STR + Flip - does it work?

Question

This is for the bay area, and here's what I am hoping to do

- buy a fixer upper for 900k
- Cost seg - write off (675k)
- Spend 200k in improvements
- 30k in furnishings

How does the 200k in improvements play in taxes? Can i write it off in the first year?

Also is it possible to convert this to LTR or primary residence after a couple of years? I know i wont break even in the cash flow but tax refund might be enough to cover.

Michael Baum · Answer

That is a tough call @Pathik Thakkar. Personally I wouldn't get involved in an area where landlords are hated like serial killers. That is why I don't buy in Seattle.

Also, don't rely on appreciation to cover for an under performing property.

Account Closed · Answer

@Pathik Thakkar:  Your Comment: "unfortunately bay area economics along with restrictions and taxes dont make for a very friendly env"Help me to understand.  Since you know that the bay area is unfriendly to investors and is only likely to get worse, what would compel you to invest your future, dreams, money and time into such an oppressive environment? Just curious.

Pathik Thakkar · Answer

Yes, I hadn't thought of that - that's something i'd need to account for - good call.

Jon Martin · Answer

The problem with going from STR to LTR is that you will spend a lot of time and money on furnishings for an STR, whereas an LTR does not require anything at all. Unless you really go cheap with used and bargain items, the furnishings can easily eat up 1-2 years of the increased profit that an STR does over LTR.

If you convert back to LTR, what are you going to do with all of that stuff? Nothing wrong with having LTR as a backup but I wouldn't plan for that from the start.

Leslie Anne Morris · Answer

AirDNA is interesting - in theory it works.  I met the CEO and their data goes back several years, but it depends what feature you're using and how you're keying the data.  Better to speak to locals who own / manage in the market.  I am holding a market call on June 1st and plan to discuss this as well as market saturation.  The Zoom link to register is on my BP profile here and also on Instagram.

Pathik Thakkar · Answer

What you are saying makes sense, and yes I will be exploring other markets as well but just starting out in STR I feel I need to be closer to be able to manage it and show material participation. One other reason to still stay on in the bay area is to capitalize on the real estate appreciation (Tax incentives basically make it so you can hold the property for sometime for free.) Also there's a good strong LTR market and if nothing else comes to pass I could make it my primary home. (I currently rent my primary home here and have some LTR in SoCal).

Brooklyn McCarty · Answer

All great questions for your cpa!

Account Closed · Answer

@Leslie Anne Morris: I'm starting an STR out west, but as a comparison, I ran some numbers on the Gatlinburg, Seiverville, Pigeon Forge area. AirDNA says the numbers are still strong there.

I’m wondering if I’m looking at old data or if year on year actually is strong. The bottom line is “how reliable is AirDNA for current data, in the real world"?

Leslie Anne Morris · Answer

learnlikeacpa.com check him out. This is my CPA!

Sarah Kensinger · Answer

I think STR restrictions are pretty hard in the Bay area, so that might help you decided what to do. Also, if you want a great CPA and real estate attorney that can help you navigate the beautiful laws of CA, I would highly recommend Anderson Advisors! Especially if you plan on purchasing more real estate in the future.

STR + Flip - does it work?

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