Any of you guys involved in non-stock related ‘passive’-income investment opportunities (eg car wash, vending machines, rental properties etc)?
Interesting to hear this perspective vs. passiveincomemd.com who makes rental properties seem like a no brainer.
I'm banking on Herbalife, Amway, Mary Kay, and Avon.
40k ? like $40,000 for a house ?My wife owns/runs the rental properties through her own LLC. I think she should benefit from the new tax plan but haven’t seen enough to determine that definitively. She has 4 and will probably buy another one this month. We are talking all less than 40k houses. These are not bad houses, just simple and smaller. Like my grandmothers house when I was kid. But they all rent for over $500/month. It is hard getting people to work, show up when they say they will, etc and minor renovations always tend to reveal more problems than you expect. BUT that monthly check is nice and once they are stabilized and the tenant has found the problems in the first 3 months for you then they are really not too much trouble. BUT it is a little like being on call all the time unless you use property mgmt.
I have a rental property but it's a hell of a lot less passive than I wish it was.
Yes.40k ? like $40,000 for a house ?
lol, yeah, I've heard as much. A family friend and a couple partners have about 15 rental units as "passive income". Word on the street is that it's a huge hassle, at least for him.
That said, if you can make it work, more power to you.
Having to work for your passive income isn't great. My question is what is their return on investment after maintenance, tax costs, tax benefits, vacancy, etc?
I mean your returns would have to be a lot higher than blue chip dividends (truly passive income) to make it worth the extra work.
A $45K investment producing $625/month is a 16.7% dividend. Even minus taxes, insurance, maintenance, that's probably north of 10%.
Our one rental property has returned about 8% on our principal the last 6 or 7 years. We've had some expensive maintenance issues that I hope are behind us now ... even so, 8% is fine by me.
There's also diversification value in having a portion of your portfolio in another asset class. Returns are comparable to equities and risks may be too, but they're different risks.
Yeah. If you subtract out the maintenance costs what are you looking at?
I'm not suggesting you can't make money on rental units, people do it all the time, but it's probably hard to beat the stock market return and requires a lot more work and risk.
And with REITs no one calls you because the plumbing backed up.
Data Proves REITs Are Better Than Buying Real Estate
My dad has about 10 properties (100k homes or less). rents them for about 1k/month. Pays 5% to a guy to manage all of it. After that, he's making 6-7% a year. Then again, these were all cash, no mortgage. Still not bad. Thinking of getting in on the action.
I go back and forth on this route, but ultimately the one thing I lack for is time between having a physician wife, a busy job, and three toddlers. We are going to continue to put 200-250k/year or so in a diversified asset allocation (70% domestic equities, 25% international (half emerging markets), 5% REITs) on auto pilot, but I do think ultimately we are probably leaving money on the table vs. having investment properties/a self-storage unit business etc. It certainly seems like we are lacking diversification.
We will try to make up for the likely lower returns that come with this plan with a higher savings rate.
Having to work for your passive income isn't great. My question is what is their return on investment after maintenance, tax costs, tax benefits, vacancy, etc?
I mean your returns would have to be a lot higher than blue chip dividends (truly passive income) to make it worth the extra work.
A $45K investment producing $625/month is a 16.7% dividend. Even minus taxes, insurance, maintenance, that's probably north of 10%.
Except that many rental expenses are deductible. Furthermore, I believe the tax bill now allows pass through of 20% on real estate income for LLCs.Rule of thumb is that 50% of real estate rental income is gone in expenses. That makes the "dividend" 8%. Then you must consider that rental income is considered active income and pays full income tax rate on your federal taxes.
Assuming 35% federal tax rate and 5% state tax rate you really only get to keep 60% of the 8% dividend= 4.8%
With a real dividend, assuming AT&T (well known, slow growing, high paying, akin to real estate stock) for example paying 5.1% currently, the tax rate is 20% federal, plus 3.8% for ACA, and 5% for state tax, thus you get to keep 71.2%= 3.6%
Is 1.2% difference at the end of the year worth it? Maybe. Maybe not. There are a lot of things that can go wrong with rental property that you don't have to worry with dividend income.
That's way too much diversification for my taste.This is an aggressive portfolio but could be a long term winner for someone willing to ride out the volatility:
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1 The deductions have all been taken into consideration already. Otherwise you would be paying tax on the 16% gross earnings.Except that many rental expenses are deductible. Furthermore, I believe the tax bill now allows pass through of 20% on real estate income for LLCs.
How the Tax Cuts and Jobs Act Affects Landlords
Income Above $415,000 ($207,500 for Singles)
If your annual taxable income is over $415,000 if you’re married filing jointly, or $207,500 if you’re single, you are still entitled to a pass-through deduction of up to 20% of your rental activity income. However, your deduction cannot exceed:
Since most residential landlords have no employees, the 25% plus 2.5% deduction will be of most benefit to them.
- 50% of your applicable share of the W-2 employee wages paid by your rental business, or
- 25% of your share of the W-2 wages paid by your business, PLUS 2.5% of the original purchase price of the depreciable long-term property used in the production of income—for example, the real property you rent.
Example: Assume that Alice from the above examples earned $250,000 in total taxable income during 2018. She has no employees in her rental business. Thus, her pass-through deduction is limited to 2.5% of the purchase price of the long-term property she uses in her rental activity. This consists of her duplex, which she purchased five years ago. Her depreciable basis in the duplex (purchase price minus value of the land) is $100,000. Her pass-through deduction is limited to 2.5% x $100,000 = $2,500.
The 2.5% deduction can be taken during the entire depreciation period for the property, which is 27.5 years for residential property. However, it can be no shorter than 10 years.
That's way too much diversification for my taste.
It's like betting on all the numbers at the roulette table.
Top 4 Signs Of Over-Diversification
Rule of thumb is that 50% of real estate rental income is gone in expenses. That makes the "dividend" 8%. Then you must consider that rental income is considered active income and pays full income tax rate on your federal taxes.
Assuming 35% federal tax rate and 5% state tax rate you really only get to keep 60% of the 8% dividend= 4.8%
With a real dividend, assuming AT&T (well known, slow growing, high paying, akin to real estate stock) for example paying 5.1% currently, the tax rate is 20% federal, plus 3.8% for ACA, and 5% for state tax, thus you get to keep 71.2%= 3.6%
Is 1.2% difference at the end of the year worth it? Maybe. Maybe not. There are a lot of things that can go wrong with rental property that you don't have to worry with dividend income.
Good thing about rentals in my situation it improves my community by taking better care of and improving some neglected homes. It is nice to be able to see your investment as well and these houses will retain their value/slightly appreciate going forward all the while you are slowly depreciating them. When they are sold you will pay long term capital gains on the recaptured depreciation. If you die, your heirs inherit them with a stepped up basis and then can liquidate them with no depreciation recaptured. That is a wonderful benefit as that is a bonanza of untaxed cash for your adult children who hopefully will be grandparents themselves at that point.
Isn’t mortgage interest on rental property deductible (and not limited, as is interest on personal property)?Yes, cash certainly. The costs of a mortgage are a bit prohibitive at this price point and many are not eligible for a mortgage do to their faults.