Author Topic: case study 4 unit in los angeles  (Read 834 times)

ca-rn

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case study 4 unit in los angeles
« on: May 05, 2018, 12:49:31 PM »
Market Value: around 1.1 million
Original Purchase price: 355000
Original Mortgage Amount: 345000
Interest Rate: 3.0
Mortgage Term: 15
Term remaining: 10
Amount remaining on mortgage: 174000
Gross Rents: 3050
Principal and Interest (the P&I of your PITI - should match with the above info): 1995
Taxes and Insurance (the T&I of your PITI): 540/month
HOA costs: n/z
Deferred maintenance notes: 1920's building so there is always something
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):

FIRE question- keep or sell?  main consideration is depreciation/taxes upon selling... i don't fully understand how it goes down- primary residence (capital gains) within rental property.  what and how much will i owe? 

i've had this property for nearly 15 years, its been ref'd a number of times and is currently on its last 15 year mortgage.  i've been paying an additional 500 principal for about 1.5 years but now questioning this if i were to sell it.  depreciate 3 of 4 units, i live in one unit. late 40's single, no dependents (except siblings- unstable low income).  central location, blue collar area that is steadily gentrify but has rent control.

originally planned to keep it for early retirement- rent two units and keep one available for a struggling sibling.  but after 15 years of being a landlord, i'm dreaming of selling it all to buy a small cheap home (200k) in a cheaper area/state and roll the rest into my investment funds (3 index funds at vanguard) and/or be a international nomadic traveler/teach english in se asia/central america etc with no home base.

thoughts?

thanks!

Gronnie

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Re: case study 4 unit in los angeles
« Reply #1 on: May 05, 2018, 01:30:28 PM »
The rent is way too low to be a good investment unless the unit you live in would rent for a metric shit ton of $$$.

Another Reader

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Re: case study 4 unit in los angeles
« Reply #2 on: May 05, 2018, 02:59:26 PM »
You are going to owe a lot of taxes on the capital gain, both to the feds and to California.  You will also have to recapture all the depreciation.  In California, capital gains are taxed at ordinary income rates.  If you use an accountant to do your taxes, have that person work up an estimate of the taxes due, based on your estimated selling price, the estimated selling expenses, and the basis from your last tax return.

marty998

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Re: case study 4 unit in los angeles
« Reply #3 on: May 05, 2018, 03:55:32 PM »
The rent is way too low to be a good investment unless the unit you live in would rent for a metric shit ton of $$$.

The capital value has gone up more than 200% and you're telling him it's not a good investment? Oh boy.

OP - yes your plan makes sense - after winning the capital gain game you now want to play the cash flow game. Get yourself a good accountant who can estimate all this in advance (it's prudent here to spend thousand dollars or two if you have to, in order to save potentially hundreds of thousands.

If your 4-plex is on separate titles, can you sell them off one at a time, (in different tax years) so as to minimise the capital gains that are added to your income? This will help (for starters) with managing how high your marginal tax rates will go.

Gronnie

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Re: case study 4 unit in los angeles
« Reply #4 on: May 05, 2018, 04:24:42 PM »
The rent is way too low to be a good investment unless the unit you live in would rent for a metric shit ton of $$$.

The capital value has gone up more than 200% and you're telling him it's not a good investment? Oh boy.

Yes, and it's sound advice. Reliance on continued appreciation over inflation for something to be a good investment is irrational.

ender

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Re: case study 4 unit in los angeles
« Reply #5 on: May 05, 2018, 04:27:59 PM »
The rent is way too low to be a good investment unless the unit you live in would rent for a metric shit ton of $$$.

The capital value has gone up more than 200% and you're telling him it's not a good investment? Oh boy.



Would you buy a 4-plex for 1.1 million that rents for $4k a month?


cchrissyy

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Re: case study 4 unit in los angeles
« Reply #6 on: May 05, 2018, 04:43:27 PM »
but selling won't give $1.1m to invest elsewhere. 
The OP would need to subtract the mortgage as well as income tax paid on the capital gain and all the recaptured depreciation for all those years. 


I agree the rental income here isn't "enough" more than the PITI.  But the hit when selling this place would be severe. And at least that PITI is paying down the mortgage principal fast, as only 10 years are left and the rate is only 3%.

ca-rn

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Re: case study 4 unit in los angeles
« Reply #7 on: May 05, 2018, 04:47:55 PM »
The rent is way too low to be a good investment unless the unit you live in would rent for a metric shit ton of $$$.

The capital value has gone up more than 200% and you're telling him it's not a good investment? Oh boy.

OP - yes your plan makes sense - after winning the capital gain game you now want to play the cash flow game. Get yourself a good accountant who can estimate all this in advance (it's prudent here to spend thousand dollars or two if you have to, in order to save potentially hundreds of thousands.

If your 4-plex is on separate titles, can you sell them off one at a time, (in different tax years) so as to minimise the capital gains that are added to your income? This will help (for starters) with managing how high your marginal tax rates will go.

the 4 plex is one title, cannot sell them off individually.  unfortunately/fortunately i also have a w2 taking me up to 24% federal tax. 

i should be able to still have 250k for capital gains since this is my primary home too.

originally bought the place because i wanted to live for cheap in a centrally located neighborhood and i figured having renters would help me make that happen.   now i get paid to live in my home which surpassed my original plan!

it makes total $$$ sense to stay here, FIRE and keep being a landlord- when mortgage free, the rents will cover everything-property maintenance/taxes AND my basic personal expenses plus it has most of what i want- great mild weather year round! ethnically diverse! public transit close by, 80-90's walk score, flat/bikable, grocery stores/restaurants, hospitals etc but i'm getting itchy feet and a desire to not be responsible for anyone but ME.

use tax program- no cpa


« Last Edit: May 05, 2018, 05:20:41 PM by ca-rn »

ca-rn

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Re: case study 4 unit in los angeles
« Reply #8 on: May 05, 2018, 04:59:20 PM »



Would you buy a 4-plex for 1.1 million that rents for $4k a month?
[/quote]

this is los angeles.  real estate prices do not make financial sense here.  i look at cheap old houses on instagram and just can't comprehend- its a totally different alternate reality full of beautiful old homes selling for the less than a used tesla.

selling with 2 vacant units makes it more attractive.

ca-rn

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Re: case study 4 unit in los angeles
« Reply #9 on: May 05, 2018, 05:17:54 PM »
First off, congrats on investing and managing a unit for 15 years that has generated a HUGE ROI for you. If you sell the cap gains will be around (1.1M - .355k) * (.20 +.123) =  241K and then you have around 355 * .7 / 27.5 * 15 =  136k depreciation recapture. I'd need your other income numbers to calculate more accurately. But assuming these numbers, if you sold today, you would walk away with 1,100 - 241 - 136 = 723. You can drive down the cap gains rate by doing a structured sale by distributing the sale over several years. It's a great time to sell if you don't want to be a landlord anymore -- good luck!!

Edit: Need to carve out 25% of the cap gains, depreciation for primary rental exclusion, (241 + 136) * .25 = 94k, and selling fees. So your walk-away is approx (1.1M - .355) * (.2 + .1230) * .75 = 181k plus 355 * .7 / 27.5 * 15 * .75 = 102. Then you factor $1.1M * .075 for selling fees =  82.5. So you're going to walk away with 1.1M - .181M - .102M - .0825M = 734.5k.

wow, thank you!  i don't understand the numbers/formula but i will study it!  i back-of-the-napkin grossly estimated it would hopefully be  about 700K-  1.1 million minus 250 capital gains minus 150 (15 years) depreciation.

my w2 gross is going to be about 120K this year.

how does one do a structured sale to distribute it over a few years? 


tralfamadorian

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Re: case study 4 unit in los angeles
« Reply #10 on: May 05, 2018, 05:47:33 PM »
how does one do a structured sale to distribute it over a few years?

The only options I know of to avoid taking the tax hit in one year are 1) to condo-ize the building to sell one per year or 2) seller financing. I believe you said above to condo is not an option so seller financing would be the only choice that I am aware of.

RyaninLA

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Re: case study 4 unit in los angeles
« Reply #11 on: May 06, 2018, 07:31:56 AM »
First off, congrats on investing and managing a unit for 15 years that has generated a HUGE ROI for you. If you sell the cap gains will be around (1.1M - .355k) * (.20 +.123) =  241K and then you have around 355 * .7 / 27.5 * 15 =  136k depreciation recapture. I'd need your other income numbers to calculate more accurately. But assuming these numbers, if you sold today, you would walk away with 1,100 - 241 - 136 = 723. You can drive down the cap gains rate by doing a structured sale by distributing the sale over several years. It's a great time to sell if you don't want to be a landlord anymore -- good luck!!

Edit: Need to carve out 25% of the cap gains, depreciation for primary rental exclusion, (241 + 136) * .25 = 94k, and selling fees. So your walk-away is approx (1.1M - .355) * (.2 + .1230) * .75 = 181k plus 355 * .7 / 27.5 * 15 * .75 = 102. Then you factor $1.1M * .075 for selling fees =  82.5. So you're going to walk away with 1.1M - .181M - .102M - .0825M = 734.5k.

wow, thank you!  i don't understand the numbers/formula but i will study it!  i back-of-the-napkin grossly estimated it would hopefully be  about 700K-  1.1 million minus 250 capital gains minus 150 (15 years) depreciation.

my w2 gross is going to be about 120K this year.

how does one do a structured sale to distribute it over a few years?

Ha, I see you caught it before I erased the post. I erased it after seeing an omission and an error -- and being too lazy to fix it -- it was a disservice to give you rushed numbers.

Recommend reading this as one way to do a structured sale: https://finnfinancialgroup.com/save-money-by-structuring-the-sale-of-your-business-or-property/
« Last Edit: May 06, 2018, 07:48:32 AM by RyaninLA »