You depreciate the house and take that off the taxable income.
Example:
Buy a house for $100k
You rent the house for $1,000/month minus expenses of $700/month you make $3,600 year. You depreciate it over 27.5 years. That is $3,600/ year
After you subtract the depreciation of $3,600 you end up with no taxable income.
This is of course simplified but pretty close to reality.
what about if you sell the house after the 30 years after you depreciated it down to zero and sell it for 200k because of market appreciation???.,…You owe long term capital gains on the sale…
Mike makes some good points…
Notice I NEVER said…NO BS…
What I DID SAY was…a FRACTION of the BS…
As to Mikes other points…
Dealing with…
Realtors…EASY…I’ve COMPLETELY ELIMINATED all my realtor issues with the “FDJAKE 30 day listing agreement”
You can not BELIEVE how telling a REALTOR they have just 30 days to sell your property MOTIVATES them!!!..It cuts through ALL the BS…I get REAL PRICES, not BS realtor “get the listing/make believe prices” I get SERVICE too…As ANY rehabber will tell you…You usually won’t HEAR from your realtors until 5 days BEFORE the LISTING EXPIRES…THEN LIKE A MIRACLE, they call you EVERYDAY telling you about all the sudden “activity” the property is generating!!! With the 30 day listing agreement…THEY CALL ME EVERYDAY FROM DAY ONE!!
I make it ABUNDANTLY CLEAR to them that unless they produce a BUYER in 30 days they will NOT have that listing on day 31.
BUYERS PROBLEMS…All my buyers get their PRE APPROVALS Through 1 of 5 banks that I use…They can pick anyone they want, and they are under NO OBLIGATION to use them…But…I will NOT accept a pre-qual from ANY BANK other than those 5…If they are REAL BUYERS they have NO PROBLEM with this…This one tactic has eliminated 99% of my buyers issues…and I put it right in the listing agreement so there’s NO ISSUES.
BUYERS ARE EASY compared to TENANTS…I see my buyers ONCE at the CLOSING table …Unlike JOHN who’s seeing WAY TOO MUCH OF HIS TENANTS!!!
Contractors…Even EASIER!!! I buy ALL the materials for my rehabs…I pay them JUST LABOR…THEY GET NOTHING upfront…NOT A CENT…and if they DON’T SHOW UP without CALLING??? They can swing by anytime to watch ANOTHER CONTRACTOR finishing THEIR JOB!!!
Works WONDERS…These guys might blow off other people…They don’t blow off ME!!! I treat my guys great…I’ve used the same group for years…They are NOT the cheapest but they are GOOD!! and THEY pull the permits…THEY deal with the inspectors…I never understood WHY investors do it any other way…A GOOD contractor should know that building inspector on a first name basis…They know his pet peeves…I AVOID all the BS by simply letting my contractors DEAL with the building inspector…THEY are doing the work…So they do it the way the inspector wants it done…SIMPLE.
TAXES…Again Mike is RIGHT, but also wrong…That $846,000 you’ll have AFTER taxes…can BUY YOU A FEW SELF STORAGE WAREHOUSES!!!
The other point Mike forgot to mention is he’s LIVING on his rental income…HE DOESN’T HAVE A JOB…So he WON’T have all that accumulated return because he uses it to SURVIVE…YOU aren’t in that position…EVERY PENNY you net from your flips can go right into OTHER investments.
Bottom line…
I don’t HOUSE my BUYERS…If they lose their jobs 1 year after BUYING my house…IT DOESN’T AFFECT ME…It WILL AFFECT MIKE!!! IT WILL AFFECT JOHN!!!
They don’t call me when the countless parts and pieces in a home start to FAIL!!!
Mike is right…EVERY BUSINESS has it’s BS…I’ve done BOTH…and FLIPPING HOUSES is INFINITELY LESS BS than RENTING!!!
There’s is NOTHING out there (other than a properly timed investment in FORD stock!) that has created the VOLUME of INVESTABLE CASH that flipping does…You’re making it 5 or sometimes 6 figures at a clip. Once you get to a certain point EVERYTHING gets easier…You’re courted by PRIVATE BANKS, You can buy 2 or 3 properties at a time whenever they become available…It just picks up speed!
Ask yourself…How many PROPERTIES can I buy on $42,000/year with it coming in at a rate of $3500/month??? BUT…If it’s coming in ALL AT ONCE in $42,000 chunks 2 or 3 times a year…In a few VERY SHORT years you’ll be buidling your first COMMERCIAL PROPERTY…THEN you’ll understand why NO ONE STAYS IN RESIDENTIAL RENTALS!
The bottom line is this…Mike does VERY WELL renting his properties. It WORKS for him and he is building REAL WEALTH…I just didn’t like being a landlord…The LAWS all favor TENANTS RIGHTS and I HATED IT…Buying and selling houses is a blast.
Been there, done that, bought the T-shirt!
But i will be sure to check out the willard. Where is it?
about a block or so from the White House…old money though…
The Tombs is pretty cool…low key…a Georgetown hangout:
http://www.tombs.com/main/index.cfm
hail a Diamond cab…
-Mike
Not to change course on this thread but there are many ways to derive income by using the capital tied up in these rentals besides playing landlord…Why not hire a management company if you hate the job of being landlord so much…Money doesnt seem to be an issue for you so why not give up a portion to add that cushion between you and the rent roll if you arent ready to sell yet…Just an idea…
Try to rent my rental is driving me crazy.
I had someone call today. I waited for her at the property while she got lost twice on the way, calling meon the phone for directions enroute.
At the end of her visit she asked if I was flexible on the rent of $950. I said I could rent it for $925. Then she said she was looking for more like $850 or $875. :rolleyes :rolleyes :rolleyes Couldn’t she have just told me that on the phone in the first place before making me drive down and dick around at that empty house waiting for her while she got lost multiple times? Or did she really think I was going to drop the rent $100 for her.
HoldandBuy
If that is the extent of your rental problems I’ll trade with you! I’m getting sued!
Rookie, I am selling two properties next week. So I guess that is how I will stop playing landlord. Try to sell them off. These two were very easy to sell, I had some guys that have been bothering me about buying them. Emailed them and a week later they are under contract. I don’t want to complicate things by being creative, just sell my problems.
I’ll have six figures from this sale to to reinvest. I’m really thinking I’ll try to flip a starter home in a decent area. Sorta like FDJake does. It’s funny, a year ago I would have thought flipping was nuts. Somehow I’ve convinced myself I can do it now, if I can find a no brainer. Wish me luck. I’ll report back.
H&B,
If you’re asking a rent amount that’s in line with other units in your area, be careful about being flexible with the rent amount. As you can see, you offer an inch and the applicant wants miles.
John,
That sounds like some pretty good equity off a couple of your properties. Good luck with your transition.
Yeah, I know my problem isn’t that big of a deal. I think my rent is in line with the market now, I was asking $1000 before and that was probably too much.
JohnNC, good luck, I hope the lawsuit gets settled or just goes away.
Alright John…I got you into this so now I feel it’s my job to help you out on your first flip…
SO…DO NOT…Let me REPEAT THAT…DO NOT…Buy a flip house off the MLS or through a REALTOR!!
I see new guys screw this up ALL THE TIME.
Here’s WHY you don’t do this…
I spent YEARS in the car business…BUYING and SELLING…Flipping Real Estate is the SAME as buying and selling cars…except you add an extra ZERO onto the end of every number…Most of my competition purchased their cars from NEW CAR DEALERS…these were the HIGH MILEAGE cars they didn’t want on their lots…The ONLY PROBLEM??? You’re trying to buy a used car from a guy that was so good at SELLING USED CARS that he purchased a NEW CAR FRANCHISE!!! IT WAS A COMPLETE WASTE OF TIME…These guys knew to the PENNY what that 100,000 mile Honda Accord was worth…So I developed my OWN system for buying used cars directly from the OWNERS…I had a HUGE advantage…I purchased cars in EXPENSIVE NEIGHBORHOODS where people didn’t want STRANGERS coming to their homes…I’d buy one car on a street and 6 other people their would call me to unload their OLD Hondas and Toyotas…I always dressed nicely, spoke well, was very polite and would handle the transaction ANY WAY they were comfortable…These people all thought a Honda Accord with 100,000 mile on it was WORTHLESS. I’d leave 10 business cards with ever person I purchased a car from and would send them $200 for every referral they sent me…THEY LOVED THAT!!!
It is LITERALLY the same business…Believe me on this…With that in mind I’d like to present you with my REALTOR/CAR DEALER analogy.
Scenario number 1…
A young man drives by an open garage door and sees a familiar set of headlights…They belong to a 1973 Porsche 911S…He pulls into the driveway and knocks on the door…And older gentleman appears and the young man introduces himself…They strike up a conversation about the Porsche…The old man hasn’t driven the car in a while because it needs some minor work but still runs good…The young man offers to buy it…They agree on a price of $10,000 which the old man is very happy with…The young man takes the car home, cleans it up, fixes the brakes, gives it a tune up and fluid change, puts a new set of tires on it and it runs and drives like all Porsches do…The young man now has a $50,000 car!!
Scenario number 2
The old man decides to drive his old Porsche down to his local Porsche dealer to see what it’s worth…The new car DEALER (the same as a REALTOR in real estate) KNOWS to the PENNY what that car is worth…He offers to BUY IT from the gentleman for $30,000 because this is a RARE CAR and he WANTS IT…The gentleman agrees to this…The NEXT DAY…That “CLASSIC” is sitting on the showroom floor with a $60,000 price tag on it and the words ONE OWNER, ALL ORIGINAL written on the windshield…Now imagaine that same YOUNG MAN (in scenario 1) walking into that dealership and TRYING to buy that Porsche from a Porsche dealer so he can RESELL IT and make a PROFIT…NOT HAPPENING!!! Buying flip properties off the MLS is like WALKING into a PORSCHE dealership and attempting to buy a car and PROFIT from the exchange.
Buying a FLIP property from a Realtor is EXACTLY the same thing…Even if it’s a DUMP they know what similiar houses have sold for in similiar condition.
AND…YOU’RE COMPETING WITH THE ENTIRE MARKET!!!
Your ADVANTAGE dealing with an INDIVIDUAL is that they DO NOT have this level of knowledge…AND…In most cases YOU and the OWNER are the ONLY 2 people that know the house is even for sale…That is a HUGE advantge for you.
I buy ALL my properties directly from the owners…I RARELY rehab these homes…I simple roll them into that PORSCHE DEALERS showroom (the MLS SYSTEM) and then let THE MARKET fight over the property…
I give the listing realtor 5% on a 30 day listing…I also make it clear in the lsiting that the home is NOT bank owned…NO BANKS INVOLVED…Offers will be presented to owner on 4/4/2010
I hire a clean out crew to empty the crap out of the home and I take care of any BIG issues…I’ll throw a new roof on a home…2 days for a crew, it’s quick, the dumpsters are already there for the clean out crews and within 1 week the property is listed on the MLS then the FEEDING FRENZY starts…
I LOW BALL ALL MY HOMES…I want to come on market at the LOWEST price for that type of home by at LEAST 10%…This gets EVERYONES attention and it gets the houses SOLD…
DON"T waste your time flipping homes like these idiots on TV…Fixing every little detail, landscaping, painting…DON’T BOTHER…This market wants CHEAP and it’s SWARMING with investor looking for deals…A lot of them are CLUELESS…
I SELL HOMES to them…VERY PROFITABLY I might add!!!
NO REHAB
NO DISCLOSURES
AS IS SALES
30 day LISTINGS
VERY LITTLE BS!!!
I have sold 7 of these so far THIS YEAR.
The KEY is creating a NETWORK of people that are out there LOOKING FOR YOU…OIL DElIVERY DRIVERS…MAILMEN…FIREMEN…ANYONE that comes into DAILY contact with PEOPLE…I pay them BIG finders fees…I’ve paid out as much as $10,000 on a single deal…But I made $100,000 on that home…That guy is one of my best DIGGERS…he doesn’t want to take any risks so this is PERFECT for him…I TRAINED HIM…Told him WORD FOR WORD what to SAY to these people…It took YEARS to build this…BUT it’s a MACHINE now…It goes to work EVERYDAY for me wehter I do anything or NOTHING…“IT” still is out there WORKING!!!
I just DISPOSE of the items it PRODUCES!!!
Pete,
Can you give me some phrases you use to convince them to sell at such a low price? I’m pretty direct with people, and I’m afraid that is going turn some off. I’ve already called up some investors that brought me a house a long time ago for a rental, to let them know i’m back in the game.
Also, I was thinking about running an overpriced ad in my local paper. It’s gonna cost more than it should, so I want it to be right. Any ideas, or is this a waste of money?
You are 100% right…That direct approach WILL turn them off. TAKE YOUR TIME but be realistic…If some idiot wants $400,000 for a 3 family home in Fall River MA…That isn’t going to be a LONG conversation. LISTEN to them and see if there is any FRUSTRATION in their story!!!
Ever sitiuation is different but here’s how I do this from a recent example…
Last weekend…
A couple had a property left to them from a death in the family NOTHING OWED ON IT…
The house was JUNK…WORTHLESS…but the LAND was zoned COMMERCIAL and was on a very busy street. The property WAS NOT lsited on the MLS…I got the lead from a “digger” of mine and called them.
I met them at the property on Saturday…I SOFT SELL everything…I NEVER push…So we talked and talked…I asked them what THEY wanted for the property??? She said $250,000…I said, I didn;t think anyone would come near that number and I also pointed out that a BANK would not finance a deal on the house because it was failing down…That meant they needed a CASH BUYER…
I asked them what the intended to do with the proceeds from a sale??? ALWAYS, ALWAYS ASK THIS QUESTION!!!
They said they’d probably just pay off their own house…I asked HOW MUCH DO YOU OWE ON IT??? They said $75,000.
I explained to them that they needed to look around and see what was selling in this area…It wasn’t commercial property…It was STARTER HOMES…I told them that right NOW would be a perfect time to SELL this albatross and use the $75,000 to PAY CASH for a 2 bed house…RENT IT OUT for $1200/month…In 5 years when the real estate market is better…Look at where they would be…The house would have generated $1200/month x 12 months=$14,400/year X 5 years=$72,000…So, 5 years from NOW you could have, not only your $75,000 back…But ALSO a home that by THEN could be easily worth $140,000…Take the $72K add in the $140K and you have $212,000!!! The property you have here is UNRENTABLE…USELESS…SELL IT and BUY something during one of the WORST real estate busts in history…HOW DO YOU LOSE???
You could SEE the light bulbs going off in their heads!!!
It made SENSE to them…They could understand it…Will it work out exactly like that??? Probably NOT…But THEY could SEE the end game…The numbers didn;t include taxes or anything else…But so what??? they keep the place 8 years, THEN sell it…Either way they could SEE the potential there!
They called Monday morning…We signed a sales agreement for $75,000!!!
LISTEN to people and FIND A FIT…PAINT A PICTURE FOR THEM.
ASK QUESTIONS…The KEY to your DEAL lies in giving them possible ANSWERS to the QUESTIONS you asked!!!
Now I understand why you haven’t gotten any really GREAT DEALS…You can’t just drop a NUMBER on these people…You have to JUSTIFY IT…You have to be able to PAINT THAT PICTURE…EXPLAIN to them WHY this is a great deal. Get them to do what YOUR DOING RIGHT NOW!!!
Look at things from a DIFFERENT PERSPECTIVE!!!
Thank you!! Very useful info. What you do sounds almost too good to be true, I imagine the real art in this is in the negotiation.
You’re right John…It IS too good to be true…
DISREGARD everything I’ve told you and go back to YOUR original plan…
Drag a dishwasher into the middle of the street and beat on it with a baseball bat so the neighbors think you’re crazy! :biggrin
Hey…
“My rentals are making me crazy.”
IT WORKED JOHN!!!
This is WHY guru’s offer a 100% money back guarantee…They KNOW ONLY 4 out of 100 will ever DO anything with it.
"THIS CAN’T WORK…IT’S TOO GOOD TO BE TRUE. :help
Why do I even BOTHER???
Hey man, everyone has to start somewhere, and I wasn’t born with a silver spoon in the kisser, and 30K dollar houses was about it between me and my banker at that time. But i’ll admit my original plan isn’t going to be as doable as I thought long term. At least what I bought is still worth more than I paid. But I’m gonna need hypnosis therapy soon if I continue renting to deadbeats who stiff me on rent and destroy my property. It’s just a matter of time before I snap, and it wont be a dishwasher or a baseball bat anymore.
I can do what you do, maybe even better. Like I said, I’ll report back. But I am very appreciative of the help you don’t have to give me.
John
What you do sounds almost too good to be true, I imagine the real art in this is in the negotiation.
John,
I think what fdjake outlined is very doable.
You might be giving these home owners too much credit. Think about it, these people where handed a piece of property they did not work for and have no clue what this place is worth on the market. Everyone’s reaction is to spit out an unrealistic number when asked what they want for their place. It’s your job to bring these people down to reality. If you are in front of the right prospect, who is somewhat rational, motivated and is willing to listen, you have a very good chance of striking a deal. Will this work with everyone 100% of the time? No way! Will it work with the right folks? You bet.
If you’re serious about flipping, it’s going to take some time and you need to inject your own spin on this.
You can also find REO’s, submit low ball offers on them. Most won’t pan out, but some will.
This sounds like good advice that FDjake is giving.
I’m on my first rental but I’m keeping the idea of flipping in the back of my mind as an alternative in case the insurance situation for rentals becomes too onerous, or I find I don’t care for dealing with tenants.
I don’t feel that I have the expertise at this point to manage a flip, but I’ve learned some about how much things cost by managing the different people who came to fix up the rental I bought from the bank.
I don’t want to put all my eggs in the rental basket long term though.
“I can do what you do, maybe even better.”
Now THAT’S what I like to HEAR!!! :banana :elephant :bouncemulti
Of coarse you can…and don’t forget to SHARE any IMPROVEMENTS you make with ME!!! :beer
I KNOW you can do this!!!
Well sold two of my DUMPS today. It’s pretty cool to get a 6 figure check. Never happened to me or my parents before. But I grew up a poor kid in Arkansas.
Anyways i’ve located a commercial DUMP for about 50% FMV. It’s a garage/service center 2900 SF. Old, beat up, and looks like something I would buy. Market rent 3K-3.5K. It’s rented now but I don’t think they are paying. The current owner can’t pay his bills because of so many non-payer commercial tenants. It’s on major street that flows out of downtown. It’s actually in downtown, like the 900 block. There are NO vacancies withing a mile or two radius of this property. Last sold for 400K about three years ago. Previous owner financed it that I would be buying it from. I have a price of 189K. Would you guys do it?
John_in_NC,
Congrats on the sales.
You’ve done your research on the supply side. What about the demand side? How’s the local economy doing? What kind of industries will utilize this space? How are these industries doing locally?