A balanced strategy for foreclosure investing by Scott Allan
As many people are aware, REO investing is a nice way to establish wealth under certain circumstances because it's times like today that create real estate millionaires. I've been involved in development in the Go Zone areas and have my primary business in Florida and New Jersey working with asset management companies and even doing some minor P/T consulting work for them.
I was putting together some ideas for myself and clients of mine and I thought of a nice way to get tons of cash flow and offset/negate your passive income tax liability for those properties. I did not think of this without my own experience doing this exact same thing.
Although my Go Zone business is more passive today than hands-on, I will buy Go Zone when I need to offset my taxes in the past, present, or future. (Buying Go Zone only good till 2010 as it expires) The easiest way to qualify for Go Zone is to have passive income off real estate, however the IRS is becoming lenient in allowing W-2 earners benefit as well which is an entirely different story. For most that know, Go Zone is offered by the IRS in designated areas of Mississippi and Louisianna at the current time (areas heavily affected by Katrina). You are allowed to accelerate the depreciation on your investment home by 50% just after the first year of ownership. Make sure you understand "recapture". It is not worth buying if you do not intend on holding for about 5 years or more. The home in LA that I recently bought was $135,000 and my bonus depreciation is going to be about $60,000 as you I or anyone else is allowed to depreciate the land it sits on. The $60k is essentially a big tax deduction. Assuming you are in the 35% tax bracket, that is a cash savings of $21,000. [b]: Your bonus depreciation has a carry back rule of 5 years and carry forward of 15 years, meaning you can recapture your PAID taxes starting 5 years ago to present and you can also save it for up to 15 years in the future. Pretty cool...and I'll explain the cash flow on this later.
Now that you kind of know how that works, lets buy some REO property. I will use Florida as an example only because I bought here. As most know there are tons of good deals anywhere but I chose FLA because the cash flow numbers work insanely good. I just bought a duplex in SW Florida for $65,000. I am renting each side for $650 so collecting $1,300 per month in cash flow. After my operating expenses I am netting about $850 per month in cash flow. (I paid cash for duplex). Annualized, I am making $10,200 or a 15% ROI Cap Rate for good measure.
My goal this year is to buy 4 duplexes this year. If I achieve that goal, I will make about $40,000 in positive cash flow per year. That is pretty solid considering my overall investment is about $260,000 or $32,500 per unit. If I make $40,000 in income I will be taxed heavily by the IRS in the amount of about 40% of it, so my $40,000 really becomes $23,000 +/-.
Remember the Go Zone. If I buy 1 Go Zone property as mentioned above, I will be able to negate most of my tax liability on my $40,000 in cash flow I made on my FLA duplexes. Keep in mind this is only a one time write-off per property. However depending on the size of the portfolio I want to build, I can buy 2 or 3 go zone properties and offset my taxes for several years. Not only that, but even my Go Zone property will provide positive cash flow so I have that tax liability also to negate.
Sometimes taxes are a good thing. Means you are making money, but I thought about this and my guys like the idea as do I. The way I explain it requires cash. I paid cash for my duplexes however financing is available for about 30% down for Fannie/Freddie I believe so you can leverage. Either way, investors will have to put cash in these days but if you have it, this is a great way to buy extremely low priced REO's and offset your tax liability by investing your tax liability right back into real estate in Go Zone designations. To me, this is a win-win. If you have a sitting IRA account or CD, take it out and do something like this. My opinion is that it's well worth it.
I know this was a little lengthy but its a great strategy. The Go Zone and investing in REO's is complex and it is worth it to get a mentor, partner, or someone with knowledge on this with experience.
Scott Allan is a full time real estate advisor and investor. Follow him at TPM Properties or New Jersey Real Estate Guys
Article Source: ArticleSnatch Free Article Directory
As many people are aware, REO investing is a nice way to establish wealth under certain circumstances because it's times like today that create real estate millionaires. I've been involved in development in the Go Zone areas and have my primary business in Florida and New Jersey working with asset management companies and even doing some minor P/T consulting work for them.
I was putting together some ideas for myself and clients of mine and I thought of a nice way to get tons of cash flow and offset/negate your passive income tax liability for those properties. I did not think of this without my own experience doing this exact same thing.
Although my Go Zone business is more passive today than hands-on, I will buy Go Zone when I need to offset my taxes in the past, present, or future. (Buying Go Zone only good till 2010 as it expires) The easiest way to qualify for Go Zone is to have passive income off real estate, however the IRS is becoming lenient in allowing W-2 earners benefit as well which is an entirely different story. For most that know, Go Zone is offered by the IRS in designated areas of Mississippi and Louisianna at the current time (areas heavily affected by Katrina). You are allowed to accelerate the depreciation on your investment home by 50% just after the first year of ownership. Make sure you understand "recapture". It is not worth buying if you do not intend on holding for about 5 years or more. The home in LA that I recently bought was $135,000 and my bonus depreciation is going to be about $60,000 as you I or anyone else is allowed to depreciate the land it sits on. The $60k is essentially a big tax deduction. Assuming you are in the 35% tax bracket, that is a cash savings of $21,000. [b]: Your bonus depreciation has a carry back rule of 5 years and carry forward of 15 years, meaning you can recapture your PAID taxes starting 5 years ago to present and you can also save it for up to 15 years in the future. Pretty cool...and I'll explain the cash flow on this later.
Now that you kind of know how that works, lets buy some REO property. I will use Florida as an example only because I bought here. As most know there are tons of good deals anywhere but I chose FLA because the cash flow numbers work insanely good. I just bought a duplex in SW Florida for $65,000. I am renting each side for $650 so collecting $1,300 per month in cash flow. After my operating expenses I am netting about $850 per month in cash flow. (I paid cash for duplex). Annualized, I am making $10,200 or a 15% ROI Cap Rate for good measure.
My goal this year is to buy 4 duplexes this year. If I achieve that goal, I will make about $40,000 in positive cash flow per year. That is pretty solid considering my overall investment is about $260,000 or $32,500 per unit. If I make $40,000 in income I will be taxed heavily by the IRS in the amount of about 40% of it, so my $40,000 really becomes $23,000 +/-.
Remember the Go Zone. If I buy 1 Go Zone property as mentioned above, I will be able to negate most of my tax liability on my $40,000 in cash flow I made on my FLA duplexes. Keep in mind this is only a one time write-off per property. However depending on the size of the portfolio I want to build, I can buy 2 or 3 go zone properties and offset my taxes for several years. Not only that, but even my Go Zone property will provide positive cash flow so I have that tax liability also to negate.
Sometimes taxes are a good thing. Means you are making money, but I thought about this and my guys like the idea as do I. The way I explain it requires cash. I paid cash for my duplexes however financing is available for about 30% down for Fannie/Freddie I believe so you can leverage. Either way, investors will have to put cash in these days but if you have it, this is a great way to buy extremely low priced REO's and offset your tax liability by investing your tax liability right back into real estate in Go Zone designations. To me, this is a win-win. If you have a sitting IRA account or CD, take it out and do something like this. My opinion is that it's well worth it.
I know this was a little lengthy but its a great strategy. The Go Zone and investing in REO's is complex and it is worth it to get a mentor, partner, or someone with knowledge on this with experience.
Scott Allan is a full time real estate advisor and investor. Follow him at TPM Properties or New Jersey Real Estate Guys
Article Source: ArticleSnatch Free Article Directory