Rental Market in Irvine

[panda]

I like to believe that appreciation is king and cash flow is an icing on the cake. In C and D neighborhoods of Cleveland and Detroit you can find $50,000 rental properties that will yield $1000 month rent, but these properties will never appreciate and possibly may even depreciate in value. I call these type of turn key properties as PIGS with a Lip Stick.

Over a long time buy and hold horizon, the capital appreciation is how one grows their net worth, not cash flow. The problem with rental properties in Texas is that property taxes are very high at 3% and insurance costs are very high in Florida. Florida also has a weak low paying job market. One should never buy a investment property that has negative cash flow, but find a strong growth market where both the job market and population is growing. Your investment goal should be to investment in properties that have both (capital) appreciation potential and cash flow (dividends). Another strategy to improve your cash flow and defer capital appreciation and depreciation recapture tax is by doing a 1031 exchange. The investor must identify the exchange properties within 45 days from the time of sale of their investment property and will have 180 months to close on the exchange investments to avoid capital appreciation and depreciate recapture tax. I advise the 1031 exchange only if your tax liability is greater than $10k otherwise it may not be worth the hassle.

Btw, my upcoming Northwood Villas listing will cash flow by about $300...cost of around $2,100/mo versus rent of $2,400/mo using 20% down and a 7 year ARM thanks to a $165 HOA and no Mello Roos.

Are you really advertising this as a cash flow investment property?  When you advertise this as a 300 a month cash flow property, you should place a big asterisk next to it and write all the disclaimers in small print at the bottom of the page.  The disclaimers being  1.  you have to take a 7 year ARM  2.  you will have awesome tenants that live there forever.  3.  assume nothing will ever ever break in this house.  4.  assume you will have no other maintenance costs ever because nothing in this house will ever wear down. 

I'm not advertising it as cash flow....just showing that the cost of ownership is less than the cost to rent for that particular property.  Again, shows that some Irvine properties aren't that far away from cash flowing even using your conservative parameters.  But the reality is, Irvine properties will never provide good cash flow using your model because the demand to own is so high.  If an investor is looking for monthly cash flow, then areas like Texas or Florida.  But to me and others, monthly cash flow is only one piece of the puzzle and not the be all and end all.  ROI return will mostly be driven off of price appreciation.

Sorry, it seemed like advertisement as cash flow since thats exactly what you said and the only thing you said.   
I like to think that appreciation is king and cash flow is icing on the cake. Real estate investment properties C and D neighborhoods

Calculating rent versus purchase for ones personal residence is ENTIRELY different from looking at a rental investment.   

So yes, you finally agree Irvine purchases will not cash flow.  Reason is simple... purchase prices are too high for rents attainable.
I agree that cash flow is not the end all be all, however for buy and hold investments, if you do not have cash flow you are a dead duck without significant appreciation.  The first rule to buy and hold real estate investments should be that it cash flow positives with reasonable down payment.  Why?  because if a property cash flows positive, you have many outs.  Otherwise your only game is appreciation and banking only on appreciation is a fools game.  If you are looking at rental investments, cash flow is king and appreciation is icing on the cake.   

 

[eyephone]

What happens if you loose your job and you are negative cash flow on your rental? (Let's say $6k negative a year for this discussion)

I like to believe that appreciation is king and cash flow is an icing on the cake. In C and D neighborhoods of Cleveland and Detroit you can find $50,000 rental properties that will yield $1000 month rent, but these properties will never appreciate and possibly may even depreciate in value. Over a long time buy and hold horizon, the capital appreciation is how one grows their net worth, not cash flow. The problem with rental properties in Texas is that property taxes are very high at 3% and insurance costs are very high in Florida. One should never buy a investment property that has negative cash flow, but find a strong growth market where the jobs and population is growing. Your goal should be to have both (capital) appreciation potential and cash flow (dividends).

Btw, my upcoming Northwood Villas listing will cash flow by about $300...cost of around $2,100/mo versus rent of $2,400/mo using 20% down and a 7 year ARM thanks to a $165 HOA and no Mello Roos.

Are you really advertising this as a cash flow investment property?  When you advertise this as a 300 a month cash flow property, you should place a big asterisk next to it and write all the disclaimers in small print at the bottom of the page.  The disclaimers being  1.  you have to take a 7 year ARM  2.  you will have awesome tenants that live there forever.  3.  assume nothing will ever ever break in this house.  4.  assume you will have no other maintenance costs ever because nothing in this house will ever wear down. 

I'm not advertising it as cash flow....just showing that the cost of ownership is less than the cost to rent for that particular property.  Again, shows that some Irvine properties aren't that far away from cash flowing even using your conservative parameters.  But the reality is, Irvine properties will never provide good cash flow using your model because the demand to own is so high.  If an investor is looking for monthly cash flow, then areas like Texas or Florida.  But to me and others, monthly cash flow is only one piece of the puzzle and not the be all and end all.  ROI return will mostly be driven off of price appreciation.

Sorry, it seemed like advertisement as cash flow since thats exactly what you said and the only thing you said.   
I like to think that appreciation is king and cash flow is icing on the cake. Real estate investment properties C and D neighborhoods

Calculating rent versus purchase for ones personal residence is ENTIRELY different from looking at a rental investment.   

So yes, you finally agree Irvine purchases will not cash flow.  Reason is simple... purchase prices are too high for rents attainable.
I agree that cash flow is not the end all be all, however for buy and hold investments, if you do not have cash flow you are a dead duck without significant appreciation.  The first rule to buy and hold real estate investments should be that it cash flow positives with reasonable down payment.  Why?  because if a property cash flows positive, you have many outs.  Otherwise your only game is appreciation and banking only on appreciation is a fools game.  If you are looking at rental investments, cash flow is king and appreciation is icing on the cake.   

 

[notTHEoc]

a

 

[usctrojancpa]

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

 

[usctrojancpa]

For the amount of $$ you have to tie up in a rental, it's high risk. most people wouldn't put 5-10% of their net worth in a stock but routinely do on a rental. They appear safe bc they're not valued daily and holding periods are very long but a lot of things can happen like a gas leak (porter ranch) or school no longer as good as before, etc etc.

One or a basket of small-cap speculative reits would prob offer similar avg returns long term, much lower risk, and more liquidity. Most of them are levered so you can get good appreciation plus yield. Picking good ones is not easy but the same is true for rentals.

It's all about diversifying your capital.  Cash, hard assets (cars, collectibles, precious metals, and rentals), equities, and higher return/higher risk investments.  That being said, not everyone is meant to be a landlord.

 

[notTHEoc]

a

 

[dream16]

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption.

Sounds like a good approach, because i do have plans to move back to IR next year and if not next, 100% by 2018 and live in my own rental as primary residence - so i will use all the depreciation on property while filing my taxes and then sell my primary...or i dont know...i might be thinking all of this in a wrong context as condo depreciation should be different than depreciation recapture tax

 

[notTHEoc]

A

 

[woodburyowner]

The depreciation benefit is most useful if you're holding your property for 10-20+ yrs or you expect to be in a lower tax bracket when you sell. Otherwise, you're just saving $1 this year and paying the $1 back a few years later.

Depreciation recapture is taxed at 25% and long term capital gain is at 15%.  Your marginal tax rate when you sell will have little effect (aside from corner cases).

 

[panda]

Trojan, you are correct that you can be exempt from capital gains up to $250k/$500k by renting out your previous primary for up to 3 years. However, even if you move back to your back to rental property, you will not be able to escape the depreciation recapture tax, but only escape the capital gains tax. Please double check on this information.

I made an early rookie investor mistake of purchasing a $546k rental property ten years ago that give me a cash on cash return which is almost as bad as owning a Woodbury Condo Investment property in Irvine. The first tenants stayed 7 years which took me 4 months to lease and second tenants stayed 3 years so far on a 4 year lease contract which took me 3 month to lease. Any vacancy and pipe breaking in the home would be in red cash flow category. I have personally named this investment property "THE BEAST"

My depreciation on this home is around $160k with rough tax liability of $40k if I were to sell it. If what you are saying is true that I can escape the depreciation recapture tax, I would move back to this investment property in a heartbeat before selling. I plan to 1031 exchange THE BEAST for 3 newer and lower priced investment SFRs north of Johns Creek next year or 2018 to provide me with better cash flow and capital appreciation.

 
"unless you move back into the home and re-establish it as your primary residence down the line"
"Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption." 

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

 

[eyephone]

Almost everybody knows about the tax free gain when you sell.

Trojan, you are correct that you can be exempt from capital gains up to $250k/$500k by renting out your previous primary for up to 3 years. However, even if you move back to your back to rental property, you will not be able to escape the depreciation recapture tax, but only escape the capital gains tax. Please double check on this information.

I made an early rookie investor mistake of purchasing a $546k rental property ten years ago that give me a cash on cash return which is almost as bad as owning a Woodbury Condo Investment property in Irvine. The first tenants stayed 7 years which took me 4 months to lease and second tenants stayed 3 years so far on a 4 year lease contract which took me 3 month to lease. Any vacancy and pipe breaking in the home would be in red cash flow category. I have personally named this investment property "THE BEAST"

My depreciation on this home is around $160k with rough tax liability of $40k if I were to sell it. If what you are saying is true that I can escape the depreciation recapture tax, I would move back to this investment property in a heartbeat before selling. I plan to 1031 exchange THE BEAST for 3 newer and lower priced investment SFRs north of Johns Creek next year or 2018 to provide me with better cash flow and capital appreciation.

 
"unless you move back into the home and re-establish it as your primary residence down the line"
"Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption." 

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

 

[hello]

What happens if you loose your job and you are negative cash flow on your rental? (Let's say $6k negative a year for this discussion)

I like to believe that appreciation is king and cash flow is an icing on the cake. In C and D neighborhoods of Cleveland and Detroit you can find $50,000 rental properties that will yield $1000 month rent, but these properties will never appreciate and possibly may even depreciate in value. Over a long time buy and hold horizon, the capital appreciation is how one grows their net worth, not cash flow. The problem with rental properties in Texas is that property taxes are very high at 3% and insurance costs are very high in Florida. One should never buy a investment property that has negative cash flow, but find a strong growth market where the jobs and population is growing. Your goal should be to have both (capital) appreciation potential and cash flow (dividends).

Btw, my upcoming Northwood Villas listing will cash flow by about $300...cost of around $2,100/mo versus rent of $2,400/mo using 20% down and a 7 year ARM thanks to a $165 HOA and no Mello Roos.

Are you really advertising this as a cash flow investment property?  When you advertise this as a 300 a month cash flow property, you should place a big asterisk next to it and write all the disclaimers in small print at the bottom of the page.  The disclaimers being  1.  you have to take a 7 year ARM  2.  you will have awesome tenants that live there forever.  3.  assume nothing will ever ever break in this house.  4.  assume you will have no other maintenance costs ever because nothing in this house will ever wear down. 

I'm not advertising it as cash flow....just showing that the cost of ownership is less than the cost to rent for that particular property.  Again, shows that some Irvine properties aren't that far away from cash flowing even using your conservative parameters.  But the reality is, Irvine properties will never provide good cash flow using your model because the demand to own is so high.  If an investor is looking for monthly cash flow, then areas like Texas or Florida.  But to me and others, monthly cash flow is only one piece of the puzzle and not the be all and end all.  ROI return will mostly be driven off of price appreciation.

Sorry, it seemed like advertisement as cash flow since thats exactly what you said and the only thing you said.   
I like to think that appreciation is king and cash flow is icing on the cake. Real estate investment properties C and D neighborhoods

Calculating rent versus purchase for ones personal residence is ENTIRELY different from looking at a rental investment.   

So yes, you finally agree Irvine purchases will not cash flow.  Reason is simple... purchase prices are too high for rents attainable.
I agree that cash flow is not the end all be all, however for buy and hold investments, if you do not have cash flow you are a dead duck without significant appreciation.  The first rule to buy and hold real estate investments should be that it cash flow positives with reasonable down payment.  Why?  because if a property cash flows positive, you have many outs.  Otherwise your only game is appreciation and banking only on appreciation is a fools game.  If you are looking at rental investments, cash flow is king and appreciation is icing on the cake.   

Exactly.  There are many scenarios that can play out, but as long as you cash flow, you have options.  If you dont cash flow then you really dont have options just like in the case of Dream16.  His only options right now is to sell.  fortunately for him, he may have had some appreciation.  Worst case scenario would be buying a negative cash flow rental and going into a housing downturn... then you are royally screwed. 

 

[usctrojancpa]

Almost everybody knows about the tax free gain when you sell.

Trojan, you are correct that you can be exempt from capital gains up to $250k/$500k by renting out your previous primary for up to 3 years. However, even if you move back to your back to rental property, you will not be able to escape the depreciation recapture tax, but only escape the capital gains tax. Please double check on this information.

I made an early rookie investor mistake of purchasing a $546k rental property ten years ago that give me a cash on cash return which is almost as bad as owning a Woodbury Condo Investment property in Irvine. The first tenants stayed 7 years which took me 4 months to lease and second tenants stayed 3 years so far on a 4 year lease contract which took me 3 month to lease. Any vacancy and pipe breaking in the home would be in red cash flow category. I have personally named this investment property "THE BEAST"

My depreciation on this home is around $160k with rough tax liability of $40k if I were to sell it. If what you are saying is true that I can escape the depreciation recapture tax, I would move back to this investment property in a heartbeat before selling. I plan to 1031 exchange THE BEAST for 3 newer and lower priced investment SFRs north of Johns Creek next year or 2018 to provide me with better cash flow and capital appreciation.

 
"unless you move back into the home and re-establish it as your primary residence down the line"
"Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption." 

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

Most people do, not everyone does though.  Many don't know that you can rent your house for up to 3 years and sell it with the gain exemption (the 2 out of the last 5 year rule). 

 

[usctrojancpa]

The depreciation benefit is most useful if you're holding your property for 10-20+ yrs or you expect to be in a lower tax bracket when you sell. Otherwise, you're just saving $1 this year and paying the $1 back a few years later.

Depreciation recapture is taxed at 25% and long term capital gain is at 15%.  Your marginal tax rate when you sell will have little effect (aside from corner cases).

Depreciation recapture tax can go up to 28% if you are in the higher tax brackets.  You also have state long term capital gain tax (for CA it can be as high as 13.3%).  Plus let's not forget about that pesky 3.8% Medicare tax.

 

[panda]

"for CA it can be as high as 13.3%" - Yikes!

One of the tax strategies I have seen among the higher net worth Georgians ready to retire is that they have one small vacation condo in Florida, and live there 6 month + 1 day to make FL their domicile state. They would then unload their business and real estate assets in the millions to avoid the Georgia 6% state tax. Curious if Neveda is sort of the Florida of California.   

The depreciation benefit is most useful if you're holding your property for 10-20+ yrs or you expect to be in a lower tax bracket when you sell. Otherwise, you're just saving $1 this year and paying the $1 back a few years later.

Depreciation recapture is taxed at 25% and long term capital gain is at 15%.  Your marginal tax rate when you sell will have little effect (aside from corner cases).

Depreciation recapture tax can go up to 28% if you are in the higher tax brackets.  You also have state long term capital gain tax (for CA it can be as high as 13.3%).  Plus let's not forget about that pesky 3.8% Medicare tax.

 

[usctrojancpa]

"for CA it can be as high as 13.3%" - Yikes!

One of the tax strategies I have seen among the higher net worth Georgians ready to retire is that they have one small vacation condo in Florida, and live there 6 month + 1 day to make FL their domicile state. They would then unload their business and real estate assets in the millions to avoid the Georgia 6% state tax. Curious if Neveda is sort of the Florida of California.   

The depreciation benefit is most useful if you're holding your property for 10-20+ yrs or you expect to be in a lower tax bracket when you sell. Otherwise, you're just saving $1 this year and paying the $1 back a few years later.

Depreciation recapture is taxed at 25% and long term capital gain is at 15%.  Your marginal tax rate when you sell will have little effect (aside from corner cases).

Depreciation recapture tax can go up to 28% if you are in the higher tax brackets.  You also have state long term capital gain tax (for CA it can be as high as 13.3%).  Plus let's not forget about that pesky 3.8% Medicare tax.

Yeah, it's gross what CA charges for cap gains tax.  Now that 13.3% for is for folks that earn over $1m but for many folks the tax will be 10.3% if you income is in the low to mid 6 figures.  Still a gross amount.  I haven't looked at it closely but I think Nevada has favorable tax treatment for capital gains.

 

[AW]

If this was done under SDIRA, there wouldn't be any cap gains at all?
(But no depreciation benefits either..)

 

[usctrojancpa]

If this was done under SDIRA, there wouldn't be any cap gains at all?
(But no depreciation benefits either..)

I think you would pay tax as you start taking the money out of the SDIRA for any gains. 

 

[panda]

AW,
I would pick up this book from Attorney Matt Sorensen. It is probably the best book I have read written about the topic of Self Directed IRA. Self Directed IRA is treated as tax deferred that is no different from 1031 Exchange, 401k, or a tax deferred SIMPLE IRA. The difference between a traditional wire-house brokerage like Schwab and Fidelity is that you have checkbook control over your funds. You are not just limited to real estate with your Self Directed IRA. One can also purchase notes and precious metals from their Self Directed IRA account.

 

[SoclosetoIrvine]

Almost everybody knows about the tax free gain when you sell.

Trojan, you are correct that you can be exempt from capital gains up to $250k/$500k by renting out your previous primary for up to 3 years. However, even if you move back to your back to rental property, you will not be able to escape the depreciation recapture tax, but only escape the capital gains tax. Please double check on this information.

I made an early rookie investor mistake of purchasing a $546k rental property ten years ago that give me a cash on cash return which is almost as bad as owning a Woodbury Condo Investment property in Irvine. The first tenants stayed 7 years which took me 4 months to lease and second tenants stayed 3 years so far on a 4 year lease contract which took me 3 month to lease. Any vacancy and pipe breaking in the home would be in red cash flow category. I have personally named this investment property "THE BEAST"

My depreciation on this home is around $160k with rough tax liability of $40k if I were to sell it. If what you are saying is true that I can escape the depreciation recapture tax, I would move back to this investment property in a heartbeat before selling. I plan to 1031 exchange THE BEAST for 3 newer and lower priced investment SFRs north of Johns Creek next year or 2018 to provide me with better cash flow and capital appreciation.

 
"unless you move back into the home and re-establish it as your primary residence down the line"
"Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption." 

Hello....since you seem to run pretty conservative numbers, let me run a scenario by you and let me know what your model spits out.

Irvine Property: Built in 2000; 3 bedroom / 3 bath attached condo (1650 sqft)

Rent: I'm presuming $3K/month
Mortgage (including property taxes): $2400 (int rate of 3.4%)
HOA: $224
Insurance: $60/month

Just out of curiosity, what are your reasons for thinking my calculations are conservative? 


Just so I can run a clean calculation, what will be purchase price, % down payment, exact taxes, any initial rehab costs?

Originally purchase price was $525 w/25% down.  Property taxes are $6581 per year.  No rehab costs. It is the home I'll be moving from and intend on renting out (I've done my own runs and am not necessarily looking at cash flow, rather fact that the property should be relatively cash-flow neutral, but I'd get the benefit of someone else paying the property down and longer term it would be a nice revenue generator as part of a portfolio of properties I'd like to grow for when I'm retired...which I'm a long ways from) but figured why not let the TI'ers analyze this for me.  25% downpayment (at the time).  House is probably worth between $650-$700 today.  I would manage the property myself and my dad is an agent so have free services from his side of the equation. 

House has new appliances, older carpet, and new floors (well 2-3 years new since it was a few years ago that we moved).  I do presume at some point the original AC will go out and it will need carpet probably after the next tenant. 

Replace the carpet with laminate when it comes time.  Your AC should be good for 15-20 years if you service it once a year (many occasional relay or what not going out every 5-6 years).  It's not like we live in Texas or Florida where it'd be on 24/7 for half a year.

Wouldn't have thought of laminate. Is that because it holds up so well (water won't be a huge impact) vs. the dirt that is hard to get off of carpet?  I'm going to guess given the AC is already 16 years old, that it craps up sometime. If it goes another 15 to 20, sweet.  I am hoping that somehow I luck into better tenants in Irvine (vs. other areas where I have had rentals before; some tenants are just brutal as to what they can do to a property...it is the one aspect that makes me double take vs. just freaking selling the property and taking the tax free return today). 

By the way, in my analysis, I do factor in the fact that from a true ROE perspective, I am getting an embedded benefit in the sense that the portion that goes to principal reduction on my mortgage is obviously a direct return to myself (not a liquid return in its current state, but if rent continues to appreciate, cash flow becomes better with time and one day you have a property free and clear, which at that point in my life, where I'm looking at fixed income, that is a good problem to have (even if I'm not fully taking advantage of "leverage"). 

Yeah, laminate lasts a long time and can withstand just about anything where carpet gets dirty and worn fairly quickly.  Laminate floors is also considered an upgrade to tenants as well because they are easier to keep clean. 

Remember that you can rent your current home for up to 3 years and still be exempt from paying tax on the gain for up to $250k/$500k...that's tax avoidance, not deferral like you get with a 1031 exchange.  You will have to pay back the depreciation recapture tax (unless you move back into the home and re-establish it as your primary residence down the line).  Then what you can do is sell your primary and use the gains to buy 2 properties as rentals without the time constraints of a 1031 exchange.  It's a way to diversify and benefit from the favorable gain tax exemption. 

Most people do, not everyone does though.  Many don't know that you can rent your house for up to 3 years and sell it with the gain exemption (the 2 out of the last 5 year rule). 

Dumb question, but in the scenario I rent out the home for 10 years and I move back in the home after ten years.  As long as I live there for 2 years (rule is 2 out of the last 5) then I gain the exemption?