How can someone with no cash start a real estate empire?

[FastLaner007]

I realized that I didn't cover this as comprehensively as I should have... I ignored the fact that when you sell, you need to "recapture" (i.e., pay taxes on) the amount of the gain over the adjusted cost basis of the property.

To clarify, here's an example:

Let's say you buy a property for $500,000 and the depreciation amount is $10,000 per year (basically, the IRS agrees that the wear-and-tear on the property devalues it by $10,000 per year and lets you take that as a deduction). After 10 years, you've depreciated $100,000 of the property. That means that you've gotten $100,000 in tax deductions, but the IRS assumes that the property is worth $100,000 less than when you bought it -- the adjusted cost basis is $400,000.

Now, let's say you sell that property after the 10 years for $550,000. Because the IRS agreed that the cost basis of the property was only $400,000, you now have a "realized gain" of $150,000 (not just the $50,000 gain based on the original purchase price).

Your depreciation recapture gain is the full $100,000 that you took in depreciation over the past 10 years -- you'll pay taxes on that at your marginal rate. The rest of the gains ($50,000) are long-term capital gains that you'll pay 15% or 20% on (depending on your capital gains rate).

So, this depreciation tax deduction isn't free money. You are essentially delaying the payment of taxes on the depreciated amount until you sell the property. The benefits are the time value of that depreciation (you get the benefit now and owe taxes later) and potentially you save money if your future marginal tax rate is lower than your current marginal tax rate (though it could potentially cost you money if the opposite is true).

Nonetheless, depreciation is a huge benefit when buying investment property.

"Nonetheless, depreciation is a huge benefit when buying investment property."

What other benefits does depreciation entail other than deferring taxes?

 

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[CareCPA]

Right, one of my businesses is life insurance related, so there you go. I meant 1031.

I have not personally done a 1031 but I know many RE investors who have successfully moved their money from one property to another, using the 1031. Great way to level up and defer taxes.

Also, if original owner dies wouldn't the new property pass at a stepped up basis, essentially avoiding all taxes? Is the stepped up basis on all real property holdings? TIA.

Generally, yes.
It would essentially reset that basis, and could then be depreciated over again (and would have a higher basis when you sell).
Be careful using the term "all taxes." This is for income tax only. Estate taxes are a different subject.

 

[Jason "GrandK"]

Generally, yes.
It would essentially reset that basis, and could then be depreciated over again (and would have a higher basis when you sell).
Be careful using the term "all taxes." This is for income tax only. Estate taxes are a different subject.

It resets the basis, meaning the investment property is valued at the date of death? So, any past depreciation is no longer taken into consideration and the beneficiary can begin depreciating the asset all over again? Am I reading you write?

And estate taxes would refer to state and federal death tax. Some states don't have it but it matters the location of the asset, not the state you reside in, if I remember correctly. So a $10 million estate in WA would have a death tax or inheritance tax but would still be under the current federal exemption limit.

 

[CareCPA]

It resets the basis, meaning the investment property is valued at the date of death? So, any past depreciation is no longer taken into consideration and the beneficiary can begin depreciating the asset all over again? Am I reading you write?

As long as the full asset value is included in the estate, yes.

As a general disclaimer, there may be items specific to your situation, so you should seek tax advice from someone who has full knowledge of your specific situation before making and decisions.

 

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[Jason "GrandK"]

As long as the full asset value is included in the estate, yes.

As a general disclaimer, there may be items specific to your situation, so you should seek tax advice from someone who has full knowledge of your specific situation before making and decisions.

I am just looking the advantage of the asset. You buy a rental property. You get the benefit of the initial cash flow, thanks in part to the depreciation on the property. It eventually appreciates in value.

Rather than sell it and create a taxable event, you do a 1031 exchange into a new property, using the equity from the old property. Once again, you depreciate the new property. You still have never paid taxes on the equity growth or the depreciation because you have not sold.

You repeat this until process a handful of times on as many investment properties as you are able and willing to buy before you die. Then that inevitable day arrives and you die.

Your heir gets the properties with a stepped up basis and the previous depreciation no longer matters, the process begins again. The only potential tax ramifications would be state and federal death taxes if you exceed the exemption limits.

Does that sound generally correct or am I missing something?

 

[CareCPA]

I am just looking the advantage of the asset. You buy a rental property. You get the benefit of the initial cash flow, thanks in part to the depreciation on the property. It eventually appreciates in value.

Rather than sell it and create a taxable event, you do a 1031 exchange into a new property, using the equity from the old property. Once again, you depreciate the new property. You still have never paid taxes on the equity growth or the depreciation because you have not sold.

You repeat this until process a handful of times on as many investment properties as you are able and willing to buy before you die. Then that inevitable day arrives and you die.

Your heir gets the properties with a stepped up basis and the previous depreciation no longer matters, the process begins again. The only potential tax ramifications would be state and federal death taxes if you exceed the exemption limits.

Does that sound generally correct or am I missing something?

That is generally correct.
Keep in mind, as you move up the scale (while still alive), you won't get full depreciation on each successive property.
For example, if you 1031 a partially-depreciated $500,000 building into a $1m building, your basis for depreciation on the new building (generally) is not going to be the full $1m. It's going to be $1m minus the deferred gain.

Here is a website that I quickly found that seems to have the calculation laid out accurately.

 

[Real Deal Denver]

That is generally correct.
Keep in mind, as you move up the scale (while still alive), you won't get full depreciation on each successive property.
For example, if you 1031 a partially-depreciated $500,000 building into a $1m building, your basis for depreciation on the new building (generally) is not going to be the full $1m. It's going to be $1m minus the deferred gain.

Here is a website that I quickly found that seems to have the calculation laid out accurately.

Love it.

Build millions in tax deferred assets.

What about the guy trading down in the 1031? He will surely get some money to compensate for the value difference. Would that money be considered income for him?

Now the tricky part. Added on to the above conversation, can I take an equity loan from my million dollar property, for let's say, $400,000? Yes - but can I not pay income taxes on it because it is not income? It's a loan. I can then use that money to buy another property? I will in effect have a goose that lays golden eggs. A perpetuating ATM.

That sounds right, but it also sounds too good to be true.

 

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[CareCPA]

...
What about the guy trading down in the 1031? He will surely get some money to compensate for the value difference. Would that money be considered income for him?

The guy you are acquiring property from may not be doing a 1031 exchange. You don't have to buy and sell from the same person. It may just be a person looking to liquidate some holdings. Whether or not they recognize gain will be dependent on their basis vs sale price

Now the tricky part. Added on to the above conversation, can I take an equity loan from my million dollar property, for let's say, $400,000? Yes - but can I not pay income taxes on it because it is not income? It's a loan. I can then use that money to buy another property? I will in effect have a goose that lays golden eggs. A perpetuating ATM.

Correct. A loan is not income. You can take a loan out on one property to purchase another, without it being a taxable event.
One way to do this efficiently is to look for a portfolio lender. Just like they sound, they will lend on your entire portfolio, instead of having to apply for each property independently. This is usually reserved for individuals with higher real-estate holdings.

 

[Jason "GrandK"]

Here is a website that I quickly found that seems to have the calculation laid out accurately.

Fantastic. Great link. Thank you!

 

[Real Deal Denver]

The guy you are acquiring property from may not be doing a 1031 exchange. You don't have to buy and sell from the same person. It may just be a person looking to liquidate some holdings. Whether or not they recognize gain will be dependent on their basis vs sale price

I did not connect the dots on this. Let me give you an example, and see where I went wrong.

I have a property that I am definately doing a 1031 exchange on, to defer taxes. That's my main purpose, but I also want to trade up.

I trade my property, worth $800K, for a property worth $1,000,000. How does that $200,000 imbalance get settled? It has to be settled somehow. Boot. That is cash, or cash equivalent (my yacht).

So I don't see how you can say the guy I am doing the exchange with might not be doing the exchange. How could this be different than what I explained, keeping in mind that my main goal IS to do a 1031 exchange, and I want to trade up. How could I (or the other guy) NOT do a 1031 exchange without exchanging properties back and forth with this guy? Your response seems to be in contradiction with that.

My options, for the $200K difference, would be to take a mortgage, or fulfill it with cash. But whatever I do, the other guy is getting the value difference somehow.

If I don't engage in a 1031 exchange by swapping properties, as your response suggests - then it is not a 1031 exchange. I can have it one way or the other - but not both ways.

Okay. Am I missing something in this analysis?

 

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[CareCPA]

I did not connect the dots on this. Let me give you an example, and see where I went wrong.

I have a property that I am definately doing a 1031 exchange on, to defer taxes. That's my main purpose, but I also want to trade up.

I trade my property, worth $800K, for a property worth $1,000,000. How does that $200,000 imbalance get settled? It has to be settled somehow. Boot. That is cash, or cash equivalent (my yacht).

So I don't see how you can say the guy I am doing the exchange with might not be doing the exchange. How could this be different than what I explained, keeping in mind that my main goal IS to do a 1031 exchange, and I want to trade up. How could I (or the other guy) NOT do a 1031 exchange without exchanging properties back and forth with this guy? Your response seems to be in contradiction with that.

My options, for the $200K difference, would be to take a mortgage, or fulfill it with cash. But whatever I do, the other guy is getting the value difference somehow.

If I don't engage in a 1031 exchange by swapping properties, as your response suggests - then it is not a 1031 exchange. I can have it one way or the other - but not both ways.

Okay. Am I missing something in this analysis?

The disconnect is that you're thinking about it as one transaction: trading your property for his. It doesn't have to be this way.

You can sell your $800,000 property to person A, hold the funds at a qualified intermediary, and buy a $1m property from person B.
Yes, the additional funds will probably come from a mortgage (or out of pocket). Neither Person A nor Person B care about this. Person A is just buying a property. Person B is just selling a property. The fact that you are executing a 1031 exchange has no bearing on how they treat the transaction.

 

[Jason "GrandK"]

The disconnect is that you're thinking about it as one transaction: trading your property for his. It doesn't have to be this way.

You can sell your $800,000 property to person A, hold the funds at a qualified intermediary, and buy a $1m property from person B.

And this must all be done within the 45/180 day exchange window, right?

Added in edit: Cool site that has an 1031 Exchange calculator. 45/180 Day Exchange Calculator - Asset Preservation, Inc.

 

[biophase]

The disconnect is that you're thinking about it as one transaction: trading your property for his. It doesn't have to be this way.

You can sell your $800,000 property to person A, hold the funds at a qualified intermediary, and buy a $1m property from person B.
Yes, the additional funds will probably come from a mortgage (or out of pocket). Neither Person A nor Person B care about this. Person A is just buying a property. Person B is just selling a property. The fact that you are executing a 1031 exchange has no bearing on how they treat the transaction.

Might i add that your loan needs to be greater too.

So you have an $800k prop with a $500k loan. You buy a $1m prop buy selling your $800k prop, effectively putting down $300k and getting a $700k loan. You get no cash back.

You can’t buy a $1m prop and take out a $800k loan and get $100k in your pocket.

But you can probably refi out the $100k after it closes.

 

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[HackVenture]

If I were in your shoes, I think what I would do is to seek out actual real estate investors in my area/however far you are willing to travel to, and offer to work for them for just a cut of profits.

Few thoughts.

1. They wouldn't be afraid that you would steal the deals for yourself cos you probably don't have the cash to do that
2. You are helping them with the legwork which they're probably busy for, and which nets you alot of knowledge
3. You get to do deals in deal size that would usually be out of your reach and accelerate your learning process

Once you are successful and have learnt a ton, you can carry on working for the same guy or strike out on your own and you can even still be on friendly terms and exchange knowledge; pass on deals you can't afford for a slight cut etc.

 

[DustinH]

You have to go out and get money. How's that's done is up to you, but it's the biggest hurdle. These "buy real estate with no-money down" gurus are bullshit. You need enough cash to put down 20%-30% on the property. Finance the rest. Never put down more than 30%. You can't make money unless you have equity in the property. Never buy just one door (or just one house). I would actually expand that to say don't buy less than 4 doors. That could be four houses or a four unit apartment. Once you get the money all of those things fall into place.

I'm still in the getting money stage. We have two businesses we are establishing and once we get that extra dough then we will start buying apartments and commercial space.

 

[Kak]

I have been thinking about real estate a lot recently. I don't think of it as a good investment for me personally for the following reasons

Renting
Cost of buying a 2BHK house: 146k
Rent for a year: 6k
Money after a year: 152k


The 146k in the bank
Money+interest after a year:156k(7.1% interest rate at RPL bank)

If you can think of a reason why real estate makes sense id love to hear it


Now back to your question, you could collaborate with a couple of friends and purchase the property together.

Each of you put in a couple of grand and collect the profits. Slowly you buy them out or even work together to buy more real estate.


P.s: I live in india

Lol... you completely disregard the access to collateralized leverage you get with real estate.

Try 30k (sometimes even less) buys you control over 150k house. 6 grand in rent for the year is LOW on a 150k door. Try 15 grand MINIMUM for anual rent if you actually put some thought into the oroperty you were buying, and 10k to keep up with the mortgage/taxes/insurance and most problems you can fix yourself.

Barring any unforeseen issues, You would be turning 30k into 35k... not 150k into 155k. There are also tax advantages like depreciation in RE. That's a 17 percent return. Most people would be pretty happy. I think it's a lot of work for 5 grand. I like the numbers far better on multi-family deals and will buy an apartment complex at some point. I have been getting my feet wet in RE though.

Listen to @JScott and @biophase they know what they are talking about.

 

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[Kak]

Op...

You said you don’t care if it takes years... but you are hell bent on building a real estate empire with no cash... Why not get some cash? Just curious. People with jobs can have an easier go of it getting the first loans.

 

[Real Deal Denver]

Lol... you completely disregard the access to collateralized leverage you get with real estate.

Try 30k (sometimes even less) buys you control over 150k house. 6 grand in rent for the year is LOW on a 150k door. Try 15 grand MINIMUM for anual rent if you actually put some thought into the oroperty you were buying, and 10k to keep up with the mortgage/taxes/insurance and most problems you can fix yourself.

Barring any unforeseen issues, You would be turning 30k into 35k... not 150k into 155k. There are also tax advantages like depreciation in RE. That's a 17 percent return. Most people would be pretty happy. I think it's a lot of work for 5 grand. I like the numbers far better on multi-family deals and will buy an apartment complex at some point. I have been getting my feet wet in RE though.

Listen to @JScott and @biophase they know what they are talking about.

You said this SO damn good, rep on the way. You should give @JScott a run for his money and write a book. I have several of his, and they are worth their weight in gold.

But he could use a little competition just to keep him on his toes.

 

[Geekour]

Op...

You said you don’t care if it takes years... but you are hell bent on building a real estate empire with no cash... Why not get some cash? Just curious. People with jobs can have an easier go of it getting the first loans.

My own cash or loaned cash? I have never bought/invested in RE before. Even if I did have cash I would not know how to best put it to work in real estate but the posts here have helped a bunch so far. That is why initially wholesaling real estate got my attention because I could pay for marketing from my job while growing a system and business out. But I like the idea of saving up and flipping also. I have only recently started saving up my own cash since I get payed more from my job now after finishing up college. I don't want to be in this to make a quick buck. But my end goal is to build a system I can maybe sell one day if I wanted to and buy and hold long term.

 

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[WJK]

My own cash or loaned cash? I have never bought/invested in RE before. Even if I did have cash I would not know how to best put it to work in real estate but the posts here have helped a bunch so far. That is why initially wholesaling real estate got my attention because I could pay for marketing from my job while growing a system and business out. But I like the idea of saving up and flipping also. I have only recently started saving up my own cash since I get payed more from my job now after finishing up college. I don't want to be in this to make a quick buck. But my end goal is to build a system I can maybe sell one day if I wanted to and buy and hold long term.

Uh? You must be talking about a different business than I know for all these last 40+ years...

 

[Kak]

You said this SO damn good, rep on the way. You should give @JScott a run for his money and write a book. I have several of his, and they are worth their weight in gold.

But he could use a little competition just to keep him on his toes.

I'll leave that to @JScott, there are topics I would be far more qualified to write about.

@JScott can you post a link to your books? I'll make sure to add them to my list.