BiggerPockets Real Estate Podcast - 831: Seeing Greene: Depreciation 101 and When to Sell a Reliable Rental

Starting point is 00:00:00 This is the Bigger Pockets 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 that say, right, if we have $500,000 in the U.S., where would we put it and how would we grow it? What's going on, everyone? This is David Green, your host of the Bigger Pockets Real Estate podcast here today with a seeing green episode. And yes, I remember to turn the light on green behind me.

Starting point is 00:00:41 I love it whenever I remember. If you haven't heard one of these shows, they're 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? Let's everybody else here. Today's show's pretty cool. We've 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. 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

Starting point is 00:01:17 scale. Tackling insurance woes, I don't know if that's you, but odds are if you're a real estate investor, you're having some issues with insuring your properties as well and how to figure out the return on investment when you are adding in depreciation. All that. that and more on today's show. If you listen to today's show and you love it, which you're going to, there's a chance for you to be a part of it. Head over to biggerpox.com slash David, where you can submit your question in video format or if you're shy in written format and hopefully we feature it on the show. And I'm going to be at the Bigger Pockets conference this weekend. It'll be great to see you there. If you're attending, make sure you come say hi, give me some knuckles. Just like you show up to

Starting point is 00:01:54 listen and learn here, you get to go the extra step and meet people just like you. If you're not going to be there, I hope to see you next year. All right, before we get to our first question, a quick tip for all of you. In the past, you've 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's 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.

Starting point is 00:02:27 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. I'm not saying don't 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're not appreciating as fast as they were. Though real estate is still a very strong market and probably the best investment vehicle that I'm

Starting point is 00:02:53 aware of, it just isn't 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. Here's why savvy real estate investors are obsessed with bonus depreciation. It lets you take that rental property or commercial building you own and depreciate most of the cost against your income. Legally, 100% IRS compliant. That's instant cash flow improvement. Cost segregation guys is that. the number one firm nationwide, specializing in identifying these faster depreciating assets

Starting point is 00:03:31 in your property. They've completed tens of thousands of studies across all 50 states from remote cabins to apartment complexes. So if you own investment property, this is a no-brainer. So visit costsegregationguise.com slash BP for your free proposal and find out how much you could save this tax season. Most investors spend all their time talking about their high-level returns. But that's not the number that actually matters. What actually matters is what you keep after taxes, and that's where multifamily real estate quietly stands out. With built-in advantages like depreciation, the right deals can generate steady cash flow while reducing the tax drag. Bam Capital structures its multifamily investments around those fundamentals, pairing tax efficiency with

Starting point is 00:04:17 disciplined operators and a long-term approach. This isn't about chasing hype or guessing market timing. It's about building durable, tax-aware wealth over time. Learn more at biggerpockets.com slash bam. Thinking about wholesaling or flipping your first property, but not sure where to start. The truth is, deals don't just fall into your lap anymore. You need to go out and create opportunities. That's where PropStream comes in. With PropStream, you get instant access to over 160 million properties nationwide. Use 20 pre-built lead lists such as pre-foreclosures, tax delinquencies, and vacant homes to find motivated sellers fast. And now, Propstream has integrated batch leads and batch dialer to provide you with a complete all-in-one solution.

Starting point is 00:04:58 That means you can not only find motivated sellers, but you can also reach out right away. SkipTrace phone numbers free on select plans, then send postcards, emails, or call sellers directly. Don't worry if you're new. PropStream also gives you AI-powered insights and comms that are over 99% accurate. So you know you're making smart offers. Plus, you'll have access to PropStream Academy to guide you step by step. Start your seven-day free trial and get 50 free leads at PropStream. dot com slash BP. That's P-R-O-P-S-T-R-E-A-M dot com slash BP. Don't just dream about real estate. Make it happen

Starting point is 00:05:31 with PropStream. All right. Let's get to our first question. Hi, David. My name is Kareen Leung. I'm 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 U.S. So I'm originally from Toronto and we bought a Triplex which has appreciated tremendously. I have no regrets about it. It's done really, really great things for our net worth. But at this point, I'm 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 U.S., especially now that I've already

Starting point is 00:06:14 quit my W-2 job. I'm 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. Thank you, Corrine. This is a pretty nuanced questions. So let's see what we can do to help you here. If I'm hearing you right, it sounds like the biggest motivation for wanting to do this is the work that it's taking to do taxes in both countries since you live here and you own the property there. I will admit, I don't know all the nuances between Canadian real estate and taxes and American real estate and

Starting point is 00:07:02 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's 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 cash flow. They just look at, well, what's a property going to cash flow right when I buy it? And that's all they know how to analyze for. That's the only way they even look at real estate making money. But once you've done this for a while, you start to see that there's ways it can make you or save you a lot of money in taxes.

Starting point is 00:07:42 Like you said, you've grown huge equity buying this triplex in Toronto. There's ways you can add value to properties or add cash flow to properties. There's 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. So according to the framework of the book, you're probably going to lose some natural equity,

Starting point is 00:08:14 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 cash flow won't keep up with it. But if you're adding value to the properties that you buy here, now you have an apples-to-apples comparison.

Starting point is 00:08:38 So let's say you sell that triplex. I don't think you mentioned how much equity you actually have, but let's say you can 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're not going to appreciate at all or they're not going to appreciate as quickly, that leads towards keeping the Toronto property. Or maybe they're going to go up the same. Are you able to add value to those?

Starting point is 00:09:08 three triplexes. That's forced equity. Are you going to be able to buy fixer uppers, put some elbow grease into them, make them worth more? Now there's some money that you just made. Are you going to be able to increase the cash flow of those properties? Are you going to be able to buy them below market value and buy some equity? Or is it be the opposite? Are you going to 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, say, the 500,000 of equity that you have and say, right, if we have 500,000 in the U.S. Where would we put it?

Starting point is 00:09:40 And how would we grow it? And this framework of the 10 different ways is really a way of our brains to understand what options we have. Part of it is cash flow, yes. Like, okay, well, I'm getting this much cash flow 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?

Starting point is 00:09:57 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 force equity and you force cash. flow. You're making more cash flow 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's 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're doing. And the last piece would be if you sell in Toronto, you're going to have some inefficiencies. You're going to have closing costs. You're going to have realtor commissions.

Starting point is 00:10:32 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'll 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 cash flow? Is equity going to go nuts or is it kind of tapped out? You don't 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.

Starting point is 00:11:06 I think that's a solid market right now. A lot of investors are scared of it because the prices are high, but my opinion is that they're high for a reason. You have a lot of money moving into that area. I think it's going to keep growing. So keep an eye out for that book on the 10 ways that you make money in real estate. It's 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,

Starting point is 00:11:26 hey, if we keep the property, here's where we're likely to be in 10 years. If we sell it and reinvest that money into three or four other properties, here's where we're likely to be in 10 years, and that decision will become a little more clear. All right, so to recap, you want to make decisions like these apples to apples to apples. 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 can buy or you can force equity as well as adding cash flow to the units. Look for opportunities like that before you make the decision on should I sell.

Starting point is 00:11:57 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? All right. Our next question comes from Luis. Luis asks, Hi, 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't 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?

Starting point is 00:12:33 I hope you get this and wish you the best. Also, can you say hi to Rob's quaff for me? 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's exactly what that quaff looks like. So if you guys are hearing this, make sure you go to Rob Belt on Instagram and tell him to shake that head feather. Maybe put a little Nelly song clip in there from YouTube. All right, here's, this is advice. Good question.

Starting point is 00:12:57 I can answer it pretty quickly here. I would use a property management company. I would use their form since they've done this before. And then they're going to have you sign those forms and I would just keep them. And then if you decide I don't want to use property management after the first year or whatever your agreement is, you've got a template that can answer the questions you're asking me now is how do I put that together? And you just adjust that template to make it say what you wanted to say. I think this is a great business principle in general. You want to do something yourself?

Starting point is 00:13:23 Great. That doesn't 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't need an instructor every single time. This works with buying real estate using a real estate agent. This works with construction, hire a contractor, a handyman, and watch what they're doing.

Starting point is 00:13:42 This works with property management. Use one, see what their system is, get all the forums that they're 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 forums available for all 50 states that pro members get access to for free. Now, they're not going to be midterm rental specific forums, 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 Vasquez, who actually manages some of mine, and he shares his system for making connections with big corporations. Our next video comes from Capono Koblianski. Hello, David.

Starting point is 00:14:24 This is Capono from Honolulu, Hawaii, and I got a question for you. We used a HELOC loan and a 401k loan as a down payment, 25% down on investment property, STR in Monument, Oregon. The value of the property is about 10K more than last year, so there's not a lot of equity in the deal. We like to refinance so that we, pull out the 25% down payment and pay off the 401k and HELOC loan. That way it will cash flow better because right now the 401k loan is about 700 a month and

Starting point is 00:15:01 the HELOC loan is about 150 a month. How can we pay off the HELOC and 401K 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. All right. Thanks, Capono. Well, congratulations on.

Starting point is 00:15:19 the midterm rental. I'm assuming that it's performing well, so good on you there. If I understand your question correctly, you're saying I took out loans as the down payment to buy the property, and I want to pay those loans off so that it will cash flow better, but the property itself doesn't have enough equity to do that because it's only got up $10,000 or so. You probably don't have options to use equity from the property that doesn't exist to pay off these loans. And this is one of the reasons that on seeing green when people say, hey, should I take out a helock on X property to buy Y, that I've cautioned people against doing that. And I'm not saying don't to it, but I'm not recommending it as liberally as I did in the past when values of real estate were going

Starting point is 00:15:59 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's not the same anymore. The risk to take on additional debt is much higher. Now, I don't think you've got a quick answer. So the way that I'm 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. In the book, I refer to different ways of paying up debt.

Starting point is 00:16:32 One of them is the snowball method. So you start by paying off that 401k loan. Then you take the money from the 401k. 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're cash selling more. That's additional money that you can 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've been listening to podcast for years of people that said just keep leveraging and leveraging and leveraging and buying more. That works great when equity is growing in properties like fruit on trees. But when that stops, we have to go back to a much more realistic way of trying to build income. That's why I wrote this book. There's 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.

Starting point is 00:17:21 So Capona, there is a benefit to this and 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 401k loan? And are there ways that you can step out of your comfort zone and start making more money. I don't know what you do for a living. I don't 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've got to carry it 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. So check out Pillars of Wealth.

Starting point is 00:18:01 You can find it at BiggerPogs.com slash pillars. And then let me know what your thoughts are after reading that and reanalyzing your situation. Here's the truth about passive investing. If the strategy isn't right on day one, the returns won't save it. Multi-family real estate offers structural advantages. Many investors are overlooking, including depreciation that can help offset taxable income while cash flow continues. Bam Capital builds its investment with that reality in mind. They are focused on solid operators, tax efficiency, and long-term performance. For investors who want real estate exposure without being landlords and who care about consistency over hype, this is a smarter way to allocate capital. Learn more at biggerpockets.com slash bam.

Starting point is 00:18:43 Thinking about wholesaling or flipping your first property, but not sure where to start. The truth is, deals don't just fall into your lap anymore. You need to go out and create opportunities. That's where PropStream comes in. With PropStream, you get instant access to over 160 million properties nationwide. Use 20 pre-built lead lists such as pre-foreclosures, tax delinquencies, and vacant homes to find motivated sellers fast. And now PropStream has integrated batch leads and batch dialer to provide you with a complete all-in-one solution. That means you can not only find motivated sellers, but you can also reach out right away. Skip trace phone numbers free on select plans, then send postcards, emails, or call sellers directly. Don't worry if you're new. PropStream

Starting point is 00:19:22 also gives you AI-powered insights and comps that are over 99% accurate. So you know you're making smart offers. Plus, you'll have access to PropStream Academy to guide you step by step. Start your seven-day free trial and get 50 free leads at Propstream.com slash BP. That's P-R-O-P-S-T-R-E-A-M. Don't just dream about real estate. Make it happen with PropStream. New Year, Clean Slate, and maybe a vacancy that needs to get filled fast. That's where a veil comes in.

Starting point is 00:19:55 With Avail, rental listings can be published to 24 top rental sites with one click, completely free. That includes places renters are already searching, like Realtor.com, Apartments.com, Redfin, and more. No copying and pasting. No juggling multiple platforms. just one listing that shows up everywhere. If getting rentals organized and filled fast is on the list this year, start with Avail. Sign up for free at Avail.co.com slash bigger pockets.

Starting point is 00:20:19 That's AVAIL.com slash bigger pockets. All right, rental property investors, listen up. Our friends at Dominion Financial already have some of the best DSCR rates in the industry. Now, they're the fastest, too. They just launched 10-day DSCR closing. That's right, 10 days. and they're still the only lender with the DSCR price beat guarantee. That means faster closing, the best terms, zero guesswork.

Starting point is 00:20:45 That's Dominion Financial. Check them out at biggerpockets.com slash dominion. Again, that's biggerpockets.com slash dominion. All right, at this segment of the show, we like to go over comments that were left on YouTube from previous seeing green episodes. So if you're listening to this, go check it out on YouTube and leave your comment there. And maybe I'll read one of your comments on a future show.

Starting point is 00:21:06 All right, the first comment comes from. from MJ-946. Are there banks that won't recall the HELOC after you find permanent financing for your real estate investment? When I use a HELOC to buy a property, the bank that put it into permanent financing made me close my HELOC. Okay, I think I understand what you're saying here. When you put a HELOC on a property, what you're actually doing is you're putting a second position mortgage on the property. That's what a HELOC is. Okay, so let's say you've got a million dollar property.

Starting point is 00:21:33 I know that's expensive, but the math will be easier for me. and you owe $500,000 on your mortgage. That's your first position lien, all right? Then you take out a HELOC for $300,000 on that property. We tend to look at this like it's just a loan, but it's a loan against the equity in the property because as a second position lien, they don't get paid back until the first position is paid off,

Starting point is 00:21:57 which means if there's not a lot of equity, they won't get paid back. That's why they base the loan on the equity in the home, and that's why we call it a home equity line of credit. Now, when you refinanced that property, you pulled money out of it. So you owed $500,000 on this million dollar property and you refinanced to pull on a new note that was $800,000, which meant you paid off the first loan for $500,000. 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're left with no money, theoretically.

Starting point is 00:22:36 And I think that's what you're asking is, well, how could I have kept the HELOC on the property itself? So I didn't have to pay it back so I could have that $300,000 of money in the bank. The problem is if the bank could let you keep the HELOC, you would have received $800,000 on the refi. You would have paid off $500,000. So now there's a note for $800,000 on the house and there's a note for $300,000 on the helock. That's a total of $1.1 million of debt on the house. but the property is only worth a million. No bank's ever going to let you borrow more than a property is worth, at least no

Starting point is 00:23:12 responsible bank would. And that's why you can't keep the money. You've actually traded the HELOC money in for a new first position note that you got the money then, right? And I know that this may sound complicated as I'm trying to describe it with words if it was written out on paper. It would make a lot more sense. But no, you can't keep the HELOC when you go to refinance.

Starting point is 00:23:33 You have to pay off the debt that that that's, that property is collateral for. Now, if you don't refinance all the money, let's 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, okay, you can keep that $300,000 because you only borrowed $500. It's 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're going to have to pay off the notes that are attached to it. All right, on episode 819, we talked about the state of multifamily insurance where Andrew Cushman and I interviewed Robert Hamilton.

Starting point is 00:24:11 And MG.1680 left a very insightful comment. They say, I'm from California. Insurance is so hard to get now. I built ADUs from detached garages. I didn't expect that ADUs require a totally different policy from the main house. Yeah, this is something a lot of people wouldn't have heard until they didn't. And it might have even been a time where they didn't require a different policy for all we know. But insurance companies have looked harder at how they're insuring homes and they've made a lot

Starting point is 00:24:39 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 is another one. But really across the country, insurance premiums are skyrocketing. And I don't know why more people aren't talking about it. In fact, I hardly ever hear anyone talk about it other than me here on bigger pockets. But when you are underwriting for your properties. Insurance was almost an afterthought. For years, I'd be buying a $150,000 property. My insurance was $30 a month. If I could reduce it down to two thirds, it was still $20 a month. I saved $10. It wasn't 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,

Starting point is 00:25:23 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's a problem. I started an insurance company, full guard insurance, and we haven't been able to underwrite policies because carriers are literally fleeing certain states. They will not underwrite insurance there. So MG 1680, I'm sorry to hear this is going on, but no, you're not alone. Investors everywhere are experiencing similar problems. 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're getting a late start. From Martin Beha, 999, great episode.

Starting point is 00:25:59 I really like that there is an expiration date on a milk carton, but we're not like that. If you spend that analogy on, we could also be exactly like that, as indirectly it is mentioned right afterwards. Martin goes on to say that there 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't we all love the cheese way more than the milk, even though it's technically already expired twice.

Starting point is 00:26:24 Great perspective here. The strategies that work when you're young may expire, but there are strategies that work better and approaches that work better when you are older that can be even more delicious than the young. And from Ty Jameson 7404 says Epic Panel and Investment Education with a whole bunch of happy emojis. Thanks for that. And our last comment comes from FIOF Fiaf, who said,

Starting point is 00:26:49 you stay in a hotel with a box fan. Well, I guess that's how you stay rich. This was because I've recorded an episode from my hotel room and I left the box fan on the counter. I'll be the first to say I was shocked by the comments about this. How many people noticed things like a fan? Like, that's a bad thing. But people really didn't like it that you could see the box fan. So here's my commitment to you seeing Green and Bigger Pockets listeners.

Starting point is 00:27:12 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's 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. If you would like to have your question read on seeing green, just head over to biggerpockets.com slash David, where you can submit a video question or a written question just like the one we're about to hear.

Starting point is 00:27:44 This comes from Shannon Lynch in St. Augustine, Florida. Hi, David. I have a house hacking insurance liability issue I'm 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's being rented, so I'm 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

Starting point is 00:28:38 you as I'm trying to keep this video under 60 seconds. So any guidance, how to you? How do you? I'm help you could provide, I would really appreciate it. And I'm in St. Augustine, Florida, insured by citizens, oldest city in the nation. Thanks, David. 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's very possible that there is not a carrier that would ensure this risk in Florida. And if that's the case, your only option is to start setting money aside to cover yourself in case something does go wrong.

Starting point is 00:29:22 So one piece of advice that I was giving is that you can 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's policy. Once again, it's 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're 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're having the same thing happen in California within the real estate agent community

Starting point is 00:30:04 where we have to serve our clients. It's becoming a big thing where agents are asking everyone else, hey, I need this type of property insured. It's in a high fire area or a high hurricane area where a lot of insurance providers have just thrown up their hands and said, hey, we don't want to deal with this anymore. I don't know exactly why this is happening. Some of my research has revealed that there's a lot of fraud that goes on in the state of Florida.

Starting point is 00:30:27 I've heard that there's a policy that if a homeowner makes a claim about like 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 to just to get all new brand new roofs, which ultimately ends up creating higher premiums and higher cost for everyone. If the premiums get too high, the carriers just back out completely and say, I don't want any part of this. I wish I could give you a better answer.

Starting point is 00:30:53 It turns out that this is a very difficult problem for a reason, so don't feel bad about yourself because you didn't have a solution. If I hear anything more, I will make sure to report it in the Bigger Pockets podcast. All right, our next question comes from Aaron Sardina in Maine. Aaron says, what 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't have to pay taxes on 3.6% of the purchase price each year, but maybe you only put 20% down.

Starting point is 00:31:23 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's 3.6% a year. But just to be clear here, you're not getting 100%. 100% of the value of the property, you're getting 100% of the value of the improvements on the land. The land is not calculated into this errand. But 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're 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.

Starting point is 00:31:59 I feel like there could be a whole show on calculating the benefits of depreciation. and that's a big piece that I'm struggling to understand when analyzing how our portfolio is performing. I'm wondering now that our portfolio has grown, if it would make sense to start buying some more expensive properties that don't cash flow very well in order to offset our future tax liabilities. And I'm wondering what the ROI would be on a property that doesn't cash flow and is only purchased for depreciation purposes. Is that a good use of money? Well, Aaron, you're asking a good question, even though it was a little bit confusing how it was worded there. And I can't tell you what a good use of money is. I can just explain the benefits and the risks.

Starting point is 00:32:33 The benefit is that, yes, if you're 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're 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 have spent in taxes. and I set it in a reserve account. How long would that last to offset how much I'd be losing every month if it was negative cash flow?

Starting point is 00:33:08 You don't want to buy a property that's going to be negative cash flow forever. The only time I advise doing this is if it's going to be negative cash flow for a period of time, but the rents are going to go up and the property is going to stabilize to where in the future it does make you money. And the reason that we don't 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's a bigger savings to you than somebody who makes $50,000 a year. It's tough to be able to put all this together. It also depends if you're a full-time real estate professional.

Starting point is 00:33:44 So if you're sheltering income that you made from real estate related activities or your W-2, you get a much bigger tax benefit than if you're just sheltering the money that you made from the income of the property. In general, what you're describing here is talking about sheltering the real estate. rents from the property itself and the down payment, the money that you put into it is a piece of your ROI, but there's a lot more than that. There's also going to be money that you put into improving the property. There's going to be closing costs. It sounds like you're trying to fit everything into a spreadsheet and that's where people get mixed up. Not everything in life,

Starting point is 00:34:14 not everything investing will actually fit into the spreadsheet. A better way to look at it would be to say, okay, if the property is going to cash flow $5,000 a year and $3,000 of that is going to be covered by the appreciation of the property, I'm going to be taxed on $2,000. How much is my tax? Then you take that tax and you say, all right, I only pay this much tax on $5,000, and you compare that to how much tax you would have 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.

Starting point is 00:34:50 All right, that was our last question of the day. And I'm so glad that you joined me for seeing Green. I'd like to know what type of shows would you want to see in the future? 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 biggerpox.com slash David, where you can submit your video question or your written question and hopefully you get featured on one of these shows. 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're watching

Starting point is 00:35:22 on YouTube, make sure you leave some comments for us to read on future shows. I'm David Green. you can find me at David Green24.com, Spartan League.com, or David Green 24 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's show. Thanks, everybody. If you've got a minute, check out another Bigger Pockets video. And if not, I will see you next week. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday.

Starting point is 00:36:15 I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www. www.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own.

Starting point is 00:36:36 Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pockets LLC disclaims. all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 831: Seeing Greene: Depreciation 101 and When to Sell a Reliable Rental

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.