Life of a Landlord

NEW -> Contingent Buyer Assistance Program
Yes, let's look at those numbers.... assuming 10%, the payment would have been $1,755 per month. This is still less than the rent on a house. Now, let's say you did refi back in 2001, but didn't take any cash out or extend the length of the loan. At 10%, it would be have been really silly not to refi. So, you refi in 2001 and your payment drops to $1,246, much lower than you can rent the house for. Dec 2007 you now owe $120K on that house. But instead of just spending the $500 per month you are saving with the lower mortgage, you start adding that to your retirement account and continue to do so until 2018. The retirement account is doing pretty good.



I know this only has to do with a primary residence, but the point is that even if you bought at the worst time, you still ended up better off than had you opted to rent that entire time. It seems that people here are saying it's stupid for anyone to buy now, even a primary residence. Maybe I'm misinterpreting, but it's the sense I'm getting.
 
actually i miscalculated. 200 to 630 over 20 yrs is more like 6% annualized. lop off inflation and its roughly 3-4% annualized appreciation.



and of course '88-'07 is an example of really bad timing. if you used '85-'05 obviously a very different answer. the point is don't count on long-term appreciation being a guaranteed CYA for your decisions right now.
 
Stepping,

I think also you're not taking into account that one bad renter or even lost cash for 1 month out of the year will completely blow the cost model away. As well as any little error that may happen.... (appliance issues, plumbing issue, rent is a PITA... they pay late....).



Good luck and be sure to take some pictures of the home with the tomatoes!



We're slowly closing in on our home in Northpark (prices keep dropping and once he hit our target we'll purchase also - maybe sooner than later).



-bix
 
<em>"I know this only has to do with a primary residence, but the point is that even if you bought at the worst time, you still ended up better off than had you opted to rent that entire time. It seems that people here are saying it?s stupid for anyone to buy now, even a primary residence. Maybe I?m misinterpreting, but it?s the sense I?m getting."</em><p>



<p>

Yeah, you're right. You had better buy now.<p>

<p>




<p>

And by the way, in your calculations, you may want to consider that you will have to pay income tax on the recaptured depreciation unless you never plan to sell or always plan to like-kind exchange.
 
<blockquote>Yeah, you?re right. You had better buy now. </blockquote>


You better buy two, or three. It's a Buyer's market - best time to buy! /sarcasm off.
 
[quote author="Major Schadenfreude" date=1209737264]I went to Paso Robles to pick tomatoes at a friend's brother's place about 15 years ago. It was beginning of October, as I recall, and they had just gotten their first frost. They had stopped watering the plants a little before that. What happens is the first frost plus no water make the vines think (correctly) that they are going to die. So, they invest one last great effort in producing offspring to continue their species. The result is a tomatoe which is extremely tasty because the tomatoes aren't bloated with water.



Man, those were the best tomatoes ever! We jarred them and they made delicious pizza sauces during the winter months.



I envy anyone who can live comfortably in Paso Robles on their own arable plot. Beautiful country out there!</blockquote>


If anyone is interested in home canning, you can read the USDA's <em>Complete Guide to Home Canning</em> online for free:

http://www.uga.edu/nchfp/publications/publications_home.html



Modern tomatoes have been genetically engineered to be resistant to pest and have lower acidic levels. So "old" recipes like those found in early to mid 1900's <em>Ball Blue Book</em> publication might not work as well.
 
step - I am a bit confused, and am confused about the same point I brought up before. You asked our opinion, and when we give it to you, you come back and say that you disagree. They are just opinions. Why are you asking if you already have your mind made up and your opinions are not open to change? Ex. - Somone says you will not like it when you are upside down by 53% and you respond that prices will not decline by that much in Costa Mesa. Why did you ask if you do not want their opinion? We have had a few posters do this now and I find it interesting. Will you feel correct if you answer all opinions with your own? Are you waiting for someone to say, " Yeah Step, in your situation you are doing the smart thing."? Why are you asking our opinions?
 
[quote author="stepping_up" date=1209767751]I've run the numbers and with the tax break, it is the same as leasing a house. </blockquote>


I don't think this is accurate. If it were true, we really would be telling you to buy right now, and many of us would be buying as well. I suggest you read the post below and make sure you have really accounted for <em>all </em>of the costs of ownership.



<a href="http://www.irvinehousingblog.com/blog/comments/rent-versus-own/">Rent vs Own</a>
 
using the number step gave us, 430k, 10% down, 30yr 5.875%, i get PI is $2300/mo. then figure TI at 1.75% = $625/mo



so PITI =~$3k. They are going to reap the full tax benefit (said were right at std/itemized break even before), so $2k interest * 40% = ~$800/mo



so net is ~$2200/mo plus maint.



what am i forgetting?



(no MR or HOA where they bought, maybe $100/mo PMI?)
 
Freedom is pretty darn close with the exception of TI. T is $361/mo and I is $64.75 with EQ. Remember it's 1255 Sq/ft. We have no PMI. PITI is $2712. Tax savings is pretty darn close to $800/mo, making net $1,912/mo plus maintenance.





"I don?t think this is accurate. If it were true, we really would be telling you to buy right now, and many of us would be buying as well. I suggest you read the post below and make sure you have really accounted for all of the costs of ownership."



That's because you guys all want to buy in those new/newer/newish subdivisons with HOA and MR. Owning in those areas, even at our current price, would make owning more than renting. You all are overestimating the insurance because it's 1255 sq/ft. Replacement cost on $1,255 sq/ft vs 2,000 sq/fit is a whole lot less. Multi policy discount with AAA and insurance is really reasonable. I ran everything... even had an argument with one mortgage guy about the fact that our actual tax savings was less than he was telling us because I factored in the loss of the standard $10,700 deduction.



"step - I am a bit confused, and am confused about the same point I brought up before. You asked our opinion, and when we give it to you, you come back and say that you disagree. They are just opinions. Why are you asking if you already have your mind made up and your opinions are not open to change? Ex. - Somone says you will not like it when you are upside down by 53% and you respond that prices will not decline by that much in Costa Mesa. Why did you ask if you do not want their opinion? We have had a few posters do this now and I find it interesting. Will you feel correct if you answer all opinions with your own? Are you waiting for someone to say, ? Yeah Step, in your situation you are doing the smart thing.?? Why are you asking our opinions? "



I thought you guys would be realistic in your opinions. Instead Iget unrealistic projections of 53% decline and telling me that my PITI after taxes CANNOT be anywhere ere owning. Well, now you have the numbers. Show me a single family 3 bd with big lot and 2 car garage that I can rent for much less than $2K/mo. I can get a nice townhouse for that. I do now understand that it may not be the investment of a lifetime and I do appreciate that. However, I think some of you guys are absolute nuts thinking that houses are going to go to $250/sq/ft. If the cautious and the bears meet in the middle, it's not going to be a bad deal for us.





"And by the way, in your calculations, you may want to consider that you will have to pay income tax on the recaptured depreciation unless you never plan to sell or always plan to like-kind exchange."



I've thought about this a lot, do we opt to do a 1031 exchange or maybe we just pay the long term capital gains rate that we would paying once we retire. One option is to do it in the house you eventually want to retire in and then after a certain amount of time you move into it. Shelter today that may not exist in 20 years. We'll cross that bridge when we get there with the tax laws of the future.



For the tomato lovers, thank you. This is going to be the first year that I will enough to not only have salads,soups and sauces from summer to fall, but to actually can and dry some too. Home made sundried tomatoes are awesome!



Thank you to everyone who has responded. I'm not dismissing anyone's thoughts and appreciate the comments.





Anyway, I will keep you posted. Maybe I'll get to have schadenfruede moment or maybe I'll be crying the blues. We shall see.
 
Some people have been very great about explaining their positions and other have just been supportive and I appreciate both of those groups. However what really bugs me are the comments like Cal Gal's 'You better buy two, or three. It?s a Buyer?s market - best time to buy! /sarcasm off. " This is someone who thinks they are so smart and so much better than I am that they enjoy making comments like this. If this is what makes these people feel better about themselves, they would be better off spending posting time with a therapist and getting their self esteem in order. These are the people who will experience absolute glee if it turns out that I made a bad decision. Advise, if you will, but don't try and make yourself feel superior when none of us knows for certain what the ultimate outcome will be... there are probabilities for all arguments, but no excuse for being a jerk who needs to feel better about themselves.
 
Now look who's calling the kettle black.



My dear, you asked for opinions and you got them. Just because most don't agree with your logic, doesn't make them "jerks". The sarcasm level is always high here on IHB, don't you know that? No matter how you rationalize your decision, the vast majority here don't agree with you. That's just fact.



Good luck to you.
 
No, just stating that some comments have been intentionally rude so that the poster feels better about themselves. Yours were also in that category. Go ahead and feel great about yourself without having said anything meaningful one way or the other.
 
[quote author="stepping_up" date=1209813624]"And by the way, in your calculations, you may want to consider that you will have to pay income tax on the recaptured depreciation unless you never plan to sell or always plan to like-kind exchange."



I've thought about this a lot, do we opt to do a 1031 exchange or maybe we just pay the long term capital gains rate that we would paying once we retire. One option is to do it in the house you eventually want to retire in and then after a certain amount of time you move into it. Shelter today that may not exist in 20 years. We'll cross that bridge when we get there with the tax laws of the future.</blockquote>
<p>.


step - For you and others who may have or are considering purchasing rental property. Upon sale of rental property, tax liability is incurred upon the allowed or allowable depreciation. This means you must pay income tax on the depreciation you are allowed to deduct, whether you have deducted it or not. Recaptured depreciation is taxed at a 25% tax rate, not at a capital gains tax rate. Nor may the tax liability incurred from recaptured depreciation be avoided by residing in the rental and using one's exemption from cap gains on the sale of a personal residence. If the property is sold as part of a like-kind exchange, (1031 is no longer accurate), the depreciation tags along with the basis to the bought property(s). As it also tags along with the property upon death and incurs tax liability to the benficiary of inherited property upon sale; again at the 25% rate. There is presently no legal, permanent way to avoid tax liability incurred from recaptured depreciation. Depreciation on real property defers taxes. It does not avoid them.<p>.


Of course, there is alot more to it than what I have just explained, but this is the short, incomplete, simple version.
 
Thank you Awgee. Does like kind mean any rental property with a price at least as much as the property you are exchanging out of? In other words, can you exchange a single family for a duplex or fourplex?
 
It is not the value or amount that determines like-kind. It is the IRS classification of property; investment real for investment real, business vehicle for business vehicle, biz equip for biz equip, etc.<p>

One may exchange a higher value property for a lesser value property and incur tax liability on the difference, again simplified.
 
Thank you again Awgee. So if I understand correctly, if we live in this for the next 5 years, rent it for the next two and a half and then sell we would still pay 28% tax on the depreciation for those three years? Say depreciation is $10K per year for 2 1/2 years, we would pay 28% on $25K of gain above cost basis. However, we would not have to pay capital gains on anything above that $25K?



You guys have said that apartments provide better cash flow. Is it unrealistic to think that perhaps at some point the SFR has appreciated enough to where we exchange for a fourplex that would offer better cash flow than the SFR?
 
[quote author="stepping_up" date=1209857596]Thank you again Awgee. So if I understand correctly, if we live in this for the next 5 years, rent it for the next two and a half and then sell we would still pay 28% tax on the depreciation for those three years? Say depreciation is $10K per year for 2 1/2 years, we would pay 28% on $25K of gain above cost basis. However, we would not have to pay capital gains on anything above that $25K?



You guys have said that apartments provide better cash flow. Is it unrealistic to think that perhaps at some point the SFR has appreciated enough to where we exchange for a fourplex that would offer better cash flow than the SFR?</blockquote>


First, I may have made a mistake and I do not have time to look it up right now. Recaptured depreciation may be taxed at the taxpayers marginal tax rate. And it does not matter if you have gain or loss. Tax is paid on allowable depreciation no matter if you have a gain or a loss. Taxes on depreciation can not be avoided legally, only deferred. Per your example, you would not pay tax on the $25K of gain above cost basis. You would pay tax on the $25K no matter if you had a gain or a loss or what your basis was.



Second, if you qualify for the sale of personal residence exemption, only $250,000 of gain is exempt for a single and $500,000 for MFJ. And tax is owed on the allowable depreciation no matter what the amount of your exemption. Do not confuse gain with depreciation. They are seperate tax issues and treated differently for income tax purposes. You will owe tax on the recaptured depreciation no matter if you sell the property for a gain or a loss. Yes, if you sell for a realized and recognized loss, you wil still owe tax on the allowable deprecitation.
 
Thank you again Awgee. It would be great if recaptured depreciation may be taxed at the taxpayers marginal tax rate because when we do retire, our marginal rate will be lower than today's. If it's 28% that changes what the best options would be.
 
You must log in or register to reply here.
Back
Top