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Author: activeREinvestor Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76237  
Subject: Re: Leveraging Equity Date: 5/20/2004 7:26 AM
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Tom,

You need to spend some time with a CPA or tax advisor. You are heading in a reasonable direction but you are missing a lot of the details that could impact the decisions or at least the timing of the decisions.

If you are going to own rental property you need to make sure you have the cash flow (from the property itself and from other sources such as your primary income). The best way to hold a property long term is to make sure the property itself is cash flow positive after all expenses INCLUDING vacancies (some people use the term voids).

You will have quite a bit of exposure to RE once you have both the vacation home and the rental property. As someone who has a lot more then that I would not say it is bad. Just pointing out that you did not indicate the vacation home in the original message so the % of your assets in RE is higher then you first implied.

As to borrowing... I would borrow out the funds if the cash flow supported it. Unlike 1 or more of the other investors I would say you are not reducing your exposure to RE. You are using leverage but your total RE assets (gross assets) does not change by taking out the loan. If property goes up by 5% or down by 5% the change is a function of the total value and not the net value.

Definitely figure you are holding the property for the long term. RE is not normally a short term asset class.

Overall I feel that you are heading in the right direction but more by accident then by conscious planning. This is because you do not seem to know about the way investment property is handled re: taxes, the fact that you did not have exposure to the sector but you were building a vacation property, etc. This is less a criticism then a warning that you have homework to do. Get some books, speak with professional advisors and listen in at fool.com.

You will do just fine if you keep on the path but close the knowledge gap.

Oh, watch out for the tax credits that might happen given you live overseas. It might mean that you should live back in the US and earn income overseas before you retire. The credits come from the fact that some deductions will be recalculated given your tax status when outside the US.

Good luck.

John
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