2002-09-03

September 3, 2002

by Al Lee
Al Lee is the author of Income for Life from Real Estate which can be ordered at website: www.myRentProperty.com

Cheap Land, Less Tax

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The North Texas area that I recommend to all the people who attend my seminars or join the Tortoise Club offers many advantages for the investor. One of those advantages is cheap land.

As most of you already know, I have made exploratory (pioneer) investments in two small properties in an area of East Texas, about two hours drive from Dallas, which showed promise for high returns because of low purchase prices. With almost a year of experience I am not yet ready to advise you to make investments in that area. I have experienced higher-than-expected maintenance costs and vacancies that were unplanned-for. My sense is that the support structure necessary for smooth operation is too immature at present and that the unexpected setbacks offset the advantage of low purchase price relative to rent rates, for now. You can always recognize a pioneer--he's the guy with the arrows in his back!

Where the prices for land are relatively low, the cost of houses (which includes the land they are sitting on) will be somewhat lower, too. That is, of course, a benefit to you as an investor, but there is even more. When you buy an income property, you are buying the lot of land on which it sits plus the improvements (buildings) that are on it. The IRS directs you to take a depreciation expense on only the improvements, not the land. The land is considered not to depreciate (lose its value) over time--probably a correct assumption in most cases.

In many parts of the U.S., land prices are so high that when you buy a property, half, or more, of the cost is for land, not improvements. That means that you can take depreciation expense on a lesser portion of the entire purchase. Depreciation expense allowance is one of the main reasons that your cash flow will be either tax-free or low-taxed for many years after you purchase the property. The loss of a mojor portion of that depreciation expense allowance would have a negative impact on your after-tax Return on Investment.

In the area that I recommend to the Tortoise Club members (North Dallas and surrounding cities) it is usual to be allowed to take depreciation on 80% of your purchase price. That gives us a very generous "tax loss" even for properties that are making a nice cash flow return.

According to the U.S. Census Bureau, three of the ten fastest growing counties in the country are in Texas

Of course, Texas is not the only place in the country where land is cheap. I am currently researching some other areas which might offer a good environment for investors. But, for the moment, most of my own investments are in the same area I recommend to you. I am currently in the process of purchasing one new investment property in the area and I bought two last month. I tell you this merely to illustrate that good investment properties can be found if you look. All of the properties I have bought and am buying recently are being bought using a real estate agent and were listed in MLS. Virtually anyone could have found them as I did. At the prices I negotiated and the average rents, all of them will easily reach my target 10% ROI. The two I bought last month are already leased. All three will produce a "tax loss" on my tax return next year.

As soon as I can identify other areas which will produce the level of returns we expect, I will begin to establish relationships with Strategic Partners in those areas so that you, especially Tortoise Club Members, can easily make investments there. Cheap land is one of the critera I am looking for.

A Fine is a Tax for Doing Something Wrong,
A Tax is a Fine for Doing Something Right

Sincerely,