Passive income

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Lecithin5

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Any of you guys involved in non-stock related ‘passive’-income investment opportunities (eg car wash, vending machines, rental properties etc)?
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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.
 
BobBarker said:
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.
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40k ? like $40,000 for a house ?
 
pgg said:
I have a rental property but it's a hell of a lot less passive than I wish it was.
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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.
 
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GA8314 said:
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.
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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.
 
I know an anesthesiologist slum lord in Indiana that does quite well with passive income from his dilapidated rentals.
 
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The one I posted will return 13.3% after property tax and insurance. The return is a bit higher when you factor in depreciation and other deductions.
 
nolagas said:
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.
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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.
 
pgg said:
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.
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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
 
While I appreciate the higher rate of return if you are buying and renting places out yourself, to me that detracts an important little bit from the "passive" part of what you are aiming for. I do not personally own any rental units, although we do own corporate property through my group that provide a passive income stream to us.

I have seriously debated the pros and cons of purchasing homes to rent out (either long term residential or week to week beach houses) on the thought that if nothing else I can break even and just accrue equity over time. I am just too busy with other things to be able to put the time required into it and there are too many other easy avenues for investing. Perhaps if I drop down to half time clinical work it will have more appeal to me.
 
Ok, two of the three houses make us a profit of over 500 each a month because they are in a high rental market area. One is seriously in the hood but in an East Coast major where rent is high as hell.

The other one barely breaks even. Got it in residency and it’s under water.

Planning on starting to buy cash houses soon. Less than 30k houses. Plenty of them available through the courts.
 
I thought a lot about getting some rental properties myself, but For the past two years I rented directly from a physician who moved south. First year, no issues but the second year some major, expensive problems came up - replace garage door and opener, new faucet and disposal, pipe burst under house, big drought completely killing the yard. He spent thousands (I’d say around 9-10K) dealing with these issues, plus a ton of time and effort.

Friend of mine used to rent her townhouse in another state, renter up and stopped paying and after months-long process ended up being evicted. But the renter left tons of food in the fridge and freezer, which spoiled when the power was turned off and the whole unit had to be fumigated and the appliances replaced.

Like @Mman said, maybe I’d consider these things if I was part time but renting your property yourself and dealing with issues doesn’t exactly meet the criteria of “passive” income to me. Depending on how much you value your time, might be worth it to rent through a 3rd party,
 
Vanguard REIT Fund or ETF

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I invest in Real Estate Funds (Domestic and International) via my IRA. I agree passive income is great and real estate should be part of your portfolio:

Captura_de_pantalla_2017-12-05_a_la_s_5.40.36_p._m.png
 
nolagas said:
Yeah. If you subtract out the maintenance costs what are you looking at?
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As I said, about 8%, despite some unexpected repairs.

As time goes by and more of the tenant's rent check goes to principal and less goes to mortgage interest, that will go up. Maintenance, taxes, insurance, and vacancies are costs and risks that vary from perfectly predictable to unpredictable.


nolagas said:
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
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It's hard to beat stock market returns with bonds, but that doesn't mean bonds don't have a place in a portfolio. I own some US and international REITs also. Their return and risk profile is also different. Rental properties may have returns that approach equity returns, with a different risk profile. There's value in diversification.

Diversification is the whole point of acquiring passive income streams outside of the operating room, right?
 
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.
 
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.
 
facted said:
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.
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I agree with more profit to be made on lower cost homes (under 200-250K range) as that is a nice spot for returns. Perhaps, in ski resorts or beach front homes etc, the price point can be 4-5 X greater.
 
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.
 
okayplayer said:
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.
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If you are willing to suffer through the volatility then look at International Small cap AND Emerging markets; I'm more like 65/35 for domestic vs international equity exposure as I believe there is tremendous growth in overseas markets.

Your portfolio is likely well diversified in terms of equities. Any exposure to domestic Bonds, Emerging market bonds, Foreign bonds, etc?
 
nolagas said:
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.
Click to expand...

pgg said:
A $45K investment producing $625/month is a 16.7% dividend. Even minus taxes, insurance, maintenance, that's probably north of 10%.
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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.
 
urge said:
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.
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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

The tax benefits of being a landlord are enormous and only getting bigger.
 
facted said:
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
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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.

2 The 20% pass through doesn't work at our income levels. Over 415k income the 20% deduction goes away. That's why I didn't mention it.

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:

  • 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.
Since most residential landlords have no employees, the 25% plus 2.5% deduction will be of most benefit to them.

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.
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How the Tax Cuts and Jobs Act Affects Landlords
 
urge said:
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
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I use my computer to evaluate my portfolio for risk and diversification. These days as long as the costs are reasonable and tax efficient (taxable accounts) the computer can analyze your holdings and spit out the % for each sector and subsector.

As to betting on all the numbers that is exactly what a world stock portfolio does for you to a degree. You get to determine the overall mix of equities like Large cap vs small cap vs Domestic vs International etc. with a slants towards growth or value (if you choose to add that).

With computer analysis the definition of "simple" has changed for some do it your-selfers and professional money managers.
 
urge said:
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.
Click to expand...

In other words, AT&T only has to gain 1.2% per year to outperform your rental property estimate. The liquidity and much much lower transaction costs to buy and sell are just icing on the cake.
 
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.
 
BobBarker said:
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.
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If you can buy those rentals at below market value (even after fixing them up) this makes good fiscal sense. Owning 5 or even 10 rental properties can be part of your portfolio provided you have the time and energy to maintain all those properties. Or, they spin off enough cash to have a full time manager/handy man deal with all the complaints.
 
Yes. Mortgage interest is fully deductible as well as all costs of owning the home on rental property
 
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