Planning my next Two Years in Real Estate Investing

6 Replies

Hi BiggerPockets Community,

I need some help in figuring out what my possible next steps are and just need someone to talk to since I don't know of anyone in my current situation.

I plan on moving to Chicago to get my MBA at Kellogg School of Management. While simultaneously building our real estate portfolio so that my brother and I can be financially free and give our families the time they truly deserve. 

I was thinking of liquidating one of my properties to acquire a small/medium (16-50 Unit) apartment complex. I'm in my planning stages and I want to figure out what is my best course of action. I could sell one of my properties (condo) use, that money for flips in Atlanta within the next 1-2 years build up additional funds to acquire an apartment complex, and to grow my portfolio, but I want to hear from some experienced investors and what they would do if they were in a similar position.

Current Picture/Portfolio: 

Property 1: 

  • Condo (Atlanta, GA 30328)
  • Current Rent = $1550/Month
  • Utility Reimbursement = $200-300/Month
  • HOA $383 (In line with HOA's for other communities)
  • Purchased June 05th, 2015 and resided in property until Jan 22nd, 2017 (Total of 1.64 Years)
  • Lease Started Jan 23rd 2017 and Lease Ends on June 30th 2018.
  • Current Equity 135,000 (Purchase Price)  - 85,000 = $50,000
  • Current Comps Similar Properties are selling for $155,000 to $170,000
  • Current Mortgage Terms: 15 yr Fixed 3.325% Monthly payment of $996 (Includes Insurance and Property Taxes)
  • Anticipated Total Earnings if Sold at End of July $64,500 (Sell Price $155K) to $78,500 (Sell Price $170K)  

Property 2:

  • Town-home (Peachtree Corners, GA 30092)
  • Current Rent = $2000-4000/Month (AirBnB) 60-70% Occupancy since November of 2017
  • Purchased July 28th 2017 and currently residing in basement house-hacking with my younger brother.
  • HOA $325/Month Covers, Water, Lawn Maintenance, Sewage, Security Gate
  • Current Equity 336,000 (Purchase Price) - 265,000 (Remaining Loan Balance) = $71,000
  • Current Comps Similar Properties are selling for $345,000 to $360,000 due to private/public school ratings going up shortly after purchase.
  • Current Mortgage Terms: 30 yr Fixed 4.326% Monthly payment of $1823 (Includes Insurance,PMI, and Property Taxes.) PMI should come off as soon as I make a large lump payment. Bringing the monthly payment down to ~$1650-$1700
  • No plan to currently sell for at least the next 3-5 years, since my brother and father will be residing here.

Property 3:

  • Single Family Home (Snellville, GA 30078)
  • Given to me by my father after my mother passed (Legally have not taken possession)
  • Anticipated Rent $1500-$1700/Month
  • Purchased June 1995 for $100K
  • Current Equity 100%
  • Current Comps $150,000 to $180,000
  • Anticipated Repairs $20,000 (Should be repaired by end of April)
  • HOA $0

My Questions:

  • I know there is a capital gains exemption (250K or less if you're single, which I currently would be classified as) if you live in a property for two years. I haven't lived in the condo for more than 2 years (Only 19 Months/1 Year 7 Months). Would it be better for me to use the 121 exclusion or use this for a 1031 exchange as a result since it has 1 year of seasoning and has been for the past year been used as an investment property? I might have this all confused in my head, but I'm open to someone explaining to me how this would work.
  • If I cannot claim the capital gains exemption since I haven't resided in there for two years would it be better for me to simply hold it for another year have two years of rental history on the condo and then do a 1031 exchange. Honestly I don't want to hold the property for another year if I can help it, since the HOA isn't the best and I was simply too dumb at the point of purchase to do my due diligence. Live and learn I guess :)
  • Currently I do not have a LLC set up for any of the properties, by setting up the LLC at this point would it provide me some inherent benefit to set it up now? Knowing that I'll have only two properties that have any rental income, I know that I can show my income on a schedule e and that I can claim depreciation on that form. Would I be able to utilize MACRS? Or should I depreciate to a point where I can just make my tax liability 0?
  • Can anyone provide me a guide to setting up an LLC or should I just use legal zoom or does anyone know of a CPA/someone who has set up an LLC in the Atlanta area that would be willing to assist me in the formation?

-Danial Qureshi

@Danial Qureshi You definitely have a few amazing options and have put yourself in a goo position already. Shoot me a Private message and we can talk through a lot of your thoughts. I would love to help where I can 

@Danial Qureshi You can't apply the 121 exemption since you don't meet the two year threshold.  You could move back in for a few months and make it.  But if you're looking at fall term at Kellogg I don't think that will work.  And in looking at it you really wont have much gain at all apart from depreciation recapture once you factor in normal closing costs.  And even if you take the 121 exemption you still have to recapture depreciation. So it probably isn't worth it.  

A possible exception to the 121 rule is a job related move.  Kellogg would probably qualify but you converted it to rental much well before you left so that's a very gray call.

Better to 1031 right now.  You've used it as rental for more than a year.  It sounds like you could defend your intent to hold.

Hi Danial! Your plan looks amazing! I’d like to discuss some options in Chicago that will allow you to scale up quickly! You have a sharp mind and aggression to match! Pls PM me to connect if interested thx

@Danial Qureshi

You most likely will be eligible to exclude your gain on the condo, even though you did not live there for 2 years. 

There is a "partial exclusion" exception, and it should let you exclude everything except depreciation recapture, as @Dave Foster correctly pointed out. There should not be much recapture, as you rented it very briefly.

To have a more definitive answer, you'd need to discuss it with someone who knows Section 121 in and out.

@Danial Qureshi

Man, you are leaving GA ??

I love your plan and you have the right mindset. Goodluck with all that. Let me see if I can answer some of your questions that were unanswered: 

1) Regarding LLC and Depreciation:

No matter where you report your depreciation, you get to use MARCS. 

Is this going to be single-member LLC or your brother and you are going to invest together? SMLLC provides less asset protection than the MMLLC. But, LLC in general in general should be used to keep your personal asset away from your REI. There are no any tax benefits of conducting REI via LLC compared to personally. But, when investing with two people, it is better to do that via limited liability entity with an operating agreement so that it clearly is written what happens when someone wants out and stuff.

2) Looks Like your LLC is pretty straightforward, so you can actually do it yourself or via lease zoom, and it can always be revised once you have few properties and get more complicated with other members. RIght now if you are just sharing the profit and loss per capital percentage, you dont need a complicated agreement.

3)Looks Like your lease on the condo is about the expire, so based on your situation, if you could live there for few more months, you could qualify for section 121, if not 1031 is always there. 

@Ashish Acharya not leaving GA just yet I still have about 1.5 / 1.75 Years until I have to move, but I'd love to continue expanding in the south. Thank you for the input I'll probably incorporate and have the paperwork finished in about two weeks. If you're free do you mind meeting up for coffee or dinner sometime this week or next?


@Michael Plaks thank you didn't know there was a partial exemption I'll do some more research. 

@Aaron Todd vaughn sure I'll PM you shortly

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