Real Estate Investing Question

[bimmer456]

So let me say I know someone who sold a house in San Gabriel, CA for $1 million and then used that money to buy 2 brand new construction houses in Las Vegas. He is renting out the houses for a total of $4000 a month. To me it's not worth it since you have to pay property tax, insurance, HOA, property management. So my estimate is net profit of around $1700 a month and you would have to pay income tax on that so maybe $1300 after tax. That's a whole lot of cash for relatively little in monthly income cash flow. You could just put that $1 million in an annuity and get $5000-$7000 a month with no expenses besides income tax. Or even a high yield savings account will get you around $3300 a month. Not to mention the house he sold must have had a much lower property tax basis so now his property tax may have doubled. And houses in CA are going to appreciate more than in Vegas unless you're talking about the inland empire maybe.

[BRAKE!]

But he can continue to depreciate his property (for tax reasons), collect rent, build up equity in the 2 properties he has, and have a secondary income stream.

However, as you mentioned, to assess whether a real estate deal is worth it or not, he should consider what the 10 year treasury note yield is and make sure that his real estate deal will bring in a realized yield higher than this. Otherwise, why take the risk of doing this vs getting a sure rate from the treasury note with zero risk?

Lastly, he may have bought a new property as opposed to using that money for other investment vehicles because buying a new property allows tax to be deferred through a 1031 exchange (and I can’t imagine the taxes due on $1M in California)

[chassis]

Originally Posted by bimmer456

So let me say I know someone who sold a house in San Gabriel, CA for $1 million and then used that money to buy 2 brand new construction houses in Las Vegas. He is renting out the houses for a total of $4000 a month. To me it's not worth it since you have to pay property tax, insurance, HOA, property management. So my estimate is net profit of around $1700 a month and you would have to pay income tax on that so maybe $1300 after tax. That's a whole lot of cash for relatively little in monthly income cash flow. You could just put that $1 million in an annuity and get $5000-$7000 a month with no expenses besides income tax. Or even a high yield savings account will get you around $3300 a month. Not to mention the house he sold must have had a much lower property tax basis so now his property tax may have doubled. And houses in CA are going to appreciate more than in Vegas unless you're talking about the inland empire maybe.

You are squarely touching on two of the principal reasons real estate is not a good investment:

1. Illiquidity
2. Inferior return vs alternatives

[TboneS54]

Real property investments provide multiple benefits, not just profit from rents.

Appreciation
Tax shelter (business)
Increased equity through loan principal repayment (greater farther into the loan ofc)

And flexibility. God forbid, but you have another house you could move to if needed. Also an ATM that be tapped into (HELOC) for other investments, emergency, improvements.

[Reborn_]

Originally Posted by TboneS54

Real property investments provide multiple benefits, not just profit from rents.

Appreciation
Tax shelter (business)
Increased equity through loan principal repayment (greater farther into the loan ofc)

And flexibility. God forbid, but you have another house you could move to if needed. Also an ATM that be tapped into (HELOC) for other investments, emergency, improvements.

I have yet to find a bank that will give me a HELOC for my rental. If you have one, please do share!

[ASAP]

with current interest rates, there are far better investments than buying a property to rent... if you are buying a house to live in and are within your budget, that's a different story...

There are 3 key things that were never focused on by all of the Instagram real estate investors of the last 10 years-

1) Low interest rates made it easy to cash flow while properties were still cheap.

2) Liquidity was almost something that was forgotten... the amount of people that I knew that got hosed because they couldn't find renters and couldn't make the payments themselves was huge.

3) Taxes, insurance and all maintenance costs have gotten up tremendously since the pandemic.

[chassis]

Compared with equities (stocks) I can see no advantages at all to direct ownership of residential single family real estate. I can see almost no advantage of direct ownership of residential multi-family real estate.

Commercial real estate is a different animal.

[eliphil]

Like many other investments real estate at times comes down to timing and location. If you do both right it can be a great piece of a portfolio.

[chassis]

Just listened to a Masters in Business podcast with Barry Ritholtz, interviewing Sean Dobson, CEO of Amherst Holdings, an investment company in residential and commercial real estate.

Commercial real estate has 10%-15% economic vacancy, meaning that much space is not under lease. CRE has 50% physical occupancy, meaning that much space is actually physically used on a given day. Said differently, CRE has 50% vacancy on a given day. Last, physical vacancy is a leading indicator of economic vacancy.

CRE is in rough waters now, and this will not change soon.

Residential RE is a nightmare as noted in previous posts.

Exceptions have always, and will always, exist.

Not an attractive place to put my capital.

[bimmer456]

Originally Posted by ASAP

with current interest rates, there are far better investments than buying a property to rent... if you are buying a house to live in and are within your budget, that's a different story...

There are 3 key things that were never focused on by all of the Instagram real estate investors of the last 10 years-

1) Low interest rates made it easy to cash flow while properties were still cheap.

2) Liquidity was almost something that was forgotten... the amount of people that I knew that got hosed because they couldn't find renters and couldn't make the payments themselves was huge.

3) Taxes, insurance and all maintenance costs have gotten up tremendously since the pandemic.

Yeah cash makes more sense but only if net monthly income is $10k or more per million invested.

[chassis]

Originally Posted by bimmer456

Yeah cash makes more sense but only if net monthly income is $10k or more per million invested.

12% annualized return? Is this what you are saying?

[MisanoblueZ4]

Depreciation gets all paid back once the investment rental home gets sold. You will owe a lot when selling plus capital gains.

[M4Tejas]

Originally Posted by bimmer456

So let me say I know someone who sold a house in San Gabriel, CA for $1 million and then used that money to buy 2 brand new construction houses in Las Vegas. He is renting out the houses for a total of $4000 a month. To me it's not worth it since you have to pay property tax, insurance, HOA, property management. So my estimate is net profit of around $1700 a month and you would have to pay income tax on that so maybe $1300 after tax. That's a whole lot of cash for relatively little in monthly income cash flow. You could just put that $1 million in an annuity and get $5000-$7000 a month with no expenses besides income tax. Or even a high yield savings account will get you around $3300 a month. Not to mention the house he sold must have had a much lower property tax basis so now his property tax may have doubled. And houses in CA are going to appreciate more than in Vegas unless you're talking about the inland empire maybe.

You have to be concerned with rent payments. I had 2 houses in Austin and one renter stopped paying. It takes months to remove them. In addition there was some damage to the property. Never again…….its a krap shoot and I am too old now to #uck with it. YMMV. Depending on factors, you can make good money flipping……cars and homes, with the right demographic $$$.

[BRAKE!]

Originally Posted by M4Tejas

You have to be concerned with rent payments. I had 2 houses in Austin and one renter stopped paying. It takes months to remove them. In addition there was some damage to the property. Never again…….its a krap shoot and I am too old now to #uck with it. YMMV. Depending on factors, you can make good money flipping……cars and homes, with the right demographic $$$.

All true. The only way to make this truly a passive income source is to invest in REITs. Otherwise, owning a property is anything but passive…

[M4Tejas]

Originally Posted by BRAKE!

All true. The only way to make this truly a passive income source is to invest in REITs. Otherwise, owning a property is anything but passive…

After rallying in late 2023, REITs have sold off again and given up a good portion of their gains. Some of them are down back to where they were in the Fall of 2023 and are down up to 50% in total …

https://seekingalpha.com/article/467...reit-investors

[Chihuahua]

Originally Posted by M4Tejas

After rallying in late 2023, REITs have sold off again and given up a good portion of their gains. Some of them are down back to where they were in the Fall of 2023 and are down up to 50% in total …

https://seekingalpha.com/article/467...reit-investors

Have a good friend currently getting pwnd in REITs right now, he told me yesterday 'never again'.

[UncleWede]

I didn't re-invest 1M, but the two rental properties that came out of my father's trust and into my hands are pretty much cash cows.

Just did my taxes Monday, was really worried about these new income streams. Since they are new to me, the depreciation, plus some $ I invested to upgrade one places, means their combined ~4200/month income has no net effect on my tax. Heck, with no other changes in employment withholdings, I'm writing checks for April 15 about $2k less than last year.

Nevada property taxes have to be MILES below Cali, no?

[W Cole]

It makes sense if you use accelerated cost seg depreciation and write off your passive losses against your ordinary income. Continually 1031 exchange and you will never pay income taxes again.

Vegas is going to get crushed in the coming recession.

Some markets have much better cap rates than others but single family resi is pretty much just a tax play.

[floridaorange]

It can be passive ish, but you have to have the heart of a slumlord, like Jared Kushner.

[wyowolf]

I retired from the airlines in 2020 and began investing in real estate. At that time it was a great opportunity and ive done pretty well. But then again I am in a friendly state. In Kali or most other places I dont know how you could make any money honestly. Taxes and the prices of everything has just been out of control.

No state taxes here and common sense laws to keep out lazy tenants...Ive been pretty lucky, most of my tenets have been great. I only had one guy who thought he could get by without paying the gas bill...going months without paying rent! that wouldn't happen here. Judge can order eviction in 14 days. But thats never happened to me... good screening is key absolutely.. treat them fairly and most likely won't have issues.

I have ten houses now and getting ready to get number 11.
but the deals are defiantly harder to find now thats for sure.
I have a good passive income stream and am building up quit a bit of equity as well.
I just wished id started years ago.

[///MPhatic]

Originally Posted by chassis

Just listened to a Masters in Business podcast with Barry Ritholtz, interviewing Sean Dobson, CEO of Amherst Holdings, an investment company in residential and commercial real estate.

Commercial real estate has 10%-15% economic vacancy, meaning that much space is not under lease. CRE has 50% physical occupancy, meaning that much space is actually physically used on a given day. Said differently, CRE has 50% vacancy on a given day. Last, physical vacancy is a leading indicator of economic vacancy.

CRE is in rough waters now, and this will not change soon.

Residential RE is a nightmare as noted in previous posts.

Exceptions have always, and will always, exist.

Not an attractive place to put my capital.

All I know is that I'm SOL because I have no idea what you just wrote. lol

[dradernh]

Originally Posted by wyowolf

In Kali or most other places I dont know how you could make any money honestly.

According to a number of people I worked with who were individually and jointly buying apartment buildings in San Francisco from 1970 to 2000, California was principally a capital appreciation play. Nothing I've read in recent years about rents and valuations has led me to think that has changed.

Because those investors had day jobs, they used property management firms to find and manage tenants and to maintain the properties. They were paying 7% of gross rentals for the service.