The mechanics of being a landlord (tenants, investment, mortgage, mortgages)

[mathjak107]

after the many discussions we had on the pros and cons of being a landlord there is a huge amount of confusion on the benefits of being a landlord..
heres a summary:

being a landlord is no different then being in any other business,whether your selling goods , performing a service or renting property ,all the money flowing in to your business is cash flow..... thats all it is .rent has no magic powers its simply cash flow coming into your business.

all the deductions you have for running your business such as taxes, the help,mortgage interest,painting,repairs , etc are deducted from the business cash flow and paid out.. no magical deductions or tax shelters for any other income. you merely take the rent and pay all expenses from it. anything left you pay tax on.

its here in the profit bucket where your deductions and expenses are paid that profits are increased by cutting deductions and diminished by increasing deductions. if you hire a new super and pay him double, you have a larger deduction but its all coming at the expense of your profit bucket. your piggy bank will have less money in it as your deductions increase.

anything left is your profit.... now heres the sticky part... just like any other company as a landlord you also have a choice about what to do with the profits... some companies invest in themselves, some companies buy their own company stock,others buy other companies. landlords can take a conventional mortgage and now re-invest their money into buying a bigger equity stake from the bank by paying both interest and principal or they can take interest only mortgages and invest in equities,bonds, another building ,spend it on a car or boat or just hold the profits as cash..... its their own choice what to do with the profits

theres a fallacy that landlords have the benefit of living in their own buildings for free... thats not quite true. by taking a rentable apartment for themselves they are sucking out the amount they could collect in rent on that apartment from their cash flow. they arent actually paying rent but they are keeping the cash flow from increasing by the amount of that rent if the apartment was collecting rent.. its as if the landlord is taking the money out of the profit bucket to pay his rent.... since he isnt making the extra rent he is spending the extra rent in a way


another fallacy is that there are these big tax deductions that offset their other income.

wrong again.. all deductions are subtracted off cash flow from the rent , the property will have negative cash flow when the deductions are more than the rent is bringing in... thats a real loss and your piggy bank will have less money in it as you make up the shortfall from your piggy bank... spending 3 dollars and seeing 1 of them come back as a tax deduction.

the fallacy of depreciation losses are really smoke and mirrors.. you can deduct every year your cost basis in the property divided by 27.5 years.... it sure looks like its helping you tax wise as it lets you write off bigger deductions without spending money from your cash flow. the hitch is it all gets recaptured when you sell the property.

yep you have to pay it all back as your cost basis is lowered by the amount you deducted thru the years , but worse its not payed back at a capital gains rate but at whatever your tax bracket is when you sell... remember too that selling property usually gives you sizable gains and those gains push you right up into higher tax brackets so you actually pay the recaptured depreciation back at far higher tax levels then you deducted them...

dont mis-understand ,,real estate has its place as an investment , its just, watch the myths.

[mathjak107]

i put the above together because i see the same myths stated over and over again and i wanted to clear up a few things.

tenants pay the bills and you take the deductions.. god knows what thats supposed to mean. that would be true though if only rent wasnt a taxable income. your deductions are you get to deduct the expenses from the rent,not from other income.... unless your loosing money then thats not suich a good thing.

the tenants are buying you your building.... see above

landlords live for free in their homes as tenants pay for you..
think of it as if you were owner of a construction company.. you have your guys build you a house, you dont actually pay for the house but since they arent out earning income for your company the effect is your paying what your not earning.... since you cant rent out the apartmnt you live in your loosing the same amount your not getting... in order for a landlord to live for free and have the tenants paying the tenants would have to pay you over and above the rent they pay an extra amount of money to actually pay the amount your not getting in rent on the apartment your living in

the big writeoffs you get in real estate.... there are no benefitial writeoffs to your other income, the deductions are merely deducted from your rent flow... its not a good thing to spend 3 bucks to get back 1 buck.... your piggy bank is poorer from these great writeoffs we hear about

yeah but you get to take the depreciation allowance boosting your profits...... just see above

yes im a big real estate investor myself but i make sure its a profitable deal when i do it and dont do it for any of the above