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  #21 (permalink)  
Old 09-11-2017, 10:02 AM
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1. Rental income is taxed as ordinary income. Sorry if I confused this. Capital gains tax applies only as it relates to the basis and gain (or loss) of the underlying investment.

!
I looked into this more, because I believe I am still confused.

It looks like I'm in the 25% tax bracket @ $67k for earned income.

So based off of this information, I would be federally taxed 25% of my profits for my rental.

On biggerpockets blog, I saw someone (who claims to work as a CPA) say "rental income is classified as passive income for tax purposes and is treated the same as any other form of business income except not subject to self employment taxes". From what I can see this is 15.3% (self employment taxes).

Q: Lets say my rental is earning me $100/mo $1200/year as profit. Would you (or someone) be able to explain how that would be taxed? (feel free to include my 67k income @25% tax as part of this hypothetical situation).
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Old 09-11-2017, 01:02 PM
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Originally Posted by amarowsky View Post
I looked into this more, because I believe I am still confused.

It looks like I'm in the 25% tax bracket @ $67k for earned income.

So based off of this information, I would be federally taxed 25% of my profits for my rental.

On biggerpockets blog, I saw someone (who claims to work as a CPA) say "rental income is classified as passive income for tax purposes and is treated the same as any other form of business income except not subject to self employment taxes". From what I can see this is 15.3% (self employment taxes).

Q: Lets say my rental is earning me $100/mo $1200/year as profit. Would you (or someone) be able to explain how that would be taxed? (feel free to include my 67k income @25% tax as part of this hypothetical situation).
1. You are correct - your rental income is taxed at your applicable tax rate.
2. It is considered passive income. If you have losses, they are passive losses.
3. Rental income IS NOT subject to self employment tax.
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Old 09-12-2017, 05:47 AM
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1. You are correct - your rental income is taxed at your applicable tax rate.
2. It is considered passive income. If you have losses, they are passive losses.
3. Rental income IS NOT subject to self employment tax.
I believe I understand now.

So if I was at 25% level, and I make $1000 after my expenses, it'll just be a straight $250 going to Uncle Sam.

It seems like though depreciation I will still be receiving an advantage for quite some time. So I can't really complain.

Thanks a bunch for the info T-Husker, I appreciate the effort you provided to support my questions. I'm excited to pick up another rental.

Although, in the area I'm looking around my average ROI will only be between 8 - 11% (this is under the assumption that my net income will only be 60% of my gross rent). So 12%+ doesn't seem so viable in my planned purchase area for new properties. Still, it's hard to say no to such a high ROI.

Congrats again on your new purchase!
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Old 09-13-2017, 12:22 PM
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I believe I understand now.

So if I was at 25% level, and I make $1000 after my expenses, it'll just be a straight $250 going to Uncle Sam.

It seems like though depreciation I will still be receiving an advantage for quite some time. So I can't really complain.

Thanks a bunch for the info T-Husker, I appreciate the effort you provided to support my questions. I'm excited to pick up another rental.

Although, in the area I'm looking around my average ROI will only be between 8 - 11% (this is under the assumption that my net income will only be 60% of my gross rent). So 12%+ doesn't seem so viable in my planned purchase area for new properties. Still, it's hard to say no to such a high ROI.

Congrats again on your new purchase!
Thank you. In the real estate world, ROI is called the "CAP" rate. So if you have a $100,000 piece of real estate that yields 10%, that is a CAP rate of 10%, etc. So the higher your CAP rate, the higher your return.

Generally, though not always, the higher the CAP rate, the higher the risk and/or time investment. As an example, I know a fellow here who holds a large portfolio of lower-income housing. The types where folks pay by the week, and often in cash. His CAP rate exceeds 20 percent. On the other hand, it takes a lot his time and energy - chasing rents, fixing lots of things, and so forth.

Vacation rentals can certainly have a CAP rate of 12%, but how do you feel about owning a rental 1,100 miles away? There's a diarrhea factor in there. Is it worth it to you? On that front, I decided to either "go big or go home." In other words, if I was going to take that risk, I was going to get set up to better manage the risk: Start my own management company, buy more properties, etc.

I have also owned rental properties locally - single family homes - that had a CAP rate of around 9-10%. That's not that hard to achieve.
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Old 09-13-2017, 01:57 PM
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Thank you. In the real estate world, ROI is called the "CAP" rate. So if you have a $100,000 piece of real estate that yields 10%, that is a CAP rate of 10%, etc. So the higher your CAP rate, the higher your return.

Generally, though not always, the higher the CAP rate, the higher the risk and/or time investment. As an example, I know a fellow here who holds a large portfolio of lower-income housing. The types where folks pay by the week, and often in cash. His CAP rate exceeds 20 percent. On the other hand, it takes a lot his time and energy - chasing rents, fixing lots of things, and so forth.

I have also owned rental properties locally - single family homes - that had a CAP rate of around 9-10%. That's not that hard to achieve.
Thank you for more clarity on CAP rate.

I have been lurking all over bigger pockets, REIclub.com, and listening to Clayton morris's podcast (focus on class C (cheaper single family homes in working neighborhoods)).

Clayton has a CAP rate calculation that I like.
Take annual total income from rental X .6 (40% Fees subtracted for PM +Vacancy + Repair + taxes ) / Home purchase price. He would refer to that as ROI (seems very similar to cap rate, just adjusted for fee's).

So the houses I'm looking at are in the 65-80k range, and rent for $950-1150/mo.

So my CAP rate would be (in the middle) = 1050*12 = 12600 / 75k = 16.8%

His ROI would be = 12600 * .6 = $7560 / 75k = ROI 10%.

I guess as long as that remaining $7560 is over the financing cost, then you're in the black. It seems like a good conservative yardstick to measure.

Would there be a standard real estate term for CAP rate minus Fees?

Also I'd like you to comment on his basic formula (and I'm also posting a question in the property management thread I would love for you to respond to!)
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Old 09-13-2017, 02:12 PM
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I think his formula is sound.

I do add back in the taxes I am saving from depreciation as part of my ROI or CAP rate.

For residential residences, I also budget 1 month per year vacancy just to be conservative.

So if monthly rent is $1000, I figure $11,000 per year. If it's rented all year, that is a bonus.

Houses of that rental amount are generally going to have higher turnover, just because you are dealing with lower-income folks. I don't know why, but it's true. You may need to budget 2 months of vacancy per year.
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Last edited by TexasHusker; 09-13-2017 at 02:16 PM.
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Old 09-14-2017, 03:57 AM
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Bigger Pockets has an excellent series of podcasts. There are several hundred of them and counting. They are also on YouTube.

I know a gentleman here locally that buys rehabs for cash. Fixes them, rents them, refinances them with a lender, takes the cash out from the reappraisal and uses it to buy another property. In two years he has created a portfolio of 13 houses. Sometimes it's as easy as a coat of paint and new carpet. The bank will reappraise at $30K higher than purchase price. Just be mindful of the area you are buying. The best deals aren't on the MLS. Pound the pavement, look for places that look vacant and track down the owner, talk to family and friends. Some of the best deals are buying from other landlords that are tired of it or who don't know what they are doing. They might be willing to offload their portfolio at a discount just to get rid of it.
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Old 09-14-2017, 05:01 AM
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I actually have found that MLS is my best tool. And I'm not swayed by an over-priced house.

Back in 2006, there was a nice 3/2/2 house near me that they were asking $179,900 for. That was around FMV for the house, but I offered $150K and closing in two weeks and they accepted. It's been rented for $1500 a month every month since, to the same renter - though I personally don't own it any more - I sold it to use the funds to open another business.

I asked the sellers later why they accepted the offer, and they said "we were moving three states away, owned it outright, and were just ready to be done with it."

I've been there!
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Last edited by TexasHusker; 09-14-2017 at 05:05 AM.
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Old 09-14-2017, 10:31 AM
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Interesting how sometimes you just want to get out.
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Old 09-14-2017, 11:35 AM
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I do hear that a lot of R/E investors use the 1% rule as the roughest calculation for a viable property. 1% rule being, as long as you can rent the house for 1% of total value, then you should be able to rent at a profit.

TH above situation follows this. $150k house, rents for $1500/mo.

There are a LOT more calculations that can skew this (taxes, area, x, y, z, etc..)

But it is a pretty good jumping off point for considering a property.
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Old 09-15-2017, 11:51 AM
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I do hear that a lot of R/E investors use the 1% rule as the roughest calculation for a viable property. 1% rule being, as long as you can rent the house for 1% of total value, then you should be able to rent at a profit.

TH above situation follows this. $150k house, rents for $1500/mo.

There are a LOT more calculations that can skew this (taxes, area, x, y, z, etc..)

But it is a pretty good jumping off point for considering a property.
Yeah where I live, property taxes run about 2% of the home's appraised value annually. My personal residence is valued at around $350K, and my taxes run about $7K +/-. That puts a serious crimp on your return, which is partly why I started buying vacation property in TN. In TN property taxes run about .5% of the home's value annual.

To give you a feel my returns in TN, I have one cabin I bought for $240K in 2005. I overpaid by $40K - the market crashed in 2008.

My gross rents are about $38K a year.

Expenses annually:

Utilities $4K
Insurance $3K
R&M $3K
Cable $1K
Taxes $1K
Lawn $2K

So I'm yielding about $24,000 net. About a 10% return on investment. If you add in depreciation tax savings, that boosts it to 11%.


I have another one that I am rebuilding from the Gatlinburg fires - I will have around $245K in that when it's all said and done.

I am fully expecting it to do $50K per year rents.

Expenses will be approx $2K less than cabin 1, so my net on that one should be around $38K annual, translating into about a 16% annual ROI.



I have two other cabins - on the same lot - that I have about $280K invested in.

They do about $50K a year all total, with about $15K in annual expenses, translating into $35K a year, or about 13% annual ROI.


I'm not just knocking it out of the park, but the returns are quite good, and stable. My strategy is to use the equity in these properties to buy more and keep going.
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  #32 (permalink)  
Old 09-15-2017, 12:35 PM
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Quote:
Originally Posted by TexasHusker View Post
Yeah where I live, property taxes run about 2% of the home's appraised value annually. My personal residence is valued at around $350K, and my taxes run about $7K +/-. That puts a serious crimp on your return, which is partly why I started buying vacation property in TN. In TN property taxes run about .5% of the home's value annual.

To give you a feel my returns in TN, I have one cabin I bought for $240K in 2005. I overpaid by $40K - the market crashed in 2008.

My gross rents are about $38K a year.

Expenses annually:

Utilities $4K
Insurance $3K
R&M $3K
Cable $1K
Taxes $1K
Lawn $2K

So I'm yielding about $24,000 net. About a 10% return on investment. If you add in depreciation tax savings, that boosts it to 11%.


I have another one that I am rebuilding from the Gatlinburg fires - I will have around $245K in that when it's all said and done.

I am fully expecting it to do $50K per year rents.

Expenses will be approx $2K less than cabin 1, so my net on that one should be around $38K annual, translating into about a 16% annual ROI.



I have two other cabins - on the same lot - that I have about $280K invested in.

They do about $50K a year all total, with about $15K in annual expenses, translating into $35K a year, or about 13% annual ROI.


I'm not just knocking it out of the park, but the returns are quite good, and stable. My strategy is to use the equity in these properties to buy more and keep going.
Are you talking about taking the rental income and using that to buy more units, or do you want to cash out refi them?
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Old 09-15-2017, 02:15 PM
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Are you talking about taking the rental income and using that to buy more units, or do you want to cash out refi them?
CORF. I live on the income.
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