Should I engage a CPA now or wait until we've built up a basic portfolio?

Question

Hi all. My wife and I are still in the 'learning phase' as real estate investors, but we know for sure that in the next year (a) we will be converting our primary residence in to a rental, and (b) buying another house that will be our primary residence for 1-2 years so that we can qualify for an owner occupied mortgage. In the meantime, we may also want to renovate our current home to increase its overall and/or rental value.

The plan is to scale our real estate investment portfolio pretty aggressively after our next purchase.

We're still a ways off doing any transactions, and when we do I can probably figure out the basic financials on my own. But should I? We will inevitably work with a CPA in the future, but are there benefits to starting that relationship now?

Jason Malabute · Answer

Hi Matthew,

I’ve been a CPA since 2015, working in tax and accounting since 2013, and I’ve been a real estate investor myself since 2018. From my experience, you don’t need to engage a CPA just yet. At this stage, your focus should be putting as much money as possible into your first deal, rather than on accountants, lawyers, or consultants.

Hiring a CPA can wait until you’re further along—either when you’ve got something under contract or need help with entity setup or tax planning. Right now, it’s too early for that, especially since you’re still in the learning phase. As an entrepreneur, especially during the startup phase, the goal is to minimize expenses and put most of your money into real estate deals.

Don’t let the absence of a CPA stop you from moving forward. Focus on getting into that first deal—everything else can fall into place after.

Best of luck with your investing journey!

Jason Malabute, CPA

Joshua Thompson · Answer

Hi Matthew,

This is a great and valid question! Being a tax professional I would say currently it doesn't sound like something you need just yet. Regardless a consultation or meeting with a tax professional will provide a TON of value and information but if you're 6 - 12 months out from determining if you'll make these big moves then it might be a bit early. Now this might be an unpopular answer compared to my colleagues but it might not be necessary just yet especially if you're savvy and know a bit about taxes.

Now if you have other major things going on in your life then yes by all means I would recommend meeting with a tax professional yesterday but it might be a bit early. However, there is nearly 0% downside to meeting with a tax professional early and building that relationship. It wouldn't hurt if you wanted to do that now as they could provide good information as you move forward and make decisions.

Benefits: building a relationship, shopping firms to get the best fit, knowledge regarding big financial decision before they occur, knowing if  you're making any major mistakes, determining if your plans will actually help you tax wise

Summary

It might be too early but only something good can come out of a meeting with a knowledgable tax professional earlier rather than later.

Account Closed · Answer

To answer both your questions, I would recommend you don't engage a real estate-focused accountant until you have at least one property. No need to spend the money yet!

Matthew Samson · Answer

@Cory Vitale @Max Emory Thank you both for your detailed replies and all the great advice!

Basit Siddiqi · Answer

One item that you want to discuss with your CPA is the basis of the property when you convert your primary residence to a rental property.Best of luck.

Max Emory · Answer

Hey @Matthew Samson, regarding "figuring out the financials" for 0-5 small properties, you can do this easily yourself just using excel or another free method. After that, think about hiring a bookkeeping firm that specializes in serving REIs.

Regarding hiring a CPA/tax pro for tax advisory and/or tax filing, I'd wait until you purchase your next primary and convert your current primary into a rental. At that point, as long as you plan to grow, you can get the relationship started so you're not scrambling once you purchase more properties.

I will say, for most tax firms, you'll probably pay for more than you need at this stage because you don't have the volume to justify the cost of their services yet. But, as long as you plan to grow, it may be worth having that relationship in place so you're not scrambling later when your REI activities have picked up.

Hope that helps!

Cory Vitale · Answer

@Matthew Samson I definitely don't recommend going with a higher cost provider until your portfolio is a little further along. That said, there is still good advice out there that accountants can offer to you. For instance, I began as a real estate CPA after building out my own portfolio personally.

Accountants in a similar situation probably have some advice that can help make sure you set yourself up from a software implementation, bookkeeping, lender sourcing situation. You could spend as much money as a CPA costs in missed opportunities because you don't have good optics into your business, or because your tax returns (often used by lenders to qualify you for loans) don't maximize your opportunities. Also, someone with real estate investing experience can probably help you shop for loan products that could be more flexible on the owner occupancy requirements so that you can scale at whatever pace you want. (I survived being a house hacker four times myself, so I get it!)

Finally, to answer your other comments, I think the exact right answer depends on your future intentions. While renovations and other expenditures can be capitalized (and in some scenarios deducted) when you classify property as a rental, that might not be a significant impact if you intend to sell the property soon and can qualify for the 2 out of 5 year deduction for primary residences.

There are also some awesome tax benefits that you can take advantage of at certain income levels when you are a W-2 employee with passive real estate investments.

Also, your classification of the property as a rental has no bearing on the fact that you should be tracking your basis. When you convert to a rental, the basis for depreciation becomes the lesser of the fair market value or adjusted basis on the date of conversion. Therefore, in many cases, you will be able to subsequently depreciate anything that adds to your basis once you convert the property, though immediately deductible expenses will not be available until you convert the property.

Hopefully this was helpful. Best of luck!

Benjamin Weinhart · Answer

Hi Matthew, I'll echo what the others above have said and give my own spin on things. Yes I agree that you may be slightly too early from needing a CPA. There's some benefit with contacting a CPA now which is mostly just building the relationship and seeing if the two of you are a good fit. Ideally, the person you choose should be someone you stick with long-term to make things easier. Spending a few hundred now to get with someone to find that they won't be a good fit for you may save you a lot of headache down the line if you don't want to continue with them for whatever reason. (Could be process, communication, or a number of other things).

Now the thing I'll mention that you might want to chat with someone about is that many folks don't take the Sec. 121 exclusion into account for situations like yours. It's possible it might not be a big deal if you'll keep doing 1031 exchanges but I always want to mention it as the "what-if" scenario if you get what I mean.

Andrew Strauss · Answer

Hi Matthew - You can go to CPA early for tax strategy perspective. You want to do renovation to increase the value of the house. But if you do renovation after you move out of the primary residence, you might be able to take benefit of bonus depreciation or sec 179(if qualified). For bookkeeping and all you can go when you have already done transaction.

Alecia Loveless · Answer

@Matthew Samson I’ve owned a business for 30 years and had some complicated tax issues due to having multiple investments in various states. Therefore I’ve always used a CPA to prepare my taxes.

Last year at tax time he recommended me getting a bookkeeper due to the fact that I’ve got 25 units and am scaling rapidly.

I did get one and it has properly organized my books and it sped up the tax preparation process.

I think if you keep good records and stay organized you can certainly do your own books and taxes until you have more units.

Should I engage a CPA now or wait until we've built up a basic portfolio?

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