Author Topic: Tell me why this is a stupid idea  (Read 960 times)

Kayad

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Tell me why this is a stupid idea
« on: November 18, 2017, 12:56:36 PM »
So an idea I am thinking about...

Short version:  Does it make sense to buy our ideal FI home right now as a negative cash-flowing rental property that would offset (for tax purposes) rental income from our other properties?

Long version:  We currently own several rentals.  Our goal is to semi-retire in ~5 years to the rural area where my SO is from.  The rental market is tight there, but rental rates are pretty low relative to house prices.  A property there, especially the type we are interested in (a home with a few acres) would be cash-flow negative.

This is the thought that occurred to me--If we had the opportunity to buy our ideal retirement property now, maybe with a 15 year mortgage, and rent it for the 4 or 5 years until we are ready to move, could that make financial sense if our rental losses on that property zeroed out much of our positive rental income on our other properties?  We are currently in the 25% tax bracket.  If rental losses were net negative, our income is low enough to qualify for some of that passive activity loss to use against our earned income.

Cons that I see:
--Mostly the opportunity cost of sinking the down payment $ for our retirement property into negative cash flowing asset.  Also ongoing opportunity cost of not being able to invest positive rental income that would instead be going to negative cash-flowing rental. 
--More precarious position in the event of financial emergency (not too worried about this given our overall job/financial situation).
--Higher interest rate on rental property mortgage compared to residential mortgage.

Pros that I see
--Tax savings of a few thousand dollars a year from reducing rental income. 
--Mortgage paydown subsidized by renter's else's money.
--Lock in mortgage rate and property cost now.  (Hard to know if property values will be higher in five years, but have to think mortgage rates can't hover near historic lows forever, right?).
--Ability to gain ownership of dream property (if it were to come on market).

Probably a stupid idea, but I'm not entirely sure.  Thoughts?

SwordGuy

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Re: Tell me why this is a stupid idea
« Reply #1 on: November 18, 2017, 03:18:56 PM »
I did that same analysis a few years ago.   The math didn't work out so I dropped the whole idea.


aasdfadsf

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Re: Tell me why this is a stupid idea
« Reply #2 on: November 21, 2017, 12:58:11 AM »
Deliberately losing money to avoid taxes is never a good idea. This only makes sense if your pro#3 is really on spot, namely you have a lot of confidence that interest rates will be going up and/or the property value will be going up. This is what is usually called "speculating".

If this really is your dream home that is on the market right now and might not be in 5 years, then well, maybe it's worth taking a bit of loss to secure it. Just accept that you'll lose some money in the meantime and be happy with it.

kayvent

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Re: Tell me why this is a stupid idea
« Reply #3 on: November 22, 2017, 05:31:36 PM »
I have a deal for you.

Pay me 1000$ each month starting on January first.

Every month I will give you 600$ on the last day of the month.

Every month Iíll store away 266.66$ in an account called equity.

On April 15, 2018 Iíll give you 210$ in time for tax time.

On subsequent years, Iíll give you 840$ On April 15 in time for tax time.

Weíll do this for five years (sixty months).

On December 31st, 2022 I will give you 16000$ from the equity account.

On April 15 2023, Iíll give you 630$ in time for tax time.

We can double, triple, or more the numbers above if youíd like.
 
(In case it is not clear, in the above example, I function as both the bank that holds a mortgage and a tenant. From the prospective of the landlord, the bank and tenant being the same entity is a non-factor. I am sure some bankís employees rent.)

The above deal is about as good as purchasing a home and renting it at a lost. Iíd contend it is better because you donít need to involve a bank, lawyers, managing tenant issues (ex. vacancies, not paying, breaking things), or worrying about filing all the taxes for the property and doing regular maintenance. In fact, unlike a home where after five years the equity is tied up in the home, in the above scheme you get 16K in liquid equity (cash)!

It only costs you 800$ a year yet I save you 840$ a year in taxes!!!

An important point to all readers: if you want to save 100$ in taxes, I will gladly take 150$ from you and pay 100$ towards your tax bill.
« Last Edit: November 23, 2017, 01:35:10 AM by kayvent »