Newbie real estate question

[aussiedog]

I have greatly appreciated an benefitted from the discussion and advice from this forum, and supplemented by reading I'm feeling more comfortable with basic investing, asset allocation, and low cost index investing approach.

For a number of reasons (including having some passive farm income each year), I'm considering whether real estate investing might be a good idea. It could benefit my tax situation if I have some (paper) passive real estate losses to balance the passive farm income, as I understand it.

From what I have been able to gather, investing in a REIT would provide some additional diversification to my stock/bond portfolio, but would not offer the tax advantages I'm looking for. On the other hand, I have a busy job, two children at home, and few home repair skills, so I have taken the sage advice not be become a landlord to heart.

Questions: 1. Any suggestions for how to achieve my goal without creating another job for myself (Multifamily or commercial real estate? Other?)
2. If anyone has suggestions for #1, do you also have a recommendation for how to educate myself on real estate investing? I find this much harder to come by than the wonderful Bogelheads advice on investing, and it seems like there are a lot of get rich quick types writing real estate investing books.

Thanks!
Aussiedog

[aussiedog]

Anyone with a general comment or suggestion for resources?

[rickmerrill]

Warning, I have zero REI experience but have done some reading and thinking about the subject. If there is a low input way to do it I haven't found it yet. The depreciation and expensing value of it may not be all that it is cracked up to be. Hiring a management firm can reduce the workload but there seem to be a lot of pitfalls.

Here is a list of several blog sites you might find helpful http://www.biggerpockets.com/renewsblog/2010/06/28/the-top-20-real-estate-investing-blogs/. Bigger pockets has a forum where you might ask this question.

[BerkeleyChris]

It could benefit my tax situation if I have some (paper) passive real estate losses to balance the passive farm income, as I understand it.

I am not an expert, but it's hard for me to imagine a scenario where the benefits to your tax bill could outweigh the actual passive losses you would seek out. Also, my gut tells me that if you are going to invest in real estate (I don't have an opinion on whether or not you should), the property should be profitable renting out and give you confidence that it will have long term price appreciation. Tax rules change, and your income may get above the limit where you are allowed to claim passive losses, so any real estate deal should really make sense irrespective of the tax situation on your farm in the short term and in the long term.

[markm]

When it comes to real estate there are rules to follow if you want to rent out properties. 50% rule and general rule of $200 cash flow+ a month. Now where most investors get wrong is rent-PMI = cash flow. That is not the case.

Take the mortgage for instance is $500 a month and MARKET RENT is 1300. You take 50% of market rent which is $600 and that 50% is TAXES, INSURANCE, REPAIRS, VACANCY, MARKETING. 50% is a proven system where many believe its too much but it is averages over time

$500 + $600 = 1100, leaving with a monthly $200 cash flow. The hardest part is finding deals good enough, saving for a down payment, and determining true market rent.

There are other systems like 10% cap rate, 2% rule. But I think the 50% is the easiest to follow.

http://www.123flip.com/education/the-50-rule

[aussiedog]

Thanks for the links and words of caution. I will do some more reading and proceed carefully

[Dulocracy]

I would highly recommend reading The Millionaire Real Estate Investor by Gary Keller.

[john94549]

It is seldom wise to let the tax tail wag the dog. While it is true that passive activity losses offset passive activity gains, one should also consider the trap of re-capture. Example: Joe and Jane have taxable income of $60,000, well below the threshhold for the 25% marginal bracket. That includes passive activity gains from (fill in the blank). Joe and Jane heard they could "shelter" those gains by buying a condo, renting it out (cash flow neutral), depreciating it, and generating passive activity losses with the depreciation. Moreover, they read that "excess" passive activity losses could shelter some ordinary income as well, since their MAGI was less than $150,000.

Joe and Jane decide to sell the condo two years down the road for $12,000 more than the purchase price. Their taxable income is still $60,000. The capital gain, $12,000, should be taxed at zero.* But what tax rate will the re-capture of the depreciation (taken or not) face? If you guessed 25%, you win the prize. The depreciation used to shelter income subject to the 15% rate is re-captured at 25%.

*Not having faced this issue personally, I'm not clear on this. It might be taxed at the re-capture rate. I'll let the tax wizards chime in.

[travellight]

I have invested in real estate and it is work but I think it is worth it.

My own formula is to consider the purchase if I think it will cash flow neutral based on a 15 year fixed rate mortgage at 4% interest. To do this, you have to really know the market, know what is a great deal, AND know your rental market. There is a lot of research involved.

I came across a phrase that stuck with me: You make money in the buy, not the sell. So, it helps to buy a really sweet deal because that is usually when you have control. When you want and need to sell, you are at the mercy of the market.

[dbonnett]

While checking a vacant rental the other day, I found that the air conditioner compressor had been stolen ($2500)
Because it is a rental, such losses are not covered if the property is vacant. While I have made money in this business,
you have to factor in a lot of mental punishment. Other landlords may also wish to add stories about the joys of eviction,
working on trashed out units, etc.
Also making judgment calls...prospective tenant has deposit and rent, but you are unable to get a solid, verifiable
reference. It could go either way, but if you do not accept the application you will probably lose this months rent.
Then, too, you get to relive may of these annoyances if your spouse agonizes about them out loud and wonders
why you couldn't anticipate them.

[DaveS]

I am a bankruptcy lawyer. I have a lot of customers who got into real estate without knowing what they were doing. Dave

[dbonnett]

bankruptcy...all it takes is leverage and sluggish rentals and high turnover.

[tc101]

I have only had one experience as a real estate investor. A year and a half ago I bought a new house, moved, and rented out the house I had lived in. Things went pretty smothly. I got a good return. I am about to sell the old house for tax reasons, but I will not make any new real estate investments.

It can be a pretty good investment and if you find the right people it is not that much work. It wears on me emotionally though. If a hot water heater goes out and rots some wood and I have to spend $1000 fixing it, it bothers me a lot more than if I lose $1000 when the stock market goes down. I am not sure why this is, but it is a fact, and I think it is true for most people. If you are free of these kinds of emotions it seems like real estate investing can be a good deal.