All Forum Posts by: Andrew C.

"I was told by the agent that is the value their construction cost algorithm shows" - their algorithm suggests they can fully reconstruct a house for 230K? That seems super super low. FWIW, I'm generally going with stated-value insurance that matches the FMV, knowing it's 60% of actual reconstruction cost. If the house burns down, we'll just take the insurance payout, payoff the mortgage, pocket the rest, sell the bare dirt for ~nothing, and walk away.

he upside is bounded - but the downside is (effectively) infinite. Can you really expect to track down your STrenters to get them to pay for damage to the unit, which you don't actually own and can't control the repair process or timing of?  this seems like a disaster waiting to happen, and a hard way to learn. 

+1 on the idea of managing others STRs while you save up the cash to get started on something you own.

options are basically:
1) just sell, pay the cap gains tax, and move on w/ your life. Def the easiest.
2) 1031 into something else. The timing can be tricky, esp since you have multiple properties, and you'll have to roll everything into the new property. Which you'll likely still be managing, though it could be less work than a short term rental.
3) there are syndicators that will accept a rollover into a DST, which avoids (defers) the cap gains tax, similar to a 1031, but with an easier process.
4) sell, then make a QOZ investment. You have 6 months from the date you realize the cap gains to make the investment (or, 6mo from Jan 1 of the next year, if the cap gains is recognized by an entity that reports, which then shows up on your taxes). You can either setup your own QOZ fund or there are quality syndicators doing this. Here, you only invest the cap gains - can take the initial investment back and do with it what you wish. you also don't have to invest all the cap gains. For those that you do invest in a QOZ, you defer federal cap gains tax till TY 2027. If you hold the QOZ investment for 10+ years, and meet the requirements (substantial improvement), then you'll pay no cap gains or depreciation recapture on the eventual sale of that investment. TBH - that works out super well for syndicated RE investments. The regular rent income is tax free (covered by depreciation) and you never have to pay that back. Be confident in the syndicator you pick, if you go that route, however. 

I have a 104 YO rental duplex in the midwest (Milwaukee). They are extremely common in parts of the larger midwest cities. Definitely find a good inspector. But a few things to start with:

1) was it built as a duplex? many are, and they're designed to make access to things easy. Many of the SFH->duplex conversions on older holes are pretty wonky. I'd be extra skeptical of that.

2) check the foundation. Have the inspector check the foundation. Minor issues can be safely braced, and you should then check above ground and look at drainage. If major issues are found I'd walk.

3) check the circuit breaker panels. For starters...does it have them, or is it still fuses? If it has circuit breakers, then likely someone has replaced the knob and tube wiring with something more modern. Are they 60amp or 100? If 100, then electrical has been touched more recently (good).

4) it's probably galvanized plumbing...which works fine, until it doesn't. When that happens you may end up needing to replace decent chunks of it. Touching the super old galvanized pipes seems to cause them to leak in other places. OTOH, that may not be a huge deal. I'm about to replace the galvanized in the lower unit from the primary shutoff valve, all the way out to the lower level hookups, with homerun-style 3/4" pex setup, and it's not that big a deal. The plumbing is super accessible in my unit from the basement. Something to check on.

5) furnace or boiler? Boilers can last a super long time (there's not a lot going on in there), but are like 8k if you have to replace one.

Looking to participate (passively) with funds form a solo 401k. Anyone have suggestions on specific syndicators or places to find them?

how'd you find the in-house PM? How many properties did you have when you pulled the trigger?

you can do a sep account for each property, but I'm unconvinced it's all that helpful and it makes it unclear how to handle things like minor tool purchases which are property accounted for across any properties you have. I'm not sure it scales all that well - will you have 12 checking accounts for 12 properties? Just sounds like planning for a lot of cash transfers to me.

You don't report them separately on your taxes, and there's plenty of budgeting/tracking software to keep the per-property data separate.

Quote from @Sarah Hatton:

Hey Heather, 

<snip>

3) Tax Benefits: owning real estate in entities drastically increases the amount of write offs (depreciation and such) that you can take on your income taxes. Owning property individually does that as well, but owning in an LLC multiples the ways in which you can use those write offs to your advantage.

What? IANAL or a CPA - I suspect the PP isn't either...There are no tax benefits to creating an LLC and owning your property through it. If you (or you +spouse in most states) are the only owners of the LLC then it's handed as a pass-through for tax purposes. the LLC doesn't file, you do and nothing at all is different about your tax rates or what's deductible.

FWIW, I own all mine through LLC - bought that way, loans to the LLC, leases to the LLC, etc. But you don't have to and most people don't.

The reasons you might want to do this:
1) asset protection. yeah, the LLCs have insurance and I have an umbrella. But insurance doesn't cover everything. The compartmentalization of an LLC is mostly to motivate a suing attorney to not both with the work of trying (and probably failing) to pierce the veil. This is only relevant if you have enough assets to bother with. Got 2M in a brokerage account or 1M in equity in your primary residence? You should think about this and also pay a lawyer to guide you through it. Otherwise, don't worry about it.

2) reduction in audit risk. If you setup the LLC such that it files as an entity (standard 1-member LLC in your home state will not accomplish that), then it does so and what appears on your income tax is a single K-1. If you have 25 properties and you own them directly, you list 25 properties on your tax filings. But...do you have 25? sounds like no. Do you believe you're already a decent audit risk? If not..then again, ignore this.

3) want to partner with someone for this venture? Then you need an LLC. That's how you keep things clean and clear. You both fund the LLC, it does the work. Pay attention to your docs.

4) are you getting loans that require to be lent to an LLC? Then you need an LLC.

for most people..really...just skip this.

net net....

- loan + cash in is 155, apprised value is 178.  So you've generated 23k in equity

- you have 23k cash-in and it's cash-flowing 3.6k/year...so ~15%. Assuming that cash flow includes a maintenance and capEx allowance, that's awesome. And this is year1 rent, so it should improve over time.

- you also have the equity gains from the mortgage being paid off (+ market appreciation over time, if this is an appreciating market)

awesome job.

Quote from @Jonathan R McLaughlin:

@Mordy Chaimovitz sigh. Another post asking " there is something I want to do that I have been clearly been told by qualified people is not allowed/illegal/unethical/inadvisable to do"....is there a way I can do it anyway? 

So I'll get off my small horse and just say that "lots of people do it and it often works because they usually don't care"  isn't much of a defense if the lender does care and also that you now have a situation where the LENDER HAS CONTACTED YOUR ATTORNEY TO SAY DON'T DO THIS. 

How do you expect to get away with this exactly?

 I think you've missed that the rules have changed. @Patricia Steiner provided the link to the relevant change, which is specifically that:
1) NO, you still cannot close the purchase in the name of an LLC and get a freddie/fanny mortgage
2) YES, it is fully allowed to transfer the title into an LLC if you have a confirming mortgage and they guidance they provide to lenders is that they are not allowed to exercise the due on sale for this, provided the LLC is majority owned by the same person/people that were on the title when the mortgage was originated.

so this is no longer a game of 'can I get away with this, since most people seem to be able to'. It's now actually a fully above-board move that's allowed. At least in the general case.

FWIW, I still don't like it and prefer to close the purchase in the name of the LLC and with a loan made to the LLC, but I'm able to find 'commercial' loans that I'm as happy with (or happier) than what's available via a conforming loan so .