Best Place to Buy a Rental Property U.S. or Abroad

[edlefou]

That is net profit. And it's tax free due to your write offs, essentially.

Can you expand on how the net profit is tax free?

I've been renting out apartments for 13 years and after you deduct your write offs from your gross you still have to pay tax on the net.

If there's some way to avoid paying tax on the net it would be very helpful if you could shed some light.

 

[samsamsam]

Edlefou, don't you have depreciation on your properties? That can add up to a lot unless you have a low acquisition price.

 

[Killface]

You still have to pay tax on the net but the net should be tiny after expenses and depreciation. Then you can take it as a distribution through an LLC (if you don't self manage) and not pay self employment taxes. Your LLC should also be in a tax free state, so no state taxes either.

 

[edlefou]

Edlefou, don't you have depreciation on your properties? That can add up to a lot unless you have a low acquisition price.

Depreciation allowance is usually 4% on the value of the building ONLY (a typical split would be something like 80% building and 20% land) and you take 4% each year on the remaining balance, so the amount you can deduct for depreciation goes down slightly every year.

Here's an approximation for a $380K property: 380 x 0.8 * 0.04 = $12,160 or about $1K/month.

That would let you reduce your taxable monthly net from $2500 to $1500, but I don't see how it could be tax free.

 

[Killface]

Yeah it's not entirely tax free but compared to being an employee it will feel like it.

 

[Orson]

Killface, am I reading it correctly... 380k for 18-20 units!? That's about 20k$ per apartment. In my area you need to pay about 10x that for one bedroom apt... are you talking about rural areas or some damaged buildings where you need to put some capital into renovating it?

I am acquiring about 800k of property this year. If I had 115k right now I would leverage it into a 70% LTV commercial loan into a 380k apartment building. This building would likely have 18-20 units. It should generate, at minimum, $7600 in gross rent per month (2% of purchase price). Do a detailed analysis to arrive at your expected net, including budgeting for maintenance and vacancy. In general, you can expect about a third of the gross rent as profit on a financed property. So you will net $2500 or so from this purchase, conservatively. You can find buildings on loopnet.com . Negotiate down about 25% off of asking price. If you can't find any that meet that criteria in that range, then keep looking and don't buy til you do.

Source: I am financially independent from rental property

killface wrote "No, there are decent markets where you can do this. Kansas City, Indianapolis, Ohio, Atlanta"

I was in property management and development before the Great Recession. What killface advises is sound.

But - are you sure that the lifestyle of property investment and management is for you? Living on site?

Because if it doesn't suit you, first, get experience to try it out as an on-site manager.

Alternatively, if ownership doesn't suit you, you might find more satisfaction in being mobile and becoming a contrarian investor, and pursuing your expertise.

My basic points again: killface knows what he's talking about. Check around with others; get educated through them and your own experience. It's part of human growth and self-development.

PS kudos to BostonBMW for a nice 'nuts and bolts' 'to-do' list, perspective, in contrast to killface strategic investor point of view. Skill at both is necessary for newbies. What nicely complementary inputs, here!

 

[kufu]

No, there are decent markets where you can do this. Kansas City, Indianapolis, Ohio, Atlanta

Are the low prices connected with likelihood of hurricanes or it's just coincidence?
Were you guys able to purchase insurance (for reasonable price) which will cover 100% of your house value in case tornado blows it away?

 

[Kissinger2014]

The best place to own rental income is the place you're most familiar with. All cities have pockets of mis-priced properties, some might be in "up and coming" neighborhoods. It's having the ground-level knowledge that will get you the best return on your investment. Otherwise, the best non-leveraged way to get passive income is investing in dividend paying stocks.

 

[BostonBMW]

No, there are decent markets where you can do this. Kansas City, Indianapolis, Ohio, Atlanta

Are the low prices connected with likelihood of hurricanes or it's just coincidence?
Were you guys able to purchase insurance (for reasonable price) which will cover 100% of your house value in case tornado blows it away?

I think it’s a regional phenomenon. The South and the Midwest have a lot of open land available coupled with comparatively lower government interference (zoning, ordinances). Most of all, the jobs/economic growth has been concentrated in the Northeast and the Pacific coast, leading to the desirability of that region.

Cities like NYC, SF, and Boston have a limited land area available to build on, so the land/building prices keep going up. Further exacerbating this phenomenon is the building restrictions in these cities.

I like the Midwest, cheap houses with solid cash flow. For my strategy, Midwest is a better option for cash flow as I am not expecting significant appreciation there.

 

[BostonBMW]

The best place to own rental income is the place you're most familiar with. All cities have pockets of mis-priced properties, some might be in "up and coming" neighborhoods. It's having the ground-level knowledge that will get you the best return on your investment. Otherwise, the best non-leveraged way to get passive income is investing in dividend paying stocks.

You can build familiarity with almost any place that you’re interested in. I think fundamentally you have to make some key decisions before you start investing in Real Estate:

- Buy and hold vs. Wholesale vs. Fix & Flip?
- Cash flow vs. price appreciation?
- What are your long term goals? Financial and/or location independence, retirement etc.

So it’s not that cut and dried. I am not going to knock investing in dividend paying stocks, however the leverage in real estate is unparalleled. Both equities and real estate markets have their pros/cons and I can go into them on a different thread if there is any interest.

 

[kufu]

So it’s not that cut and dried. I am not going to knock investing in dividend paying stocks, however the leverage in real estate is unparalleled. Both equities and real estate markets have their pros/cons and I can go into them on a different thread if there is any interest.

Would definitely be useful. Also, I haven't find any cheatsheet on the forum related to real estate investing. I think end-to-end overview of the process from choosing the investment to renting/maintaining/selling it would be very helpful, even without giving out any "secrets"

 

[ikoko]

I think there is some really solid advice on this thread. My two cents:
1) don't purchase property overseas unless you have on the ground knowledge of that country and city and some strong native contacts. You probably would not buy property in Seattle if you lived in Atlanta, why the hell would it be a good idea to buy property in a foreigner country ?!

2) In the US- Don't buy real estate anywhere, unless you have spent a lot of time ON THE GROUND in that city and neighborhood. The numbers often look good in far away cities compared to where you live, but there is always a reason for this.

3) Pick a city or town you would not mind living in and then go there and live there and get to know the market. There are always deals. The secret is not to think of a given city as a monolithic whole, but as distinct neighborhoods, all offering different value. For example in the same city or town, there will be upscale stable neighborhoods, which while desirable places to live are usually overpriced for an investor wanting a decent return. In the same city there will be poor neighborhoods, with really cheap property, which often seems like great deals, but due to the high turn over and crime, often these properties are more trouble then they are worth.
Usually the best combination of return and stability can be found in up and coming areas, but the secret is you have to be one of the early buyers, not one of the masses who buy once everyone knows this is the next “hot” area. That is why its important to be boots on the ground getting to know the city and what is happening. Acting not reaction.

If you are partial to the Midwest, there are a lot of good cities, Columbus, Lexington, Cincinnati, Indianapolis, Pittsburgh and Louisville. Not coincidentally almost all of these cities have decent student populations and a lot of centrally located older neighborhoods that are coming back in style as most people seek to return to urban centers instead of commuting from the suburbs. These older neighborhoods offer excellent opportunities to get larger single family homes (where you would rent by the room) or duplexes, triplexes or quads. These are probably your best bet for a mid range tenant base (students, young professionals) while being in areas you probably would not mind living in yourself and offer good cash flow.

Generally, I feel like non-commercial multi-units (4 units or less) are the best bet for new investors, but a lot of people know this so it can be harder to find good cash flowing deals. Another option you mentioned which has the potential for good cash flow is to buy a large, generally older home near a university and rent rooms. In older cities, which the Midwest is full of, you can often find older homes with 6, 7, 8 even 10 bedrooms. If you live in one room and rent the other 5 out at $400 a month, this is $2000 a month in gross before expenses. If you live there you can qualify for a owner occupied mortgage with less down and better terms or be able to borrow more. The drawback with this type of situation is expenses are higher as you will be paying utilities and its more hands on management.

These are just some things to think about, but you definitively need to do a lot of reading, and do not buy into any of those get rich quick scams. You can make a lot of money, but its hard work.

 

[elsupremo]

Hey, OP here ----- I want to specially thank y'all sincerely- specially okoko and killface - for all the good advice. I regret not replying sooner but have been offline recovering from eye surgery (computing hurts the stitches as the eye moves around) and really digesting/researching your sugs. I was kind of bummed to realize how right you were that you need to be onsite and familiar with a place before making an investment with all your capital. I spent a lot of time trying to research which city - I'd narrowed it down to Ohio - to make the play in and realized I'd have to packup, move to a place I'd only seen in pics where I didn't know a sould, rent/lease for a good while looking and learning how re works in that area before i could take the leap.

All this with the short term goal to a- pay for my housing b- generate an income (min of 1k) after expenses so that I could stay abroad for long stretches. (sidenote: I completely disagree that it can't be managed remotely via tech and/or motivated help).
As it happens, I taught U over the summer in the quintessential college town of Gainesville. While there, I looked hard at the market.
Although homes and apts were really cheap, so were the rents and a few lenders said they would not loan on student housing. Also rents are at the extremes - either really low 3-400/m older housing or v high (for the area) of 7-900 for v nice props developed by well-funded developers/corporations.
I came to believe that while certainly you could live rent free with min. two roomies paying your share, I didn't see the income potential.
Also you wouldn't have to buy to to that. Just renting a bigger place and subletting for a markup would work. There just wasn't enough 'fat' due to low area rents, to generate a surplus.

What decided me against it- in Gainesville at least- in the end was getting to know my landlord, a guy a bit younger than me who had a couple units he rented out. He was looking to buy more at auction. He also prop managing a few more for absentee owners in the bldg. He seemed to be doing alright and I could see past all the bitching about college student renters. But in the end, I thought his life quality was poor. He was kind of stuck in a little college town babysitting students. Now if was involved w the U as an adjunct or researcher then ok. Or if he was married with little kids (where family takes up a lot of time) then ok. But to be a single guy pushing 20 years beyond college (undergrad) age and dealing/partying with immature kids who kind of 'friend' you seeking some leverage and who havelnt lived yet, I just didn't see it for me. Too, in his case, no he could not manage it from afar - overlapping /short leases, no support. And, no, his status did not seem to give him any edge with the pussy that I could see. His role and age sent mixed signals to them and he didn't have the game to spin it to his favor.
Now, if this was in a cool city that you were stoked to live in e.g. coastal SoCal, that might be different.

Sooooo, and after what I've been through with my eyes, I'm blowing this Popsicle stand and going surfing for a month or more. I'll be looking at ops there for sure. I still like the r.e. play I envisioned as I can't get asset based mortgage terms of 70/30 anywhere else - just fear finding myself alone in the middle of winter in Cleveland, with a stack of bills to pay, and Talking Head's 'Once in a Lifetime' playing in the background!

 

[elsupremo]

That last reply seemed a little fatalistic so let me end by mentioning that I would be very receptive to hearing/participating or initiating a dialogue with forum guys who have specific suggestions or actionable ops that might be for me.
I appreciate so much being warned away from stupid moves I might make that I sometimes forget what my ex once wrote on the back of my monthly check to her (back when banks sent your cashed checks back to you):

Leave some room to let the happiness in.

 

[jamaicabound]

Hey just thought I would chime in as I have a little bit of experience in this, have contemplated buying a home out of the country, done some research, etc. I'm also in the midwest and have rentals here.

My first piece of advice, or at least something that I took into mind was until you have at least a couple properties buy a place you would actually consider living in yourself. For example, Im in the Chicagoland area. I have a place in the city and a place in the burbs. Both are places I would live, I have lived in one. My thinking with this is on the offchance I do have a vacancy for a while I can live in the place and at least it's not a total waste.

I've actually been pretty fortunate in that every tenant I have pays on time, takes care of the home, etc. I havn't run into any of the nightmare scenarios we often hear about so I consider myself lucky. That said I also run credit checks, check with employer, try to rent to families, etc so part of that is probably due to careful screening.

As far as the college town thing I think many midwestern colleges not the mega ones like U of I, have pretty low priced rentals. Dekalk or NIU is a bit more pricey because of the proximity to Chicago, though it still a small town anything less than an hour from Chicago isn't going to be dirt cheap just due to proximity. If you go to western illinosi or eastern illinois in bufu your going to find much cheaper housing. Back when I was in college you could pickup a 4 bedroom SFH for like 25k, the way rentals are structured each kid pays say $200 and has an individual lease as opposed to just saying the house is $800. Anyhow, mortage on a 25k place, if you even need one is like nothing a month, low taxe, etc. It's hard not to make money with a scenario like this. Heck if even one of the 4 kids pays the rent you cover your expenses. I know college kids trash stuff and everything else but they also have lower expectations and aren't on your ass to repair things. Heck I had cold water in one house for an entire year and never said boo about it, that said we had a chill landlord who let us have parties and do whatever as long as we didn't burn the place down where as some might drive around on a friday night looking to catch you having a party so they could hit you with a $250 per keg fine for violating your lease. He didn't bug us so we didn't bug him.

Don't get me wrong I know some schools have these luxury apartments with hot tubs and stuff but most of the housing stock at EIU which I'm very familiar with and WIU kids didn't have high expectations houses weren't anything fancy and honestly most were in disrepair.

My best place currently is in the Chicago burbs, in one of the top school districts in the state but in a bordering community which is a bit sketchier, but place was only 87K, its safe, in a good school district and will always be easy to rent. People who want to live here care about their kids being in a good district so most aren't lowlifes. Mortgae including taxes and everything is around 744, I charge $1250 and could probably get upwards of $1400 but don't want to raise rent as I have a tenant who has been there a while, pays on time and actually does a lot of work to improve the house, has put in thousands themselves.

Some other markets around here that are good off the top of my head would be Toledo Ohio you can buy houses in not that bad areas for say 15k if you got cash, maybe needing a few grand in repairs.

There was a guy on here a while back who was very knowledgeable in real estate I think his name was bikerbiker or something like that. He'd be a guy to PM as I picked his brain a few times and he knows a lot. Also he has a lot of stuff in the midwest which is where I'm most familiar.

I'm looking at buying my next place down in South Carolina as my parents moved down there, want to pickup a rental I can have them check on from time to time and I may consider reloacting down there in the next year or so, Charleston area or maybe out by the beach by Folly Beach.