Hi Dave T,
Your strategy fits my lifestyle perfectly. I am not a REI, I am just looking to acquire few properties for rentals and hold them for a long time and hopefully I will be able to pay them all off at one point. I guess I am going to use your strategy to start out with even though in the beginning it might generate negative cash flow. In addition, I really like the way you responded to the post below:
http://www.reiclub.com/forums/index.php/topic,33916.0.html
"I won’t buy a property for a rental that I won’t live in myself. Consequently, I have a little different composition in real estate portfolio than Bluemoon and propertymanager. My properties tend to be in neighborhoods populated by white collar folks. Parking lot has a lot of sedans and SUVs, very few pickup trucks. My town car won’t stick out like a sore thumb if I lived in one of my rentals.
I admit that my ratio of rental income to purchase price may be a little lower than propertymanager or bluemoon, but I believe I tend to get tenants who stay longer than they might in a lower rent neighborhood. On the other hand, I suspect that my vacancies tend to last a little longer than I might experience in a downscale property."
Here is my next question:
I did a little research on the MACRS you mentioned in your response, and I have no clue of what it was saying. Can you explain it in plain English? An example would be great.
Modified Accelerated Cost Recovery System (Macrs)
Provision, originally called the Accelerated Cost Recovery System (ACRS), instituted by the Economic Recovery Tax Act of 1981 (ERTA) and modified by the Tax Reform Act of 1986, which establishes rules for the Depreciation (the recovery of cost through tax deductions) of qualifying assets. With certain exceptions, the 1986 Act modifications, which generally provide for greater acceleration over longer periods of time than ERTA rules, are effective for property placed in service after 1986.
Under the modified rules, depreciable assets other than buildings fall within a 3-, 5-, 7-, 10-, 15-, or 20-year class life. The 3-, 5-, 7-, and 10-year classes use the Double Declining Balance Depreciation Method with a switch to Straight Line Depreciation. Instead of the 200% rate, you may elect a 150% rate. For 15- and 20-year property, the 150% declining balance method is used with a switch to straight line. The conversion to straight line occurs when larger annual deductions may be claimed over the remaining life. Real estate uses the straight line basis. Residential rental property placed in service after December 31, 1986, is depreciated over 27.5 years, while nonresidential property placed in service between December 1, 1986, and May 13, 1993, is depreciated over 31.5 years. A 39-year period applies to nonresidential property placed in service after May 12, 1993, although certain transition rules apply.