Most investors try to use debt to finance the purchase of rental properties. This strategy turned out to be very dangerous in 2008 when home prices fell sharply leaving many borrowers owning more than what the house was worth. We form partnerships with wealthy investors from all over the world to buy rentals in Michigan because we believe in synergy, the ability to help each other and share knowledge to achieve great results. Being debt free also gives us the ability to be very stable during times of crisis.
Risks:
An investment in ZeroDebt Investments is a speculative investment and it will be subject to several risks.
The risks include, among others, the following factors, which are not
exhaustive, but are merely illustrative:
– The LLC is a new business and has no operating history.
– The rental industry in Michigan is extremely competitive and cyclical.
– The LLC will be subject to competition from other investors in the
vicinity as well as in other areas in Michigan.
– Conflicts of interest may exist between the Managing Member and
affiliates thereof.
Properties Overview:
Properties acquired are generally single family homes, quadruplex houses and apartment buildings.
Financial Overview:
Minimum investment cost $80,000.00
Equity 100 %
Expected Return on Investment 15%
Debt Financing:
Debt won’t be used to acquire the properties and/or to borrow in the future against the properties in order to acquire more properties.
Reasons To Invest:
– Property prices are severely undervalued in Michigan following the
real estate bubble/burst of 2008-2009
– Michigan is expected to experience a surge in employment in the
next 10 years.
– Michigan renters display strong interest in renovated homes.
– The return on investment is very high averaging 15%.
The location:
We invest mainly in Michigan in Wayne, Oakland, Macomb and Saginaw county.
Property Amenities:
We buy solid properties that we partially renovate, typical amenities are:
– central air
– kitchen appliances
– proximity to shopping centers
-beautiful landscape
-washer/dryer in unit
Occupancy:
The average occupancy in this market is 90%.
Cost Of Units:
The average cost for single family homes is $40,000 after renovations
The average cost for quadruplex houses is $80,000 after renovations
The average cost for a 10 unit apartment building is $300,000.
About Michigan:
Michigan is one of the best areas of the United States
Products and services include automobiles, food products, information technology, aerospace, military equipment, furniture, and mining of copper and iron ore. Michigan is the third leading grower of Christmas trees with 60,520 acres (245 km2) of land dedicated to Christmas tree farming. The beverage Vernors was invented in Michigan in 1866, sharing the title of oldest soft drink with Hires Root Beer. Faygo was founded in Detroit on November 4, 1907. Two of the top four pizza chains were founded in Michigan and are headquartered there: Domino’s Pizza by Tom Monaghan and Little Caesars Pizza by Mike Ilitch. Michigan became the 24th Right to Work state in U.S. in 2012.
Since 2009, GM, Ford, and Chrysler have managed a significant reorganization of their benefit funds structure after a volatile stock market which followed the September 11 attacks and early 2000s recession impacted their respective U.S. pension and benefit funds (OPEB). General Motors, Ford, and Chrysler reached agreements with the United Auto Workers Union to transfer the liabilities for their respective health care and benefit funds to a 501(c)(9) Voluntary Employee Beneficiary Association (VEBA). Manufacturing in the state grew 6.6% from 2001 to 2006, but the high speculative price of oil became a factor for the U.S. auto industry during the economic crisis of 2008 impacting industry revenues. In 2009, GM and Chrysler emerged from Chapter 11 restructurings with financing provided in part by the U.S. and Canadian governments. GM began its initial public offering (IPO) of stock in 2010. For 2010, the Big Three domestic automakers have reported significant profits indicating the beginning of rebound.
As of 2002, Michigan ranked fourth in the U.S. in high tech employment with 568,000 high tech workers, which includes 70,000 in the automotive industry. Michigan typically ranks third or fourth in overall Research & development (R&D) expenditures in the United States. Its research and development, which includes automotive, comprises a higher percentage of the state’s overall gross domestic product than for any other U.S. state. The state is an important source of engineering job opportunities. The domestic auto industry accounts directly and indirectly for one of every ten jobs in the U.S.
Michigan was second in the U.S. in 2004 for new corporate facilities and expansions. From 1997 to 2004, Michigan was the only state to top the 10,000 mark for the number of major new developments; however, the effects of the late 2000s recession have slowed the state’s economy.
In 2008, Michigan placed third in a site selection survey among the states for luring new business which measured capital investment and new job creation per one million population. In August 2009, Michigan and Detroit’s auto industry received $1.36 B in grants from the U.S.
Department of Energy for the manufacture of electric vehicle technologies which is expected to generate 6,800 immediate jobs and employ 40,000 in the state by 2020. From 2007 to 2009, Michigan ranked 3rd in the U.S. for new corporate facilities and expansions.
As leading research institutions, the University of Michigan, Michigan State University, and Wayne State University are important partners in the state’s economy and the state’s University Research Corridor.
Michigan’s public universities attract more than $1.5 B in research and development grants each year. The National Superconducting Cyclotron Laboratory is located at Michigan State University. Michigan’s workforce is well-educated and highly skilled, making it attractive to companies. It has the third highest number of engineering graduates nationally.
Detroit Metropolitan Airport is one of the nation’s most recently expanded and modernized airports with six major runways, and large aircraft maintenance facilities capable of servicing and repairing a Boeing 747 and is a major hub for Delta Air Lines. Michigan’s schools and colleges rank among the nation’s best. The state has maintained its early commitment to public education. The state’s infrastructure gives it a competitive edge; Michigan has 38 deep water
ports. In 2007, Bank of America announced that it would commit $25 billion to community development in Michigan following its acquisition of LaSalle Bank in Troy.
Michigan led the nation in job creation improvement in 2010.
Tax Benefits Of Being A Landlord:
Favorable IRS rules are one big reason why so many fortunes have been made in real estate.
What You Can Write Off:
You can deduct real estate property taxes on rental properties.
You can also write off all other operating expenses — like utilities, insurance, homeowner association fees, repairs and maintenance, yard care and so forth.
You can depreciate the cost of residential buildings over 30 years, even while they are increasing in value. Say your rental property cost $30,000. The annual depreciation deduction is $1,000, which means you can have that much in positive cash flow without owing any income taxes. That’s a pretty good deal, especially after you own several properties. Commercial buildings must be depreciated over a much longer 39 years, but the write-offs will still shelter some cash flow from taxes.
Beware of the Passive Loss Rules.
If your property throws off a tax loss — and most do at least during the early years — things get complicated. The so-called passive activity loss, or PAL, rules will probably apply. The fundamental PAL concept is this: You can deduct passive losses only to the extent that you have passive income from other sources — like positive operating income from other rental properties or gains from selling them.
Fortunately, a special exception says you can generally deduct up to $25,000 in passive losses from rental real estate so long as: (1) your adjusted gross income (before the real estate losses) is under $100,000; and (2) you “actively participate” in the rental activity. Active participation means owning a 10% or greater stake in the property and being energetic enough to at least make management decisions like approving tenants, signing leases and authorizing repairs. In other words, you don’t have to mow the lawn and snake out the drains yourself to pass the test.
If your AGI is between $100,000 and $150,000, the exception is phased out pro-rata. So AGI of $125,000 means you can deduct up to $12,500 in passive real estate losses (half of the $25,000 maximum) even if you have zero passive income.
The bottom line: Rental property owners have to watch their AGI like a hawk. Every $2 over the $100,000 threshold costs a dollar in current passive loss deductions. For example, say your current-year AGI is shaping up to be right around the $100,000 borderline. Selling some loser stocks or mutual funds could be a good idea, while selling some winners might only make Uncle Sam happy.
If your AGI is above $150,000 and you have no passive income, you generally cannot deduct a rental real-estate loss. However, your loss carries over to future tax years. You will eventually be able to deduct your carryover losses when you either sell the property or generate some passive income. All in all, this is not a bad outcome as long as you have just “paper losses” caused by your depreciation write-offs.
What If I Have Income?
Eventually your rental properties should start throwing off positive taxable income instead of losses because escalating rents will finally surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up some carryover passive losses in earlier years, you now get to use them to offset your profits. So you might not actually owe any extra taxes for a while.
Another nice thing: Positive taxable income from rental real estate isn’t hit with the dreaded self employment, or SE, tax, which applies to most other profit-making ventures other than working as an employee and investing. Depending on your situation, the SE tax can be either 15.3% or 2.9%. In either case, it’s a wonderful thing when you don’t have to pay it.
Taxpayer-Friendly Rules When You Sell.
When you sell real estate that you’ve owned for more than a year, your profit — the difference between sales proceeds and basis after reductions for depreciation is generally considered a long-term capital gain. However, part of the gain — the amount equal to the depreciation is taxed at a maximum federal rate of up to 25% rather than the normal 15%. Before you complain, remember that those earlier depreciation write-offs probably sheltered income that would have been taxed at 25% or greater. The rest of your gain is taxed at a maximum federal rate of no more than 15%.
Remember, too, that you are able to defer income taxes on rental property appreciation until you sell. Good properties can generate the kind of compounded tax-deferred growth that investors dream about. As you know, this is not so easily done in the stock market these days.
You also get to charge the buyer interest on the deferred payments, but you generally don’t have to pay interest to the government on your deferred gains. Can you do this with publicly traded securities? Nope.
Remember those carryover passive losses? You also get to use them to offset gains from selling your properties. So it pays to keep careful track of your losses, even though you cannot deduct them right now.
Finally, the law allows real estate owners to unload appreciated properties while still deferring income taxes indefinitely. Here we are talking about so-called “like-kind exchanges,” or “Section 1031 exchanges.” Basically what you do is swap one piece of real estate for another, and put off paying taxes until you sell the new piece. Or, when you are ready to unload that property, you can arrange yet another like-kind exchange.
Granted, you’re not allowed to actually cash in your real estate investments, but you can certainly trade your holdings in one area for properties in what you deem to be a more promising location.
Or you can, for example, exit the rental apartment business by making a like-kind exchange for a strip shopping center, or raw land, or even a golf course or marina for that matter.
The tax rules for real estate are pretty darned favorable. Now it’s up to you to decide if you want to take the plunge.