Author Topic: Rentals Vs Stocks in Retirement. Isn't Stocks better since no Taxes on Stocks?  (Read 4464 times)

andysandp

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Go Curry Cracker has shown how he can use $100,000 in Income from Stocks and paying 0 in Taxes during Retirement.

If you make $100,000 in Rental Income after all Expenses, you get around $88,000 after paying Fed. Taxes.  I know there is Depreciation but it doesn't help much in the later years because the Rental Income will be much higher in years 15-27.

After 27 years you can't take any more Depreciation and in early Retirement you are expecting another 20-40 years of living.

The difference in Stock Income Vs Rental Income After Taxes is probably even much bigger if we use $200,000-$300,000 of Income a year.

So isn't it better to FIRE with Stock Income then Rental Income?

Any thoughts?

« Last Edit: January 21, 2017, 11:59:43 AM by andysandp »

andysandp

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Stocks VS Real Estate Income in FIRE. Isn't Stocks better because no tax?
« Reply #1 on: January 21, 2017, 11:46:56 AM »
Go Curry Cracker has shown how you can use $100,000 in income from Stocks and paying 0 in Taxes during Retirement.

If you make $100,000 in Rental Income after all Expenses, you get around $88,000 to use after paying Fed. Taxes.  I know there is Depreciation but it doesn't help much in the later years because the Rental Income will be much higher in years 15-27.

After 27 years you can't take any more Depreciation and in early Retirement you are expecting another 20-40 years of living.

The difference in Stock Income Vs Rental Income After Taxes is probably even much bigger if we use $200,000-$300,000 of Income a year.

Isn't living off Stocks Income better then Real Estate income?

Any thoughts?
« Last Edit: January 21, 2017, 11:57:53 AM by andysandp »

seattlecyclone

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Sure, if the gross income is the same either way you might as well go with stocks. If the rental income is little bit bigger, that can be a better option after taxes. These two investments have different income-generating characteristics that can be unpredictable in their own special ways.

maizeman

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Honestly, I think a big part of the appeal of real estate is that people are able to use leverage (mortgages) to a much larger extent than is possible (or at least wise) with stocks. This translates into bigger grains when things go well (as they have since 2009ish), but also the potential for losses well beyond your original investment.

Assuming a person was investing in real estate for the leverage/depreciation benefits, they'd be doing things like money out refinances or 1031 exchanges to continue to keep their leverage high and continue to be able to depreciate things all the way from FIRE to regular retirement to death. So if you assume equal unleveraged rates of return from the stock market and real estate, I wouldn't be surprised if real estate came out ahead after factoring in leverage and tax treatment (if you don't consider there is a lot of "free" labor and potential stress -- finding tenants, performing or arranging for maintenance and repairs, evictions, all that jazz)

SeattleCPA

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I don't think that's the right way to think. But I understand what you're getting at.

I would keep in mind that the money a company makes gets taxed and then you get your dividends out of the after-tax portion. Which is why you get a preferential rate (which may be zero). E.g. your shares in a company may represent $10,000 of profit... but at the corporate level, there's $3,400 of tax paid .. and then you only get $6,600 of dividends or appreciation.

The money you make in real estate or in a REIT isn't taxed at an entity level and so you get taxed on your return because those profits have to taxed someplace. E.g., you might make $10,000 of profit... and then personally have to $3,400 of income taxes... and so only get $6,600 of income.

I'm intentionally making the numbers equate. Obviously. Hopefully you see what I'm trying to say...

A related comment: I think you can make a pretty good case that a stocks-heavy portfolio makes more sense in retirement because returns are probably higher, workload is lower, diversification is greater or easier, etc. But a chunk of your portfolio in real estate should do good things to your overall portfolio.

And finally this comment: Unlike stocks, direct real estate does offer you the opportunity jack your return by doing things like injecting sweat equity, earning a bit extra (aka "alpha") by making smarter decisions, etc.

Fishingmn

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Go Curry Cracker has shown how you can use $100,000 in income from Stocks and paying 0 in Taxes during Retirement.

If you make $100,000 in Rental Income after all Expenses, you get around $88,000 to use after paying Fed. Taxes.  I know there is Depreciation but it doesn't help much in the later years because the Rental Income will be much higher in years 15-27.

After 27 years you can't take any more Depreciation and in early Retirement you are expecting another 20-40 years of living.

The difference in Stock Income Vs Rental Income After Taxes is probably even much bigger if we use $200,000-$300,000 of Income a year.

Isn't living off Stocks Income better then Real Estate income?

Any thoughts?

First off, you are projecting tax rates well into the future. Who knows.

My main argument though would be that, at least in my case, the amounts I can rely on to live off of are much higher with real estate.

I have $750k in rental real estate that is giving me a return of 10% after all expenses (not including depreciation or taxes). So that's $75k. This amount is mostly protected from inflation as rents normally rise at about the same rate.

If I have $750k in stocks you are supposed to use a SWR of 4%. So the income I can safely withdraw is $30k.

Therefore, the amount I have to live on with the rental income is much higher even if I have to pay taxes on it.

andysandp

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Wow 10% return after all Expenses?  Does the Expenses include building a reserve fund for future repairs like new roof, windows, kitchen, bathroom, etc?

I live in Boston, where the return is only 4% after Expenses.

Where is this property and is that normal in that area? 

I own Real Estate in Boston and since the return is only 4% without building a reserve fund, I'm thinking of selling it and buying in a different area.  Or selling it and buying S and P and taking advantage of the 0 tax rate.

Thanks!
« Last Edit: January 22, 2017, 07:32:56 AM by andysandp »

andysandp

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Right now I have 70 percent in Real Estate and 30 percent in Stocks.  I have enough to Retire now.

I'm wondering if it's worth it to sell my Real Estate and then put it into Stocks since the Tax benefits are better in Retirement.  In Boston I'm only getting 4% return after all expenses which doesn't even include saving for a repair fund, such as new kitchen, bathroom, heating system etc.

The downside is paying Capital Gains on the Real Estate sale and the Recapture Tax.

Any thoughts?
« Last Edit: January 22, 2017, 09:41:09 AM by andysandp »

Arktinkerer

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Rental property is work.  If you do your own work, the upside potential is high and, in my opinion, the downside is lower.  It is a chance to change some work to value at lower or even 0 tax rates.

But for me, the biggest thing is diversity.  The OP makes this an either/or proposition.  I do both.  Just like I have both ROTH and standard IRAs.  Gives one many more options at times.

Fishingmn

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Wow 10% return after all Expenses?  Does the Expenses include building a reserve fund for future repairs like new roof, windows, kitchen, bathroom, etc?

I live in Boston, where the return is only 4% after Expenses.

Where is this property and is that normal in that area? 

I own Real Estate in Boston and since the return is only 4% without building a reserve fund, I'm thinking of selling it and buying in a different area.  Or selling it and buying S and P and taking advantage of the 0 tax rate.

Thanks!

Yes - 10% after all expenses. I have 8 townhouses & 2 condos in the Twin Cities. Key is I bought them all at the low point of the market 4-5 years ago. No way I could find the same returns now. I do budget 7% of my income toward repairs & maintenance plus since they are all in HOA's the outside maintenance is covered as a part of my HOA fee.

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Right now I have 70 percent in Real Estate and 30 percent in Stocks.  I have enough to Retire now.

I'm wondering if it's worth it to sell my Real Estate and then put it into Stocks since the Tax benefits are better in Retirement.  In Boston I'm only getting 4% return after all expenses which doesn't even include saving for a repair fund, such as new kitchen, bathroom, heating system etc.

The downside is paying Capital Gains on the Real Estate sale and the Recapture Tax.

Any thoughts?

Okay, so does this help: Ignoring your capital gains tax and the Unrecaptured Sec. 1250 gain (the "recapture of depreciation), you're going to move money that's taxable and earning 4% to something that basically isn't taxable and is earning 2%.

I.e., the dividend yield on the total stock market is about 2%... so yes, you can earn that money tax free if you're marginal rate is 10% or 15%... but i'd still rather take 4% taxable than 2% not taxed.

P.S. The capital gains from real estate and the capital gains from stocks might both be taxed at that 0% rate too if you're really careful.

andysandp

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Re: Stocks VS Real Estate Income in FIRE. Isn't Stocks better because no tax?
« Reply #11 on: January 23, 2017, 03:36:33 PM »
Wow 8 Townhouses and 2 Condo are a lot of units!  Congrats! 

Don't Expenses for each unit really add up?  For example a new Kitchen and bathroom probably runs at least $30,000 and in 20 years it will cost a lot more due to inflation. So in 20 years you may need $600,000 do change 10 kitchens and bathrooms.

I'm in a similar situation where I own 6 units, and thinking down the road those kitchens and bathrooms will be expensive.  So that's why I'm thinking of selling my real estate and buying stocks.  Or another option is exchange 6 units for 2 expensive units.  2 units will only need 2 kitchen and baths.

It would be great to hear your thoughts!

 
« Last Edit: January 24, 2017, 07:30:42 AM by andysandp »

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Right now I have 70 percent in Real Estate and 30 percent in Stocks.  I have enough to Retire now.

I'm wondering if it's worth it to sell my Real Estate and then put it into Stocks since the Tax benefits are better in Retirement.  In Boston I'm only getting 4% return after all expenses which doesn't even include saving for a repair fund, such as new kitchen, bathroom, heating system etc.

The downside is paying Capital Gains on the Real Estate sale and the Recapture Tax.

Any thoughts?

Yeah, I'm also concerned about this Andy, having stumbled across Sol's old post about recapture tax. Assuming the tax system remains as it is (a big if right now, sure...) the gocurrycracker trick with market investments seems easy and straightforward.

I 'd like to think a % of rentals in a retirement portfolio still might make sense BUT you'd have to be planning to use the roll-over 1031 loophole to maintain the capital in rentals and leave the capital appreciation for your heirs as it seems all those defered tax liabilities do dissappear when you die. By rolling over when you sell the capital gain appreciation can be taken and plowed into more rentals with a reset on depreciation forever, and you just get a nice low tax income stream (having deducted expenses, interest and depreciation) that is pretty diversified from the volatility of the stock market.

I'd have to do a HEAP of scenario number crunching to bottom out the delta, taking into account the impact of leverage, and of rental income on capital gains tax rates.

Is there anyone out there who is doing this for real in FIRE and can help explain why rentals in retirement are still a good idea vs mutual fund/index/REIT investments combined with low W2 income and all those tasty IRA/Roth benefits? It seems that the danger of the rental path could be to effectively lock you into rolling over rentals forever, as that recaptured depreciation liability (taxed at 25% and will count as earned income) builds and builds.

arebelspy

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Go Curry Cracker has shown how he can use $100,000 in Income from Stocks and paying 0 in Taxes during Retirement.

If you make $100,000 in Rental Income after all Expenses, you get around $88,000 after paying Fed. Taxes.  I know there is Depreciation but it doesn't help much in the later years because the Rental Income will be much higher in years 15-27.

Okay, ignoring depreciation.

What if to get 100k in ER from stocks at the 4% rule you'd need 2.5MM invested, but to get 100k from rentals (say, 130k gross, the same 100k net after taxes) you only needed 1.3MM invested?

To me, at the end of the day what matters most is time to FIRE (aka amount of freedom) and stability of ER (i.e. chance of having to go back).

Rentals minimize both of those.

Sure, you pay taxes.  But you still FIRE so much earlier, even with paying them.

If I could theoretically FIRE in, say, 10 years on 1.3MM of real estate and net 100k after paying 30k in taxes or FIRE on 2.5MM of stocks and net 100k after paying $0 in taxes taxes, in, say, 20 years, I'd take the first scenario every time.

The point is, you're looking at the two situations and saying that the one you pay taxes and the other you don't, so the no tax scenario must be better, but that's not the case, since the tax scenario nets you much more on an apples-to-apples basis.

Or, in other words, choose between these scenarios:
2.5MM in stocks, you pull out 100k (4% rule), pay $0 taxes.
2.5MM in real estate, you gross 250k, net 187.5k after 25% taxes.

Which would you choose?

I'll take more money, and pay some in taxes than less overall money in my pocket, but none goes to taxes.

:)

Disclaimers:
1) This is all assuming good rentals.  A bad rental, obviously, takes away from FIRE plans.
2) All numbers in this post are theoretical. Please don't nitpick them as realistic, or not. I just used a standard 10% cash on cash return.  I don't care if that's not feasible in your area, or you live outside the US, or whatever. It is a common metric that is absolutely possible.
3) Real estate is more work.  Mostly up front.  A lot more work.
4) Real estate may have more risk.  It may be mitigated, but you must be aware of it.
5) This post was meant to be illustrative of why, even if you're paying taxes, you could come out ahead. The tax comparison isn't the bottom line.
« Last Edit: January 24, 2017, 06:35:30 AM by arebelspy »
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Mr Mark

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ARS,
Fair point that it's about time to and sustainability of FIRE.

"10% cash on cash" - that implies a leveraged property portfolio I guess?

"ignoring depreciation"  - Are you not concerned about the ever building tax liability as depreciation eats away at your net capital? Or do you plan on the 1031 technique to push them endlessly into the future?

arebelspy

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ARS,
Fair point that it's about time to and sustainability of FIRE.

"10% cash on cash" - that implies a leveraged property portfolio I guess?

No, without leverage.  Leverage should push that to 15-18%, I'd say.

Quote
"ignoring depreciation"  - Are you not concerned about the ever building tax liability as depreciation eats away at your net capital? Or do you plan on the 1031 technique to push them endlessly into the future?

I ignored it because he wanted apples to apples, and that's easier. 

Yes, you can 1031 or pass on to heirs on a stepped up basis to never have to pay that back.

Or you can just sell, and not care, and when you sell, you can pay the depreciation.

First of all, you take depreciation in today's dollars, and pay it back with future dollars, so that's already a win, but even besides that, it's a net wash overall.. take 100k depreciation over the life of the rental (for example), pay it back when you sell... so?  We can ignore it then for comparison's sake, because we take it now, pay it back later, whatever, it's a wash in terms of total return.

Basically: why would I need to worry about the tax liability of it in a comparison if I'm not counting the tax benefit of it now?  Just easier to dump it from our comparison (even though like I said, with time value of money, it's a net win--i.e. you could stick all the money you save on depreciation into an investment, do that over 27.5 years, sell, and have way more than you need to pay back the depreciation, on average).
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FrugalFisherman10

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Go Curry Cracker has shown how he can use $100,000 in Income from Stocks and paying 0 in Taxes during Retirement.

If you make $100,000 in Rental Income after all Expenses, you get around $88,000 after paying Fed. Taxes.  I know there is Depreciation but it doesn't help much in the later years because the Rental Income will be much higher in years 15-27.

Okay, ignoring depreciation.

What if to get 100k in ER from stocks at the 4% rule you'd need 2.5MM invested, but to get 100k from stocks (say, 130k gross, the same 100k net after taxes) you only needed 1.3MM invested?

To me, at the end of the day what matters most is time to FIRE (aka amount of freedom) and stability of ER (i.e. chance of having to go back).

Rentals minimize both of those.

Sure, you pay taxes.  But you still FIRE so much earlier, even with paying them.

If I could theoretically FIRE in, say, 10 years on 1.3MM of real estate and net 100k after paying 30k in taxes or FIRE on 2.5MM of stocks and net 100k after paying $0 in taxes taxes, in, say, 20 years, I'd take the first scenario every time.

The point is, you're looking at the two situations and saying that the one you pay taxes and the other you don't, so the no tax scenario must be better, but that's not the case, since the tax scenario nets you much more on an apples-to-apples basis.

Or, in other words, choose between these scenarios:
2.5MM in stocks, you pull out 100k (4% rule), pay $0 taxes.
2.5MM in real estate, you gross 250k, net 187.5k after 25% taxes.

Which would you choose?

I'll take more money, and pay some in taxes than less overall money in my pocket, but none goes to taxes.

:)

Disclaimers:
1) This is all assuming good rentals.  A bad rental, obviously, takes away from FIRE plans.
2) All numbers in this post are theoretical. Please don't nitpick them as realistic, or not. I just used a standard 10% cash on cash return.  I don't care if that's not feasible in your area, or you live outside the US, or whatever. It is a common metric that is absolutely possible.
3) Real estate is more work.  Mostly up front.  A lot more work.
4) Real estate may have more risk.  It may be mitigated, but you must be aware of it.
5) This post was meant to be illustrative of why, even if you're paying taxes, you could come out ahead. The tax comparison isn't the bottom line.
", but to get 100k from STOCKS (say, 130k gross, the same 100k net after taxes) you only needed 1.3MM invested?"
ARS, just to clarify,  did you mean to say "Rentals" here?


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arebelspy

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", but to get 100k from STOCKS (say, 130k gross, the same 100k net after taxes) you only needed 1.3MM invested?"
ARS, just to clarify,  did you mean to say "Rentals" here?

I did indeed!  Typo fixed, thanks for catching it.
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andysandp

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Wow, great discussion/info and makes great sense!

I already have 70 percent of my portfolio in Real Estate in Boston.

In Boston i'm only getting about 3-4% cash on cash after all Expenses.  When I'm saying 3-4%, that's based on today's value.  I bought these units much cheaper years ago.

I read your Disclaimer, but is it pretty normal to get 10% on Real Estate after all Expenses right now?

Now I'm seriously considering selling my properties and buy in those areas where I can get 10%.  Which cities offer that now? 

Thanks!
« Last Edit: January 24, 2017, 09:49:10 AM by andysandp »

SeattleCPA

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ARS,
Fair point that it's about time to and sustainability of FIRE.

"10% cash on cash" - that implies a leveraged property portfolio I guess?

"ignoring depreciation"  - Are you not concerned about the ever building tax liability as depreciation eats away at your net capital? Or do you plan on the 1031 technique to push them endlessly into the future?

Mr Mark,

As noted in the above posts, I think this whole analysis is apples to oranges...

But here are a handful of other things to keep in mind about the apples and the oranges. First, if you're in the 10% or 15% tax bracket, which is the income band Jeremy was pointing to as meaning qualified dividends are taxed at 0%, that means unrecaptured Sec. 1250 gain (which is what we're talking about here) is taxed not at 25% but at 15%.

Second, if you buy a rental for say $100K, split that into $20K of land and $80K of building, fully depreciate the building, and then sell the property in three decades for $300K, your unrecaptured Sec. 1250 gain equals $80K and that other $200K is basically long-term capital gains.

Third, you should over the decades be able to use the partial disposition rules to sluff off the depreciation. (This is a bigger subject that can be discussed here but google on "tangible property regulations partial disposition".)

Fourth, in three decades, assuming we continue to have inflation adjusted brackets and deductions, that first $25k to $50K of unrecaptured Sec 1250 gain won't even taxable necessarily because it'll be sheltered by your personal exemptions and personal deductions. I.e., inflation will actually eat away at it.
 
Fifth and final, for taxes, I'd rather have passive income than portfolio income because over those three decades, I can then more easily write off expenses.

brooklynguy

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Basically: why would I need to worry about the tax liability of it in a comparison if I'm not counting the tax benefit of it now?

For a complete apples-to-apples analysis, you should count the tax benefit of it now (which, for the frugal low-income retiree, could be nil, depending on his or her overall financial profile), in addition to all the other costs and benefits (both tax and otherwise), both now and later, of each alternative.  This is the same exercise sol is doing in the depreciation recapture thread that Mr Mark referenced above.  As Mr Mark's helpful hypothetical example in that thread illustrates, the effective tax drag on rental income when the assumptions include a future sale of the rental property could be a significant factor in the analysis (though, as you point out, the opportunity cost of forgoing the rental income could easily outweigh it).

arebelspy

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Basically: why would I need to worry about the tax liability of it in a comparison if I'm not counting the tax benefit of it now?

For a complete apples-to-apples analysis, you should count the tax benefit of it now (which, for the frugal low-income retiree, could be nil, depending on his or her overall financial profile)

If the rental is good, the cash flow from the rental itself should suck up the depreciation, so all of it is used.

Quote
in addition to all the other costs and benefits (both tax and otherwise), both now and later, of each alternative.  This is the same exercise sol is doing in the depreciation recapture thread that Mr Mark referenced above.  As Mr Mark's helpful hypothetical example in that thread illustrates, the effective tax drag on rental income when the assumptions include a future sale of the rental property could be a significant factor in the analysis (though, as you point out, the opportunity cost of forgoing the rental income could easily outweigh it).

Explain to me how a tax drag occurs from a future sale if the depreciation recapture is literally just kicking the can down the road by taking a benefit now?
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brooklynguy

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Explain to me how a tax drag occurs from a future sale if the depreciation recapture is literally just kicking the can down the road by taking a benefit now?

Because there may be zero tax benefit to taking the depreciation deductions now, and nonzero tax costs when the depreciation deductions are "recaptured" later.  And this could happen even if the rental is good and all the depreciation is eaten up by cash flow from the rental along the way, because that still provides no upfront tax benefits if you would have no tax liability on that cash flow anyway.  (This is all exactly the point behind sol's thread.)

arebelspy

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Explain to me how a tax drag occurs from a future sale if the depreciation recapture is literally just kicking the can down the road by taking a benefit now?

Because there may be zero tax benefit to taking the depreciation deductions now, and nonzero tax costs when the depreciation deductions are "recaptured" later.  And this could happen even if the rental is good and all the depreciation is eaten up by cash flow from the rental along the way, because that still provides no upfront tax benefits if you would have no tax liability on that cash flow anyway.  (This is all exactly the point behind sol's thread.)

Only if your marginal tax rate is low, which it likely won't be if you have lots of real estate.

That thread is about a single rental.  It would also apply if you have multiple rentals with very little cash flow.

But if you have multiple rentals with high cash flow (e.g. your ER is built on real estate), I just don't see it being an issue.  $76k if married is what you need to hit 25% bracket. Keeping in mind that you'll put a large chunk of that away for vacancy, future repairs and capital expenses, etc. (but still be taxed on it now--it'll just raise your basis back up when you spend it later), that maybe gives you 40k to spend, in line with most Mustachian spending (and even some of that you may want as a buffer to the movements, depending on how conservative you are).

And it's a mere 38k if you're filing single.

This sentence you said is the key, IMO:
Quote
For a complete apples-to-apples analysis, you should count the tax benefit of it now (which, for the frugal low-income retiree, could be nil, depending on his or her overall financial profile)

That analysis is good for someone like sol, holding a single former primary residence turned rental.

For someone building their ER on real estate, I just don't see the bolded being true.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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brooklynguy

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For someone building their ER on real estate, I just don't see the bolded being true.

Yeah, that's a good point -- I don't either.  I guess I was just trying to broaden the discussion to include those of us with smaller real estate allocations (perhaps including Mr Mark, to whom you were originally responding?).

arebelspy

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For someone building their ER on real estate, I just don't see the bolded being true.

Yeah, that's a good point -- I don't either.  I guess I was just trying to broaden the discussion to include those of us with smaller real estate allocations (perhaps including Mr Mark, to whom you were originally responding?).

Cool.  Glad we're on the same page.

I was thinking about the OP, whose comparison was 100k of income for stocks vs real estate (and said "If you make $100,000 in Rental Income after all Expenses"), so my scenario was responding to that, and Mr Mark asked about if I'm concerned about depreciation in that scenario, and I'm not.

Good to include the caveats and other scenarios too though, so people will see there are times it could matter.  :)
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andysandp

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Hi Arebelspy!  I'm learning a lot from this great board!

Right now I  have 70 percent of my total retirement portfolio in Real Estate in Boston.

In Boston i'm only getting about 3-4% cash on cash after all Expenses.  When I'm saying 3-4%, that's based on today's value.  I bought these units much cheaper years ago.

I read your Disclaimer, but is it pretty normal to get 10% on Real Estate after all Expenses RIGHT NOW?

Now I'm seriously considering selling my properties and buying in those areas where I can get 10%.  Which cities offer that now? 

Thanks!
« Last Edit: January 24, 2017, 03:38:25 PM by andysandp »

arebelspy

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Hi Arebelspy!  I'm learning a lot from this great board!

Right now I  have 70 percent of my total retirement portfolio in Real Estate in Boston.

In Boston i'm only getting about 3-4% cash on cash after all Expenses.  When I'm saying 3-4%, that's based on today's value.  I bought these units much cheaper years ago.

I read your Disclaimer, but is it pretty normal to get 10% on Real Estate after all Expenses RIGHT NOW?

Now I'm seriously considering selling my properties and buying in those areas where I can get 10%.  Which cities offer that now? 

Thanks!

Hi Andy!  I saw that you posted this question 3 or 4 times. 

http://forum.mrmoneymustache.com/post-fire/stocks-vs-real-estate-income-isn't-stocks-better-after-taxes/msg1394521/#msg1394521
http://forum.mrmoneymustache.com/real-estate-and-landlording/rentals-vs-stocks-in-retirement-isn't-stocks-better-since-no-taxes-on-stocks/msg1394651/#msg1394651
http://forum.mrmoneymustache.com/real-estate-and-landlording/rentals-vs-stocks-in-retirement-isn't-stocks-better-since-no-taxes-on-stocks/msg1397664/#msg1397664
http://forum.mrmoneymustache.com/real-estate-and-landlording/rentals-vs-stocks-in-retirement-isn't-stocks-better-since-no-taxes-on-stocks/msg1398655/#msg1398655

Once is sufficient, repeatedly posting starts to look like spam.  :)

It's a more complex question with an answer that depends on the person, properties, etc. which is why I can't give you a clear answer.

To give you a shortened version:
I'd ballpark an estimate that 90% of the areas in the US offer it, but the amount of digging you have to do and value-add to make it happen varies between locations.  In other words, some places have tons of those opportunities without much work, others you'll have to be much pickier and it will take much longer to find them.

Selling and reallocating equity is a more complex decision than comparing cash-on-cash return that includes potential appreciation, taxes, frictional (transaction) costs, etc.

You will need to either do this research yourself, or pay a professional to do it for you.

Free advice on an internet forum is great to a certain point, to pointing you in what you need to learn, maybe where you can learn it, but it can't give you complex answers to specific personalized scenarios, and you shouldn't try to extrapolate generalized advice to your specific situation without customizing it.

Good luck!   :)
« Last Edit: January 24, 2017, 04:07:40 PM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

andysandp

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Arebelspy, Sorry about the repeated posts. 

I posted in different Boards because I figured Stock people may have different views then Real Estate people, and post FIRE people may have different views as well.  Since I own both Stocks and Real Estate, I was hoping to get both points of view.

The 4% rule is pretty clear to me for Stocks, but I didn't realize you could get 10% rental yield after all Expenses in other parts of the country.

I always thought it was 4%-6% yield in other parts of the country due to high renovation costs on low property prices.

If I can only get 4% rental yield, like I am now in Boston, I was thinking Stocks may be better because  I would pay little taxes or maybe none.

I'm going to have to look more carefully at other parts of the country now that I know 10% is a real possibility.

Thanks for all the tips everyone!



« Last Edit: January 24, 2017, 05:12:10 PM by andysandp »

arebelspy

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Cool.  Good luck!  :)

[MOD NOTE: Merged duplicate topics, one in the real estate section and one in the post-FIRE section.]
« Last Edit: January 25, 2017, 02:02:20 AM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Mr Mark

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For someone building their ER on real estate, I just don't see the bolded being true.

Yeah, that's a good point -- I don't either.  I guess I was just trying to broaden the discussion to include those of us with smaller real estate allocations (perhaps including Mr Mark, to whom you were originally responding?).

Cool.  Glad we're on the same page.

I was thinking about the OP, whose comparison was 100k of income for stocks vs real estate (and said "If you make $100,000 in Rental Income after all Expenses"), so my scenario was responding to that, and Mr Mark asked about if I'm concerned about depreciation in that scenario, and I'm not.

Good to include the caveats and other scenarios too though, so people will see there are times it could matter.  :)

Guys,

exactly - it's mainly a potential issue with people with a small number of rentals or when you've lived for a shortish time in a property that has had signficant appreciation and the ratio of residential time to rental time is low (that's the situation I'm facing).

So thanks for the discussion - I now feel a lot more informed on the implications.

I also would note that if depreciation and deductible expenses are so high that the  activity of renting results in a 'passive activity loss' (deliberately not the case in my hypothetical example but easily done if you include significant leverage) that loss can be carried forward (indefinitely) and used to offset those capital gains in future, including apparently the recaptured depreciation Sol was originally worried about.

All in all, the US tax code - as complex and byzantine as it is -  is a wonderful thing for Mustashians. :-)  It creates a lot of opportunities for enhancing income on the margins, but it helps to know some of those many loopholes beforehand so you can position your activities to capture them! (IE if you are thinking about moving back into a rental as your principal residence, but the HVAC and roof are getting really close to end of life, replacing them while it's a rental means the expenses are treated better than if you are in it as the owner.)