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Comment by snissn | Hacker News Reader

i tried to negotiate being month to month at my manhattan apt at the same rate and my land lord wouldn't accommodate me. Now the apt has been unrented for a few months and they're asking for a 10% drop in rent and probably won't get it for a long long time. happily commenting from hawaii

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Wow, good for you, that is awesome.

how'd you compare with your cost of living overall?

Real estate, being a straightforward investment attracts those who couldn't be making more money at pretty much any other type of investment.

Hence you get the most clueless people managing the properties.

Putting your money in an index fund will probably make more money than the average real estate investment.

Looking at the returns alone is an incomplete picture; a huge part of being a real estate investor is having clever tricks at your disposal to reduce your taxes.

Could you please share some examples?

invest 1 million in a building, raise its value to 2 million.

sell building for 2 million. buy another building for 2 million.

0 taxes paid on growth. and new basis is 2 million.

Don't you pay capital gains on real estate sales? It's something they remind you of everytime you sell a house.

You do. The real tricks around real estate involve depreciation, not selling. You don't sell, you just keep adding properties to your portfolio with your profits to increase your total deduction from depreciation and loan interest, and that way you never end up showing a paper profit even though the total value of your holdings is going up radically over time.

not if you buy a replacement. (which goes together with the depreication comment).

https://www.investopedia.com/articles/06/section1031exchange...

though I was wrong about the stepped up cost basis. was confusing that with inheritance.

That'd be true if it weren't for cheap leverage that you get with real estate. 3%/yr with 5x leverage is 15%/yr

My point exactly

I concur. Here in India I had once finalized an apartment for rent for around Rs. 35000/month. The landlord bailed at the last moment because an agent found him another tenant willing to pay Rs. 2000 more/month. However:

1. I had approached the landlord directly since his previous tenant had been a friend of mine. So there was no agent fee (one month rent) to be paid.

2. The other tenant moved in almost a month after i was supposed to, so another month's worth of rent lost for him.

The landlord didn't realize it would take him almost 3 years to recoup the losses even with the increased rent. I didn't push my case much, and found someplace else to stay.

I have a similar story from buying a house almost a decade ago. My final firm offer was $350k, and the flipper/seller went with another offer that was only $5k more. Only problem was, my offer was bulletproof (I had the full amount of the down payment in cash at hand plus a pre-approved loan offer) and the other offer was not. You can see where this is going: The other buyer couldn't actually come up with the money and didn't get approved for a loan, and then I ended up buying the house for the original $350k several months later, after the flipper had lost a lot more than $5k in all the added actual costs and opportunity costs of holding onto that house for several more months and trying to close on it twice.

Agree. If these landlords saw their p&l on a screen like stocks, they would smash that sell button.

Probably it's better to write it off as a loss than lower the rent

The absence of income is not a "loss", certainly not a taxable one. This is not how landlords make money.

The landlord's paying for the building no matter what, so it's possible that depending on how it's leveraged and their income overall, they'd rather lose money and get a reduction in taxable income than break even with lowered rent.

I don't see any kind of mathematical gymnastics that has landlords making more money on vacancies.

Any tax they'd save would be a fraction what would otherwise be revenue. Besides, real-estate investors attempt to keep their costs (interest, depreciation, etc) all very close to their revenue, not the other way around. Less revenue is simply less of a chance to deduct expenses (not to mention less money for them).

The only way I think it makes sense is if they're sure they're going to be able to rent it for more if they hold out in a way that would make up for the short term loss.

I recall a comment suggesting financing terms can be impacted once a drop in rental rate is realized.

An apartment with an assumed rental value of $X can sit empty and still be assumed to pull $X.

As soon as they start renting it out for $Y, the financials might have to be re-evaluated, which might prompt extra collateral from the borrower.

I have no idea how reliable this comment may have been, but it's an idea...

This is what I had in mind but admittedly I'm not an accountant, lawyer, or landlord so I don't know for sure :)

A buddy of mine rents in a 90% vacant building he claims the owners haven't bothered putting tenants in at lowered rents because they're borrowing against the value established by the high rents. It's also a rent control scenario, which strongly disincentivizes ever lowering the rent.

I'm no tax lawyer but I think you get to deduct the costs whether or not the apartment is rented out. Also you can only deduct costs from revenue. This is no VC backed entrepreneur with a growth story where you get more money with a negative contribution margin. ;)

If it’s not a primary residence, you don’t get to deduct the taxes from other sources of income. It’s restricted to deducting from rental income. You can carry the loss forward though.

Why?

In some constructions you can use it to lower your taxable income, or helps lowering council taxes for empty buildings, etc. My family used these kind of tricks

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