its value each year, to save on taxes, I am all ears.

You don’t have to buy in California. Buy in other places that are doing well. Texas, North Carolina, Idaho. Also, do NOT buy residential. Buy 4 plexes or more.

My wife and I make about $200k and our total federal taxes total $6k. There isn’t a whole lot you can do about social security, but federal and state tax can be lowered by quite a bit.

[surveyor]

Lower Your Taxes…

If you want to lower your taxes, there are ways to do it. It just takes effort and research. It is very possible for a person making $150k to pay less than $5k in taxes using legitimate and legal tax deductions. There are so many of these tax “loopholes” that it is not necessary to petition for the fairtax. And really, do you think Washington D.C. would actually take the time, effort, and pain to give us the fair tax?

I personally would like to have the fairtax so that it would eliminate a lot of the inefficiencies of our tax code and it would also discourage the avoidance of taxes.

However, the way to lower your taxes is out there. Unfortunately I don’t think a lot of people on this board would take this route because it would entail….

…investing in real estate. 🙂

[surveyor]

Asians

There are certain cities and states that are perceived as “Asian friendly” and California and Washington state are two of them. There are already established Asian communities in these two states and it makes being there easier. A lot of times there is an established network of family as well that can help ease the assimilation of an out-of-state family.

Also, the high tech economy of California attracts a lot of well educated and skilled Asians.

[Author]

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