\n<\/p>\n
\u201cShould I <\/strong>sell my rental property<\/strong><\/a> in 2023?<\/strong>\u201d If you own investment property, you\u2019ve probably asked yourself this numerous times over the past ten months. Prices are high<\/strong>, inventory is low, and your appreciated property\u2019s profits could be turned into even more rental units<\/strong>, making you wealthier over time. So, how do you know if selling and swapping<\/strong> is the best move to make? Or, if you do sell, could you be missing out on even more wild <\/strong>appreciation<\/strong><\/a> potential? <\/strong>Let\u2019s find out!<\/p>\n Welcome back to Seeing Greene<\/strong>, where your investor, agent, lender, big guy at the gym who helps you with your form, and mentor, David Greene, is here to answer your real estate investing questions. This time, we hear from a Canadian investor debating selling her pricey Toronto triplex for cash-flowing American real estate<\/strong>. Then, David shows you exactly where to find rental property leases<\/strong>, when pulling out equity<\/strong> may not be a good idea, what to do when you CAN\u2019T get home insurance<\/strong>, and how to calculate depreciation <\/strong>on your next rental.<\/p>\n Want to ask David a question? If so, <\/strong>submit your question here<\/strong><\/a> so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums<\/strong><\/a> and ask other investors their take, or follow David on Instagram<\/strong><\/a> to see when he\u2019s going live so you can hop on a live Q&A and get your question answered on the spot!<\/p>\n David: David: David: David: David: David: David: Karine: David: David: David: David: David: David: David: David: David: David: David: David: David: Kapono: David: David: David: David: David: David: David: David: David: David: David: David: David: David: David: David: Shannon: David: David: David: David: David: David: David: David: David: David: David: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show, 831. The question would be, are those three triplexes going to appreciate at the same level or better than the one in Toronto? Are you able to add value to those three triplexes? Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Are you going to be able to buy them below market value and buy some equity? What you need to do is look at your potential opportunities and say, \u201cAll right, if we have $500,000 in the US, where would we put it and how would we grow it?\u201d<\/p>\n
What\u2019s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene episode. And yes, I remembered to turn the light on green behind me. I love it whenever I remember. If you haven\u2019t heard one of these shows, they\u2019re very cool. We take questions from you, our listener base, and answer them directly for everyone to hear. One of the only real estate shows where the host, me, takes your questions directly, does my best to answer them, lets everybody else hear. Today\u2019s show is pretty cool. We\u2019ve got questions about how to compare properties in an apples-to-apples way. This will eliminate a lot of the confusion people have when it comes to making moves within their portfolio. When to hold them, when to fold them, and when to walk away.<\/p>\n
We talk about how to pay off loans that you took out to buy your last property. This is a question that comes up a lot when people are trying to figure out how to scale. Tackling insurance woes. I don\u2019t know if that\u2019s you, but odds are, if you\u2019re a real estate investor, you\u2019re having some issues with ensuring your properties as well. And how to figure out the return on investment when you are adding in depreciation. All that and more on today\u2019s show.<\/p>\n
If you listen to today\u2019s show and you love it, which you\u2019re going to, there\u2019s a chance for you to be a part of it. Head over to biggerpockets.com\/david, where you can submit your question in video format or if you\u2019re shy, in written format. And hopefully, we feature it on the show. And I\u2019m going to be at the BiggerPockets Conference this weekend. It\u2019ll be great to see you there. If you\u2019re attending, make sure you come say hi. Give me some knuckles. Just like you show up to listen and learn here, you get to go the extra step and meet people just like you. If you\u2019re not going to be there, I hope to see you next year.<\/p>\n
All right, before we get to our first question, a quick tip for all of you. In the past, you\u2019ve heard a lot of us influencers, including myself, giving you strategies for how to leverage properties or take out loans to buy the next property. Though while there\u2019s always been a component of risk involved in that strategy, the risk was significantly lower than it is today because rents and values were going up very fast. It was easier to get equity out of properties to pay off the notes that you took to get the next property. It became very common to use a loan to put the down payment on your second, third, fourth, fifth, whatever step you are in your portfolio. And I just want to say be careful with that right now.<\/p>\n
I\u2019m not saying don\u2019t do it, but I am saying that the risk is significantly higher in taking out loans to buy properties than it was in the past, and the reason is they\u2019re not appreciating as fast as they were. Though real estate is still a very strong market and probably the best investment vehicle that I\u2019m aware of, it just isn\u2019t as good as it was in the past. So, maybe rethink taking out loans to buy properties and look into the good old-fashioned technique of making more money, working harder, being disciplined and saving up the down payment to put on future properties.<\/p>\n
All right, let\u2019s get to our first question.<\/p>\n
Hi, David. My name is Karin Leung. I\u2019m from Daytona Beach, Florida. And my question to you is how would you recommend that I convince my husband to sell our triplex in Canada and reinvest those funds in real estate in the US? So, I\u2019m originally from Toronto and we bought a triplex, which has appreciated tremendously. I have no regrets about it. It\u2019s done really, really great things for our net worth, but at this point, I\u2019m kind of tired of doing taxes on both sides of the border. And I really want to work on building a real estate portfolio here in the US, especially now that I\u2019ve already quit my W2 job. I\u2019m just having trouble understanding how to do an apples-to-apples comparison of the opportunity cost of keeping the triplex, versus selling it and reinvesting the funds here, especially given the currency conversion with capital gains tax, but also, the strong appreciation in Toronto. So, any advice is appreciated. Thank you.<\/p>\n
Thank you, Karin. This is a pretty nuanced question, so let\u2019s see what we can do to help you here. If I\u2019m hearing you right, it sounds like the biggest motivation for wanting to do this is the work that it\u2019s taking to do taxes in both countries, since you live here and you own the property there. I will admit, I don\u2019t know all the nuances between Canadian real estate and taxes and American real estate and taxes. So, forgive me if I miss something that could play into the algorithm of this decision because of that fact. But I am working on a book that\u2019s going to be coming out after Pillars of Wealth that will hopefully shine some light on situations like these. The book highlights the 10 ways that we make money in real estate. And I wrote it because I see so many people that only focus on one way, which is what I call natural cashflow.<\/p>\n
They just look at, \u201cWell, what\u2019s a property going to cashflow right when I buy it?\u201d And that\u2019s all they know how to analyze for. That\u2019s the only way they even look at real estate making money. But once you\u2019ve done this for a while, you would start to see that there\u2019s ways it can make you or save you a lot of money in taxes. Like you said, you\u2019ve grown huge equity buying this triplex in Toronto. There\u2019s ways you can add value to properties or add cashflow to properties. There\u2019s a lot of ways that we make money in real estate. And when you understand all 10, it really opens up your perspective on if I sell the triplex in Toronto, in what ways am I losing money? So, one would be you are losing the future equity of that property going up in value.<\/p>\n
So, according to the framework of the book, you\u2019re probably going to lose some natural equity, which is what I call it when property values go up along with inflation, and some market appreciation equity, which is the type of equity that we gain when we buy in the right area, that goes up more than other areas around it. Toronto is notorious for having really, really strong equity growth, and cashflow won\u2019t keep up with it. But if you\u2019re adding value to the properties that you buy here, now you have an apples-to-apples comparison. So, let\u2019s say you sell that triplex. I don\u2019t think you mentioned how much equity you actually have, but let\u2019s say you could buy three more triplexes with the equity that you take from the Toronto one. The question would be are those three triplexes going to appreciate at the same level or better than the one in Toronto? If they\u2019re not going to appreciate at all or they\u2019re not going to appreciate as quickly, that leads towards keeping the Toronto property. Or maybe they\u2019re going to go up the same.<\/p>\n
Are you able to add value to those three triplexes? That\u2019s forced equity. Are you going to be able to buy fixer-uppers, put some elbow grease into them, make them worth more? Now, there\u2019s some money that you just made. Are you going to be able to increase the cashflow of those properties? Are you going to be able to buy them below market value and buy some equity? Or is it going to be the opposite? Are you have to pay more than the appraised value for those triplexes? What you need to do is look at your potential opportunities that you could take, say, the 500,000 of equity that you have and say, \u201cAll right, if we have $500,000 in the US, where would we put it and how would we grow it?\u201d And this framework of the 10 different ways is really a way of our brains to understand what options we have.<\/p>\n
Part of it is cashflow. Yes, like, okay, well, I\u2019m getting this much cashflow in Toronto. How much would I get if I bought in America? But another part of it would be, am I buying equity? Can I force equity? Can I buy a place where you live, in Daytona Beach, and buy it a little under market value and then add some square footage to it and add a unit to it? So, now you forced equity and you forced cashflow. You\u2019re making more cashflow, maybe, than if you had kept a place in Toronto, and the area that you live in right now is growing as well. What if that\u2019s growing at the same level as Toronto? You really want to try to turn as many of these decisions into apples-to-apples comparisons as you can because then it becomes clear what you\u2019re doing. And the last piece would be if you sell in Toronto, you\u2019re going to have some inefficiencies. You\u2019re going to have closing costs, you\u2019re going to have realtor commissions.<\/p>\n
So, you want to look at, all right, if we sell this property, how much is it going to cost me to sell it and can I make that money back or more of that money back buying into a new market? And the last piece of advice that I\u2019ll give you is try to analyze for 10 or 20 years down the road. If you keep that triplex for another 10 years, are rents going to keep pace or is rent control in that area going to stop you from increasing cashflow? Is equity going to go nuts or is it kind of tapped out? You don\u2019t see that prices could go much higher in that area? And then, compare it to wherever else you might invest. I just like South Florida, I think that\u2019s a solid market right now. A lot of investors are scared of it because the prices are high, but my opinion is that they\u2019re high for a reason. You have a lot of money moving into that area. I think it\u2019s going to keep growing.<\/p>\n
So, keep an eye out for that book on the 10 ways that you make money in real estate. It\u2019s a framework that will help you make these decisions, and then do a little bit of research and go back to your husband and say, \u201cHey, if we keep the property, here\u2019s where we\u2019re likely to be in 10 years. If we sell it and reinvest that money into three or four other properties, here\u2019s where we\u2019re likely to be in 10 years,\u201d and that decision will become a little more clear.<\/p>\n
All right, so to recap, you want to make decisions like these apples-to-apples, not apples-to-oranges. Confusion happens when we are mixing up fruit. Look at potential opportunities before you make the decision on if you should sell what you have. You could buy or you can force equity as well as adding cashflow to the units. Look for opportunities like that before you make the decision on should I sell? First be looking at, well, what would I buy? Look at the cost to sell and how you can make back the inefficiencies when you exchange real estate. And then, take a long-term view. In 10 years, where will I be and which is the better path?<\/p>\n
All right, our next question comes from Luis. Luis asks, \u201cHi, David. I love the show and I love that you answer all our questions and your awesome analogies. My question is about midterm rentals. How do you form a contract for your midterm rentals? I don\u2019t have an idea where to start or what I should write on the contract to sound professional to big corporations. Would you just hire a lawyer to form it or find an experienced property management company to handle the paperwork? I hope you get this and wish you the best. Also, can you say hi to Rob\u2019s quaff for me?\u201d<\/p>\n
I would love to. In fact, I started telling Rob that he needs to shake his head feather instead of shake his tail feather because that\u2019s exactly what that quaff looks like. So, if you guys are hearing this, make sure you go to @robuilt on Instagram and tell him to shake that head feather. Maybe put a little Nelly song clip in there from YouTube.<\/p>\n
All right, this is advice. Good question. I can answer it pretty quickly here. I would use a property management company. I would use their form, since they\u2019ve done this before. And then, they\u2019re going to have you sign those forms and I would just keep them. And then, if you decide, \u201cI don\u2019t want to use property management after the first year,\u201d whatever your agreement is, you\u2019ve got a template that can answer the questions you\u2019re asking me now, is how do I put that together? And you just adjust that template to make it say what you want it to say. I think this is a great business principle in general. You want to do something yourself? Great, that doesn\u2019t mean that you need to be the one to go figure it all out. You want to learn how to snowboard? Great, hire an instructor, spend a little bit of money, learn how to snowboard a lot faster, and then you don\u2019t need an instructor every single time.<\/p>\n
This works with buying real estate, using a real estate agent. This works with construction, hire a contractor or a handyman and watch what they\u2019re doing. This works with property management. Use one, see what their system is, get all the forms that they\u2019re using and then decide if you want to do it yourself. It will shorten your learning curve a ton. And if you are a BP Pro member, remember that there are landlord forms available for all 50 states that Pro members get access to for free. Now, they\u2019re not going to be midterm rental specific forms, but they do work for traditional rentals. And if you want more information about how to manage a midterm rental check out BiggerPockets Podcast episode 728, where I interview Jesse Vazquez, who actually manages some of mine, and he shares his system for making connections with big corporations.<\/p>\n
Our next video comes from Kapono [inaudible 00:11:58].<\/p>\n
Hello, David. This is Kapono from Honolulu, Hawaii, and I got a question for you. We used a HELOC loan and a 401(k) loan as a down payment, 25% down on investment property, SDR in Monument, Oregon. The value of the property is about 10K more than last year, so there\u2019s not a lot of equity in the deal. We\u2019d like to refinance, so that we can pull out the 25% down payment and pay off the 401(k) and HELOC loan. That way, it\u2019ll cashflow better. Because right now, the 410(k) loan is about 700 a month and the HELOC loan is about 150 a month. How can we pay off the HELOC and 401(k) loan, get that money out of the deal so we can fund future deals, maybe a business loan, or got any input for us? Take care. Aloha.<\/p>\n
All right, thanks, Kapono. Well, congratulations on the midterm rental. I\u2019m assuming that it\u2019s performing well, so good on you there. If I understand your question correctly, you\u2019re saying, \u201cI took out loans as the down payment to buy the property and I want to pay those loans off so that it will cashflow better, but the property itself doesn\u2019t have enough equity to do that because it\u2019s only gone up $10,000 or so.\u201d You probably don\u2019t have options to use equity from the property that doesn\u2019t exist to pay off these loans. And this is one of the reasons that on Seeing Greene, when people say, \u201cHey, should I take out a HELOC on X property to buy Y?\u201d That I\u2019ve cautioned people against doing that.<\/p>\n
And I\u2019m not saying don\u2019t do it, but I\u2019m not recommending it as liberally as I did in the past when values of real estate were going up incredibly fast because of all the money that we were printing. That coupled with low rates and a craze in the market made it so that the risk was much lower to put yourself in debt to buy real estate. It\u2019s not the same anymore. The risk to take on additional debt is much higher. Now, I don\u2019t think you\u2019ve got a quick answer. So, the way that I\u2019m going to advise you is to check out Pillars of Wealth: How to Make, Save, and Invest Your Money to Achieve Financial Freedom, and look for some ways that you can create additional income and save additional income to pay that debt off.<\/p>\n
In the book I refer to different ways of paying off debt. One of them is the snowball method. So, you start by paying off that 401(k) loan. Then you take the money from the 401(k), I believe you said it was $700 a month. You put that towards paying off the HELOC. Once you get that one paid off, now you\u2019re cashflowing more. That\u2019s additional money that you could put towards saving for the next property or paying down debt. This becomes tricky when we want to scale fast and we want to scale fast because we\u2019ve been listening to podcasts for years of people that said, \u201cJust keep leveraging and leveraging and leveraging, and buying more.\u201d That works great when equity growing in properties like fruit on trees, but when that stops, we have to go back into a much more realistic way of trying to build income. That\u2019s why I wrote this book.<\/p>\n
There\u2019s a lot of people that look for creative ways to buy real estate rather than blue collar ways that work no matter what. And that involves saving your money, living on a budget and looking for ways to make more. So, Kapono. There is a benefit to this in that you are now going to have an incentive to ask yourself, not just how do I create income and make money investing, but how do I do it in the other two pillars? Are there ways that you can start saving more so you have more money to put towards paying down this 401(k) loan? And are there ways that you can step out of your comfort zone and start making more money? I don\u2019t know what you do for a living. I don\u2019t know what skills you have, but now might be the time to start working on building more of those and becoming more productive and efficient because now you\u2019ve got a carrot to chase, paying down these loans, so that you can make more money on your real estate, so that you can live a safer financial life overall.<\/p>\n
So, check out Pillars of Wealth. You can find it at biggerpockets.com\/pillars, and then let me know what your thoughts are after reading that and re-analyzing your situation.<\/p>\n
All right, at this segment of the show, we\u2019d like to go over comments that were left on YouTube from previous Seeing Greene episodes. So, if you\u2019re listening to this, go check it out on YouTube and leave your comment there, and maybe I\u2019ll read one of your comments on a future show. All right, the first comment comes from MJ9496. \u201cAre there banks that won\u2019t recall the HELOC after you find permanent financing for your real estate investment? When I used a HELOC to buy a property, the bank that put it into permanent financing made me close my HELOC.\u201d Okay, I think I understand what you\u2019re saying here. When you put a HELOC on a property, what you\u2019re actually doing is you\u2019re putting a second-position mortgage on the property. That\u2019s what a HELOC is.<\/p>\n
Okay, so let\u2019s say you\u2019ve got a million-dollar property. I know that\u2019s expensive, but the math will be easier for me. And you owe $500,000 on your mortgage. That\u2019s your first position lien. Then, you take out a HELOC for $300,000 on that property. We tend to look at this like it\u2019s just a loan, but it\u2019s a loan against the equity in the property, because as a second position lien, they don\u2019t get paid back until the first position is paid off, which means if there\u2019s not a lot of equity, they won\u2019t get paid back. That\u2019s why they base the loan on the equity in the home, and that\u2019s why we call it a home equity line of credit.<\/p>\n
Now, when you refinance that property, you pulled money out of it. So, you owed $500,000 on this million-dollar property, and you refinanced on a new note that was $800,000, which meant you paid off the first loan for 500, you received $800,000 on your new cash-out refi, and you are left with $300,000 yourself. Well, that 300,000 had to go to pay off the HELOC that you had on the property. So, now you\u2019re left with no money theoretically. And I think that\u2019s what you\u2019re asking is, \u201cWell, how could I have kept the HELOC on the property itself, so I didn\u2019t have to pay it back, so I could have that $300,000 of money in the bank?\u201d<\/p>\n
The problem is if the bank had let you keep the HELOC, you would\u2019ve received $800,000 on the refi. You would\u2019ve paid off $500,000. So, now there\u2019s a note for $800,000 on the house and there\u2019s a note for $300,000 on the HELOC. That\u2019s a total of $1.1 million of debt on the house, but the property\u2019s only worth a million. No bank\u2019s ever going to let you borrow more than a property is worth, at least no responsible bank would, and that\u2019s why you can\u2019t keep the money. You\u2019ve actually traded the HELOC money in for a new first position note, you got the money then, right? And I know that this may sound complicated as I\u2019m trying to describe it with words. If it was written out on paper, it would make a lot more sense. But no, you can\u2019t keep the HELOC when you go to refinance. You have to pay off the debt that that property is collateral for.<\/p>\n
Now, if you don\u2019t refinance all the money, let\u2019s say that you only borrowed 500,000, not the full 800,000 on this million-dollar property, then the new lender might let you keep the HELOC loan. They might say, \u201cOkay, you can keep that 300,000 because you only borrowed 500.\u201d It\u2019s still at 80% total loan-to-value. Hope that helps you make sense. But if you want to get money out of a property, you\u2019re going to have to pay off the notes that are attached to it.<\/p>\n
All right. On episode 819, we talked about the state of multifamily insurance where Andrew Cushman and I interviewed Robert Hamilton. And MG.1680 left a very insightful comment. They say, \u201cI\u2019m from California, insurance is so hard to get now. I built ADUs from detached garages. I didn\u2019t expect that ADUs require a totally different policy from the main house.\u201d Yeah, this is something a lot of people wouldn\u2019t have heard until they did it, and it might\u2019ve even been a time where they didn\u2019t require a different policy for all we know. But insurance companies have looked harder at how they\u2019re insuring homes, and they\u2019ve made a lot of adjustments to the way that policies are issued. There is a big insurance problem going on in a lot of states. California is one of them, Florida\u2019s another one. But really, across the country insurance premiums are skyrocketing, and I don\u2019t know why more people aren\u2019t talking about it.<\/p>\n
In fact, I hardly ever hear anyone talk about it other than me here on BiggerPockets. But when you are underwriting for your properties, insurance was almost an afterthought. For years, I\u2019d be buying $150,000 property. My insurance was 30 bucks a month. If I could reduce it down to two thirds, it was still 20 bucks a month. I saved $10. It wasn\u2019t really worth diving into the insurance element that much, but now it is. Some premiums are doubling, tripling or more in areas. If any of you know why this is happening, please leave me a comment on YouTube and let me know what your theories are as to why insurance is going so high, but it\u2019s a problem. I started an insurance company, Full Guard Insurance, and we haven\u2019t been able to underwrite policies because carriers are literally fleeing certain states. They will not underwrite insurance there. So, MG.1680, I\u2019m sorry to hear this is going on, but no, you\u2019re not alone. Investors everywhere are experiencing similar problems.<\/p>\n
All right, our next comment came from the Late Starters Guide, episode 820, which was a show all about how you can get started investing in real estate, even if you\u2019re getting a late start. From MartinBeha9999. \u201cGreat episode. I really like that there is an expiration date on a milk carton, but we are not like that. If you spin that analogy on, we could also be exactly like that as indirectly, it is mentioned right afterwards.\u201d Martin goes on to say that, \u201cThere might be an expiration date on the carton itself, but the milk inside is different. Milk may expire, but it turns into yogurt and then it turns into cheese. And boy, don\u2019t we all love the cheese way more than the milk, even though it\u2019s technically already expired twice?\u201d<\/p>\n
Great perspective here. The strategies that work when you\u2019re young may expire, but there are strategies that work better and approaches that work better when you are older that could be even more delicious than the young. And from TyJameson7404 says, \u201cEpic panel and investment education,\u201d with a whole bunch of happy emojis. Thanks for that. And our last comment comes from F-I-O-F, Fiof, who said, \u201cYou stay in a hotel with a box fan. Well, I guess that\u2019s how you stay rich.\u201d This was because I\u2019ve recorded an episode from my hotel room, and I left the box fan on the counter. I\u2019ll be the first to say I was shocked by the comments about this, how many people notice things like a fan, like that\u2019s a bad thing. But people really didn\u2019t like it that you could see the box fan.<\/p>\n
So, here\u2019s my commitment to you, Seeing Greene and BiggerPockets listeners. The next time I record from a hotel, I will put much more effort and energy into the background of the show, which I thought had very little to do with the actual content that\u2019s going to make you wealthy, but apparently means a whole lot more to people than what I thought. Thank you for being a fan. My only fans will be you, not the box fans in the background.<\/p>\n
If you would like to have your question read on Seeing Greene, just head over to biggerpockets.com\/david where you can submit a video question or a written question, just like the one we\u2019re about to hear. This comes from Shannon Lynch in St. Augustine, Florida.<\/p>\n
Hi, David. I have a house hacking insurance liability issue I\u2019m hoping you can help me with. I recently started renting my primary residence on Airbnb and Vrbo on weekends and holidays for extra income. I have not been able to find any umbrella policy, CPL coverage, or any type of rental-related liability coverage to help protect me and my home during the times that the house is being rented. It seems that part of the problem is because I vacate the property when it\u2019s being rented, so I\u2019m not physically present. I actually stay with family while renters are here. That seems to be causing issues with regards to my eligibility for any type of renter liability coverage. I gave much more detail in my email to you, as I\u2019m trying to keep this video under 60 seconds. So, any guidance help you could provide, I would really appreciate it. And I\u2019m in St. Augustine, Florida, insured by Citizens, oldest city in the nation. Thanks, David.<\/p>\n
All right. Thank you, Shannon. Now, I called in the insurance experts on this one, and I got a little bit of detailed feedback to share with everybody. So, first off, like I mentioned earlier, insurance is very difficult right now, especially where you live in Florida. In fact, it was referred to as a hellscape for insurance in general. It\u2019s very possible that there is not a carrier that would ensure this risk in Florida, and if that\u2019s the case, your only option is to start setting money aside to cover yourself in case something does go wrong. So, one piece of advice that I was giving is that you get an investment property insurance policy and then add personal property coverage and increase the liability with possibly a rider that you would occupy the home for a period of time in the year. But that will primarily be a renter\u2019s policy.<\/p>\n
Once again, it\u2019s a situation that insurance is really not built for and it will require either a combination of coverages or a super specialized insurance policy in a state where 90% of carriers do not offer quotes right now. Shannon, this might be something where you\u2019re going to literally have to go uninsured for a period of time until we find carriers that will work in the state of Florida. We\u2019re having the same thing happen in California within the real estate agent community where we have to serve our clients. It\u2019s becoming a big thing where agents are asking everyone else, \u201cHey, I need this type of property insured. It\u2019s in a high fire area,\u201d or a high hurricane area where a lot of insurance providers have just thrown up their hands and said, \u201cHey, we don\u2019t want to deal with this anymore.\u201d<\/p>\n
I don\u2019t know exactly why this is happening. Some of my research has revealed that there\u2019s a lot of fraud that goes on in the state of Florida. I\u2019ve heard that there\u2019s a policy that if a homeowner makes a claim about a problem with their roof, that the insurance company has to replace the entire roof, not just fix the problem there was. So, people are frequently making claims just to get all new brand new roofs, which ultimately ends up creating higher premiums and higher costs for everyone. And if the premiums get too high, the carriers just back out completely and say, \u201cI don\u2019t want any part of this.\u201d I wish I could give you a better answer. It turns out that this is a very difficult problem for a reason, so don\u2019t feel bad about yourself because you didn\u2019t have a solution. If I hear anything more, I will make sure to report it in the BiggerPockets Podcast.<\/p>\n
All right, our next question comes from Aaron Sardina in Maine. Aaron says, \u201cWhat is the math behind basic depreciation and how it can be factored into tax savings and return on investment when analyzing a property in your portfolio? You don\u2019t have to pay taxes on 3.6% of the purchase price each year, but maybe you only put 20% down.\u201d Okay, that 3.6% is coming from, if you take 100% of the value of the property and you divide it by 27 and a half years, that\u2019s 3.6% a year. But just to be clear here, you\u2019re not getting 100% of the value of the property. You\u2019re getting 100% of the value of the improvements on the land. The land is not calculated into this, Aaron.<\/p>\n
\u201cBut maybe you only put 20% down. So, are you getting to avoid taxes on 18% of your down payment, which would be 5 times 3.6? But then if you\u2019re in the 20% tax bracket, you are saving 20% of the 18%, and so is that your annual dollar amount That can be added to your ROI? I feel like there could be a whole show on calculating the benefits of depreciation, and that\u2019s a big piece that I\u2019m struggling to understand when analyzing how our portfolio is performing. I\u2019m wondering now that our portfolio has grown, if it would make sense to start buying some more expensive properties that don\u2019t cashflow very well in order to offset our future tax liabilities. And I\u2019m wondering what the ROI would be on a property that doesn\u2019t cashflow and is only purchased for depreciation purposes. Is that a good use of money?\u201d<\/p>\n
Well, Aaron, you\u2019re asking a good question, even though it was a little bit confusing how it was worded there. And I can\u2019t tell you what a good use of money is, I can just explain the benefits and the risks. The benefit is that, yes, if you\u2019re a high-income earner, you could buy a property that breaks even, or even God forbid, loses $100 a month, so you lost $1,200 a year, but what if you save $20,000 in taxes? That actually is a good financial position. The risk is that you saved the money when you first did it, but now you\u2019re bleeding money every month going into the future. So, the way that I think you should analyze this is if I saved the $20,000 I would\u2019ve spent in taxes and I set it in a reserve account, how long would that last to offset how much I\u2019d be losing every month if it was negative cashflow?<\/p>\n
You don\u2019t want to buy a property that\u2019s going to be negative cashflow forever. The only time I\u2019d advise doing this is if it\u2019s going to be negative cashflow for a period of time, but the rents are going to go up and the property\u2019s going to stabilize to where, in the future, it does make you money. And the reason that we don\u2019t have a calculator to help you analyze this is that not everybody makes the same amount of money. So, if you yourself, Aaron, get $50,000 of depreciation, but you make $500,000 a year, that\u2019s a bigger savings to you than somebody who makes $50,000 a year. It\u2019s tough to be able to put all this together.<\/p>\n
It also depends if you\u2019re a full-time real estate professional. So, if you\u2019re sheltering income that you made from real estate related activities or your W2, you get a much bigger tax benefit than if you\u2019re just sheltering the money that you made from the income of the property. In general, what you\u2019re describing here is talking about sheltering the rents from the property itself, and the down payment, the money that you put into it is a piece of your ROI, but there\u2019s a lot more than that. There\u2019s also going to be money that you put into improving the property. There\u2019s going to be closing costs. It sounds like you\u2019re trying to fit everything into a spreadsheet, and that\u2019s where people get mixed up. Not everything in life, not everything in investing will actually fit into the spreadsheet.<\/p>\n
A better way to look at it would be to say, \u201cOkay, if the property\u2019s going to cashflow $5,000 a year and 3,000 of that is going to be covered by the depreciation of the property, I\u2019m going to be taxed on $2,000. How much is my tax?\u201d Then, you take that tax and you say, \u201cAll right, I only pay this much tax on $5,000,\u201d and you compare that to how much tax you would\u2019ve paid on $5,000 made any other way. Most of the time, real estate comes out on top because of this depreciation. Hope that helps.<\/p>\n
All right, that was our last question of the day, and I\u2019m so glad that you joined me for Seeing Greene. I\u2019d like to know what type of shows would you want to see in the future? What type of content would you like to see in the future? What type of questions do you want to see asked, and do you want to be the one asking that question? Head over to biggerpockets.com\/david, where you can submit your video question or your written question. And hopefully, you get featured on one of these shows.<\/p>\n
Remember, if you like the podcast to go pull it up and leave me a review wherever you listen to your podcast. Those really help out a ton. And if you\u2019re watching on YouTube, make sure you leave some comments for us to read on future shows. I\u2019m David Greene. You can find me at DavidGreene24.com, spartanleague.com, or DavidGreene24 on wherever your favorite social media is. Go give me a follow and send me a DM. Let me know what you thought about today\u2019s show. Thanks, everybody. If you\u2019ve got a minute, check out another BiggerPockets video. And if not, I will see you next week.<\/p>\n