mcarterbrown.com  

Money and Finance Because you have to save money to spend it on new paintball stuff!

Reply
 
Thread Tools
Old 09-12-2019, 07:20 PM   #21 (permalink)
MCB Member
 
Gabe's Avatar
 
Join Date: Mar 2006
Location: Wasilla, AK
Send a message via MSN to Gabe

Quote:
Originally Posted by Lrrpie-CT View Post
A few pros/cons to add to a good discussion.


1.) With real estate you can leverage your equity investment via mortgaging as opposed to leverage in stocks and index funds via margin that the typical investor shouldn't touch. That leverage can result in significant return on investment (or loss...)

That is all correct, and that is the reason why it is best to start with real estate (in my opinion) and invest cashflow from that in low cost index funds (and not pick individual stocks)

2.) In real estate you have to pay annual taxes (in most states) on the value of the property, and then again on any gains when you sell. In equities you only pay taxes on any realized gains when you sell, and dividends, not the principal.

While you do pay taxes on the value of the property those are also a write off which decreases your tax liability from your W2 income. You can also write off the "depreciation" of the property over time which greatly reduces taxes paid on any earned income. This is a huge advantage that is overlooked. Last year I was able to reduce my taxable income from $55k to $38K which dropped my tax rate by almost 10% because of these real estate write-offs. Also if you spend more than 100 hours working in/on your rental property during a year that can be written off at an hourly rate as well.

Also if you live in any piece of real estate for 2 years or more it is exempt from capital gains tax. That's the beauty of living in one unit and renting the rest.

In index fund/stock/bond investing you are taxed on any gains you get from selling, any capital gains received by other members that are bought into the same fund, and when you sell the gains are added to your overall income rate and can boost you into a higher tax bracket. Oh, and your are taxed on the money you earn to invest into the stock or fund which again you cannot leverage so you have to be in all cash whereas you only pay taxes on money earned for the downpayment and not the money the bank puts up for you.


3.) Those annual taxes on real estate, when properly accounted for, seriously decrease the true ROI (return on investment) of real estate.
4.) US Stock market over the past 200 years has averaged around 9% annual return over that very long period.
I'd like to see where you're getting that average return number. Among investors the average return is normally considered 5%
5.) Expenses on stocks and index funds are a fraction of a percent or zero. Expenses on maintaining investment properties are much higher. True, but again buying a well built building can mitigate this and always budget into your numbers for maintenance and damages and only consider your return rate after that percentage of set aside costs
6.) Odds are that Jeff Bezos aka Amazon stock (as an example) will generate a much higher net total rate of return than your typical rental investment property. On average picking individual stocks can return higher over the short term than S&P500 or Total Market indexes but if you're buy and hold then buying Amazon over something like VTSAX is a pretty big gamble
7.) Even though it is possible to put real estate in a special IRA it isn't easy as opposed to equities. In a Roth IRA there are no taxes on gains ever, in essence. Having money grow tax free/deferred/advantaged is hard to replicate outside of retirement accounts.
You are taxed on any retirement account not at the rate at which you would pay during your prime earning years but at the rate at which you are earning when you withdraw the money. In theory this is a much lower rate when you're retired than when you are working but you are still definitely obligated to pay taxes. (BTW taxation is theft)

Anyway, no "real" right or wrong here. In the end, invest in whatever you feel most comfortable doing.
As you might be able to tell I'm really big on real estate with then investing cash flow and captured equity into index funds as a long term savings account. It's also important to stay somewhat liquid, and the stock market can be volatile so a mix of bonds is also a good strategy so you have some slow moving cash that is always available to pull out in case of emergency or unexpected costs arise on your investment property. Just my approach, as you say there are many viable approaches and it's all based on your level of risk aversion.

Speaking of risk, people might say being leveraged heavily on real estate is very risky. On the contrary my worst case scenario is that I have to pay out of my pocket for the mortgage on my properties. That is the reality of 99% of the people I know who own a single family home and dedicate the majority of their income to keeping a roof over their heads. In my best case scenario I not only pay nothing for living in a very nice duplex unit but I also am making money every minute of the day for doing nothing more than dedicating a few hours a month to management of my investments. It does sound arrogant but to me this seems like the opposite of risky. If you are paying the mortgage on a single family home you are living in and you lose your job you are pretty much done. However if you are renting out one side of a duplex for example you have income to fall back on and it's much less stressful and risky. That's my take on risk management.
Gabe is offline   Reply With Quote
Old 09-12-2019, 07:35 PM   #22 (permalink)
Super Moderator
 
Lrrpie-CT's Avatar
 
Join Date: Mar 2006
Location: CT

Hi Gabe,


I don't want to get off the OP's question but a few of your points are spot on and some are not correct but that's okay. This isn't geared at you at all but, as a business owner, it grinds my gears when I hear people tell me about some expense, "Hey, it's a tax deduction!" Doesn't mean it's still not an expense as opposed to income and I have to bear the expense. Good discussion nonetheless.
__________________
Quote:
Originally Posted by dukie View Post
There is a fine line between MCB and the crazy hobos.
Lrrpie-CT is offline   Reply With Quote
Old 09-12-2019, 08:04 PM   #23 (permalink)
MCB Member
 
Join Date: Dec 2015

Yeah this has all been very helpful.

We are under contract in the Rocky Mount, NC area. Excited to see where we go from here :-)
apamburn is offline   Reply With Quote
Old 09-12-2019, 11:46 PM   #24 (permalink)
MCB Member
 
Gabe's Avatar
 
Join Date: Mar 2006
Location: Wasilla, AK
Send a message via MSN to Gabe

Quote:
Originally Posted by Lrrpie-CT View Post
Hi Gabe,


I don't want to get off the OP's question but a few of your points are spot on and some are not correct but that's okay. This isn't geared at you at all but, as a business owner, it grinds my gears when I hear people tell me about some expense, "Hey, it's a tax deduction!" Doesn't mean it's still not an expense as opposed to income and I have to bear the expense. Good discussion nonetheless.
Fair enough, I can be a little over enthusiastic with my opinions and I'm not always right or tactful about them as most people that know me can attest to.

I've had that conversation about interest charges and taxes on real estate with quite a few people including my parents. They are old school and pay everything in cash and would never take a loan because they don't like the idea of interest being charged. And of course, we all hate taxes. Honestly the way our money is taxed when earned, spent, and wisely invested is criminal. BUT, I'm also a realist and as long as my investments cover not only their expenses including tax and interest and still make me a tidy profit I'm (begrudgingly) fine with paying those things. It's the cost of doing business and if I don't want to play the game the other option is sitting it out and letting money pass me by.

Take this all with a grain of salt, I'm 30 and very much in the building phase of my investment career so there is a good bit of work, headaches, and risk that I'm willing to put up with at this phase. Investment advice for somebody looking towards retirement and with some risk aversion after building their financial life up over a long career will be far different.

Apamburn, congratulations! Closing on a new house or investment property is one of the most gratifying things a person can do. Hopefully all this discussion and back and forth helped in some small way.
Gabe is offline   Reply With Quote
Old 09-13-2019, 07:56 AM   #25 (permalink)
I Am The Admin
 
Painthappy's Avatar
 
Join Date: Mar 2006
Location: New Boston, NH
Send a message via AIM to Painthappy

Fan of EMR
CCM Fan
CCI Phantom Fan
Quote:
Originally Posted by apamburn View Post
Yeah this has all been very helpful.

We are under contract in the Rocky Mount, NC area. Excited to see where we go from here :-)
Congratulations!
__________________
Follow me on my blog For Non-Paintball Banter
carterbrown.com
Painthappy is offline   Reply With Quote
Old 09-13-2019, 11:00 AM   #26 (permalink)
Post Whore
 
sniper97's Avatar
 
Join Date: Jul 2006

CCM Fan
Quote:
Originally Posted by Gabe View Post
You've obviously been out of the loop on real estate for a while. There's this loan that's literally available to anyone that has a credit score above 620 and can fog a mirror called the FHA loan. It's 3.5% down and about 4.25% interest. It includes PMI (property mortgage insurance) which is an insurance that pays the bank in case you default on the loan. There are also 5% and 10% ARM loans available through portfolio lenders and many other low downpayment loans that include PMI. You should research this, it's a very common thing in the last 20 years.

As far as appreciation, yes the stock market has gone up pretty consistently but not as aggressively as it has in the last 10 years. Historically you could expect 3-5% market growth year over year which is pretty sustainable. We have had 100% market growth since 2009 which is fueled by historically low interest rates, increased lending (see low down mortgages above) and out of control consumer debt. This will all come swiftly to bear in the next recession (or depression) which nobody can predict but it will come to a head at some point.

As far as stock/bond investment, it is a very good idea but the problem is that you cannot leverage it, at least not easily. For every 5 cents you make a year you need to have invested a dollar. For me to have made $50k I would have had to have $1MM invested in stocks. With real estate you can leverage the vast majority of it but reap the appreciation of a much larger sum than you invested. Again, that's not to mention cash flow, tax advantages, and having your renters essentially pay into a bank held mandatory savings account for you (a mortgage).

How much rental real estate have you actually owned? In my experience, if you vet good tenants and do thorough screening you can avoid all these nightmares that people talk about. Vacancy at least for me has not been a thing, I literally on the last 2 turnovers had tenants moving things in as the last ones were moving out. As far as damages, I set aside 20% of gross income to cover damages, maintenance, and vacancy and build that margin into the cashflow of any deals I buy. If it doesn't at least cover it's own expenses plus 20% it's not worth buying. And that's in a hot market up here where houses are 250k and 4 plexes are 450-500K and cashflow is hard to find. In many places in the midwest you can buy buildings for a quarter of that and still charge decent rents and make a good bit of money.

I mean, the whole basis of the conversation is that the OP was able to capitalize on appreciation and equity in their home and reinvest it. Now imagine that instead of one home doing that you have more than one. And instead of you paying into the loan to get equity you have other people doing it for you. That's how you exponentially grow wealth.

I recommend anybody interested in real estate look up Bigger Pockets and read any and all of the FAQ's on there. Lots of good information. Or feel free to PM me with any questions on real estate investing and I'll be glad to point you in the right direction. I want to see all my homies on here be able to afford all the vintage paintguns at elevated prices that they want.
Gabe, Hi! Always good to play nice! BTW, how much property do own?

I have been a lender for a local community bank for the last 17+ years (in banking for over 22 years), covering all loan types (auto, home equity, land/lot loans/bridge loans/const loan/rehab loans, fixed rate loan (Conv, VA, FHA, Rural Housing and several grant programs) and commericial real estate. FHA is for a primary residence only, you can buy up to a 4 plex provided you live in it. The rates are currently much lower than you quoted, low 3's. You do pay 1.75% upfront MI (which is added to your loan)and the monthly MI gradually declines, but never goes away. I have seen individuals do awesome with rental properies, some do "ok", some do badly. With good credit, a 95% conventional loan (for a primary residence)is a much better option (MI drops off at 78% LTV, no up-front MI). On a conventional loan for a duplex (owner occupied), down payment is 15%. I am currently refinancing a single family rental purchased in 2004, just appraised for $128,000. Per the owner he paid $145,000 in 2004. He is also going to put approx $20,000 into maintenance. Not all real estate goes up in value.

I have a customer with over 100 rental units (some duplexs, mostly multi-family with up to 20 units), he has put in 3 new kitchens in the last year, does alot of the work himself. Makes money, really good money. With a new kitchen, it will take a year to break even.

My comment above is for investment property loans. Not using a FHA (owner occupied) loan to buy up to a 4 plex. The info I post is correct. Also, you are only allowed 1 FHA loan at time (typicall, there are exceptions on moving for a job and family size).

If you are into rental properties, you will not make much money on single family homes, a duplex is the minimum. Renting not flipping. Really recommend a 4 Plex +. Typically the taxes on a 4 plex are not much more then a single family home, the insurance is just a lilttle more also. If you look at income per unit is is much better and expenses per unit are less (leverage).

If you have any other questions. Please let me know.

Also, the stock market has averaged 10%-11% returns since 1970 and close to an 8% return since the early 1900's. There is also a componding effect (which I guess you can do with real estate by buying more properties). If you go a little bit further back (15 years vs. 10 yrs), the returns are not as compelling for the stock market. You are also looking off the low in 2008/2009.

I have debated rental properties and never pulled the trigger. I am in the St Louis Area, property is probably cheaper here than the East Coast, you probably see better appreciation. Multi-family has been super hot the last 5+ years, everyone wants top dollar.

Carter, alot of people buying a house do not want someone else living that close to them (in a duplex).
__________________
Originally posted by heinous: "sniper's gun always gets extra camera love"
sniper97 is offline   Reply With Quote
Old 09-13-2019, 12:10 PM   #27 (permalink)
MCB Member
 
seajay's Avatar
 
Join Date: Apr 2016

The best real-estate investment I've seen was a colleague looked at new construction. A new housing area being built near a budding growth area.

For a brand new building you can get a great deal on a new property, then turn around and rent it. Maybe they got lucky but their brand new building, with 2 year construction warranty, gained %30 equity in the first 2 years due to growth. They made decent returns that first year, and would make a lot more after 5 years. This is with a management company so they had little physical investment. This also gives them the option to just sell at a certain point.

The other successful option was buying a lot of small cheap housing... slum lord life seems pretty good I guess.
__________________
I like Spyders.
MR1, MR2 LP, EMR5 LP, EM-1, Raven Primal, Victor, Fenix.

Magfed Hurricane with T15 Mags
seajay is offline   Reply With Quote
Old 09-13-2019, 12:52 PM   #28 (permalink)
MCB Member
 
Join Date: Dec 2015

I know a guy that is quite successful with college rentals...owns a dozen or so college rental condos, each with 2-3 tenants.

They are around a religious school that has no drinking / smoking rules, rules against having the opposite gender in your apartment after certain hours, etc...and so he gets tenants that frankly don't cause any problems.

That seems to have been a successful thing for him.
apamburn is offline   Reply With Quote
Old 09-13-2019, 11:00 PM   #29 (permalink)
Post Whore
 
sniper97's Avatar
 
Join Date: Jul 2006

CCM Fan
Quote:
Originally Posted by apamburn View Post
I know a guy that is quite successful with college rentals...owns a dozen or so college rental condos, each with 2-3 tenants.

They are around a religious school that has no drinking / smoking rules, rules against having the opposite gender in your apartment after certain hours, etc...and so he gets tenants that frankly don't cause any problems.

That seems to have been a successful thing for him.
Be very careful with college towns, if the college enrollment drops off significantly, the value of your real estate drops.
__________________
Originally posted by heinous: "sniper's gun always gets extra camera love"

Last edited by sniper97; 09-13-2019 at 11:42 PM.
sniper97 is offline   Reply With Quote
Reply

  mcarterbrown.com » General » Off-Topic » Money and Finance

Thread Tools

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are On
Pingbacks are On
Refbacks are On

Forum Jump


All times are GMT -4. The time now is 03:01 AM.


Powered by vBulletin® Version 3.8.9
Copyright ©2000 - 2019, vBulletin Solutions, Inc.
Search Engine Optimization by vBSEO
© MCB Network LLC