All Forum Posts by: Eric La Pratt

Thanks again for the clarification.

Last question: In Chicago, we pay a tax to the city based on the cost of the transaction as a title transfer tax. It's substantial enough - mine was over $4k. Is that deductible or included in the total depreciation? Not sure since it is an actual tax.

@Brandon Hall Your response is super helpful! Looks like my accountant was accurate which really helps bolster my trust in him. It just seems a bit wonky to my brain that some of these items are not directly deductible and only depreciable as they are directly related to the cost of doing business versus improving an asset. So as long as everything is captured eventually, I care less about getting it all in 2016 per se anyway. It would serve me better in years I am collecting more rent anyway since the property is not performing during construction.

I do have a follow up:

I am paying mortgage insurance monthly on the note and that is separate from the up front mortgage insurance required by FHA at closing. To be clear, what you are saying is that the up front mortgage insurance is captured evenly over appx 7 years and my monthly mortgage insurance is just captured in the tax year it is paid? What happens when I refi out of my currently mortgage product in about a year and consequently drop the monthly insurance - do we then keep on the 7 year schedule for the up front deduction or is that taken all at once since there is now no requirement?

I closed on a multi-family 203k project in Chicago that I am house hacking. Since I will be occupying, I understand I can only write off a portion of the expenses (presumably 75% since there are 4 floors and I will live on 1). Some questions:

1. My accountant is saying that pretty much all closing costs and rehab expenses except interest and taxes paid will just be captured by standard 30 year depreciation. Is that accurate
   
2. Is upfront mortgage insurance premium something that can be written off or is that also depreciable?
3. Would the entire rehab cost be captured in general depreciation of the property or should I parse items out? Like, for instance, kitchen cabinets and bath vanities that probably won't last 30 years.
4. I plan to purchase appliances for all the units. Would those be captured in the same rehab depreciation above or would I also separate those?
5. Is I sold for a profit and met the threshold for occupying the property for 2 of the past 5 years, do I still get to not pay taxes on those profits or would that be different because it is currently a multi-family and I'm already taking deductions on expenses and depreciation on the units I am not occupying? So, essentially, I don't pay taxes on 25% of the profits since I occupied 25% of the building? 
6. To piggy back on #5 above, what if the scenario were that I de-converted the property into a beautiful SFH, still met the 2 of 5 year threshold (probably when it was a multi family but maybe not) and sold it for a profit?

Here are some line items that appears on my master statement that I paid for. I am curious to know if any of these are a write off versus depreciable:

• 203 (K) Supplemental Origination
• Application Fees paid outside closing
• Lender Fees
• Processing Fees
• 203 (K) Consultant Fee paid outside closing
• 203 (K) Architectural Fee
• 203 (K) Title Update Fee
• Homeowner's Insurance Premium
• Survey Fee
• Buyers Attorney Fee paid outside of closing
• Title - Escrow Fees, Policy Update Fee, Chain of Title Fee, CPL Fee, Overnight/Express Delivery Service Fee, Email Package Fee, Tax Payment Service Fee, Yadda Yadda Yadda Fee, etc. 
• Permits
• Appraisal fee paid outside of closing
• Mortgage Insurance Premium to HUD

The main reason I am asking is because I track all of my expenses including an estimate of what I should be maintaining in reserves for expected income taxes. 

@Joe Villeneuve My point is that the Detroit does not need any lambasting or defending anymore and when those conversations creep up in posts, it just detracts from the actual conversation. There is a time and place for it, I get it, but it just annoying to constantly see the same back and forth over and over and over again. This conversation has been going on for decades!!! SCORES, actually.

To answer your question, I do not care when someone says anything about Chicago. It's a city, not my wife. And I have very deep connections to Detroit. I was born and raised in Sterling Heights. I own a duplex in Ferndale, 1000 feet north of Detroit as the crow flies (I have measured just for fun). My family lives there and owns a locally well known small retail chain there (which I ran for a while). A good friend from high school owns/manages/runs/founded/whateveritiscalled the Detroit Experience Factory (aka the Detroit Welcome Center). I've spent long days photographing Dan Gilbert's personal office and that of his executives at the Compuware building for the architects who designed it. I just took my daughter to her first and my last game at the Joe a few weeks ago. I have fond memories of going to the Freedom Festival every year and countless games at Michigan and Trumbull from the time I could barely walk (and I'm 35). I am in Detroit 6-12 times a year. Believe me, Detroit runs deep for me.

I'm frankly so tired of sifting through the "Detroit sooooo is/isn't a war zone" tug of war. Is there a person on this planet who has not heard of the horror or comeback stories by now? Everyone is right in this debate: Detroit is and is not a war zone. Great. Can we move away from this constant low hanging fruit... or whatever fruit is left? Let's get some substance and talk specifics. ...sorry for the digress!

Thanks everyone! I most certainly will keep everyone updated on the progress. Speaking of, waiting on preliminary architect drawings on Monday.

@Ricky ButlerThey were not low, but they also were not stellar. Just decent, good borrowers.

@Justin MorrisThe Detroit deal is actually a Ferndale (suburb) deal and we got it as a house hack in 2011. Detroit & suburbs have been rebounding for several years. In the city proper, there have been and continue to be incredibly lucrative properties, or so I am told. I have friends who live in the city and I am shocked when I hear of some rents being more expensive than Chicago rents. That said, those deals are finite, competition is stiff and there is a substantially large amount of bad deals out there. Again, my property is outside of the city anyway, so it is a completely different market. We found it on the MLS and are paying for it using FHA financing... but it was 2011!

Patience and letting the numbers guide you, for sure. Perhaps the best real estate advice I ever heard was the very simple and very dumbed down, "What will be will be." In other words, the numbers are what the numbers are and you will never be able to control everything.

5th time is a charm!

@Art MaydanI was originally pre-approved for about the same amount but ended up closing (TODAY) on a 4 flat (legal 3) in Lincoln Square that hit the FHA loan limit and all because the property had such strong market rent. If you did not know, your lender can use a percentage (about 75%) of market rent of legal units you will not be occupying to help qualify you for the mortgage. When you do the math and find the right niche of properties, it opens things up in a major way. In my analysis, every single 4 flat cash-flowed better than any 3-flat and 2's were not worth the time (unless they had the illegal 3rd unit).

My first pre-approaval was for $250k. The ARV of what I closed on today is over $650k. You can see the numbers I just posted on BP by clicking here.

Almost 5 years ago my wife and I became landlords and we did it all on our own. No books, no blogs, no forums, no BP, no podcasts, no REIA's and certainly no team I would ever call on again to do it. Our agent was sympathetic to our newlywedness and went out of her way to make a lousy $1800 commission on a property far away from her territory. But it worked out and to this day, that was the best financial decision we have ever made by far. Since then, we moved back to Chicago, changed careers, had a kid and dealt with life in a small, one-bedroom apartment on the lake... all while being landlords on a great duplex in metro Detroit that we bought for very little.

Fastforward to 8 months ago when I stumbled across Bigger Pockets while searching for the answer I had to a question about that property. Little did I know that would be the catalyst to today: closing on a spectacular 4 flat in a class A neighborhood on Chicago's north side. I cannot remember a time in my recent past when I thought I would be able to lock in a deal close to what we closed on today. Thanks to BP - and I mean that wholeheartedly - I was able to learn and team up with a great group.

The takeaway really is that: Never in my life did I think I would be closing on a property that appraised for well over half a million dollars. I may have dreamt it, but I did not think it possible given the reality of my situation. We have a fair amount student loans, pay a massive amount to daycare, live in a tiny 1-bedroom apartment, drive a 9 year old civic and work low-level healthcare administrative jobs. But today, somehow, we did it. Actually, we freakin' nailed it! And this would not have been possible if it were not for BP and the team that came from it including @Brie Schmidtour fantastic agent! Even more so, none of this would be possible if it were not for my wife trusting me! We actually went under contract without her even seeing the property and this will be our home!

Here's where we are at today:

Price: $400k
Rehab: $185k
Down: 3.5%
HomePath Seller Credit: $12k
Down payment + closing costs: $18k + $6k to pay off *some* student loans
ARV: $655k (not including appliances or central AC condensers which will increase that)
NOI: $50k (including taxes, insurance, utilities, 3% vacancy, 5% maintenance, 5% CapEx, 7% management)
Debt Service: $33k/year
Cash Flow: $1300/month
COC ROI: 66%

Pay close attention to that COC ROI. That is way beyond my expectations. Even better, we scored a HELOC to leverage the equity we have in the metro-Detroit duplex to fund this entire deal. I am yet to spend a penny of my own money. 2 cherries on top: We should be in position to refinance and ditch PMI in 12 months, saving $375/month and will have our HELOC fully paid back in around 18 months (we will pay ourselves a drastically discounted rent to get us there).

Now on to construction...

I'm weeks away from closing on a 203k in Chicago (proper) and need insurance. Getting a quote has been difficult. I'm being told I can't get a homeowners policy, that I need a very expensive builders risk and general liability policy or a vacant dwelling + rehab policy. However I need a quote to get pre-approved and need a policy to close. What gives? Any suggestions? Are there any Illinois insurance brokers who are used to this?