All Forum Posts by: Edmund Ricker

Hi Mike,

Generally a sole prop uses the taxpayers SSN for its EIN and the rental income and expenses would be filed on Schedule E of your 1040 personal return.

Do you have employees?  Is that why the sole prop has a separate EIN?

Ed

@Chris Clemptor

The amount that is depreciated is called your basis.  Basis generally includes the cost to buy the house and includes any improvements made on the house.  In your case it sounds like your basis would be approximately $145,000, assuming you can produce receipts for all of the materials spent on renovations.  $85,000 purchase price + $60,000 materials on reno = $145,000 

You can deduct labor and materials for repairs but not improvements on Sch E.  The difference is a repair is something small such as replacing a toilet or sink vs. an improvement such as re-roofing the house.

This is a some what simplified explanation using general numbers from your post.  You should consult a tax preparer if you are not familiar with these concepts.  

Hope this helps.

Ed

@Conner Smallwood

I am in the process of setting up an LLC right now and I am using an attorney. I probably could set it up myself, just like I probably could rebuild the engine in my car, but it would take me longer than a pro and I wouldn't be confident it was done correctly.

My point is that it does not cost that much more to have an attorney draft your entity than it does to use a website.  The difference is, an attorney is going to advise you on all the things that have to be done after set up to make sure the entity will protect you as it is supposed to.

In my opinion, there are places to skimp on budget, but the professionals that make up your team are not one of them.  I am admittedly biased because I am an Enrolled Agent.

That being said, there are enough problems that arise unexpectedly.  Don't create one when you are building your business just to save a couple hundred dollars.  You wouldn't rehab a house on an unsafe foundation would you?

Hope that helps.

Ed

@Melinda Rupard

I bought my current home a year ago and when the appraisal was done, the appraiser said that our in ground pool was of little or no value.  He based his decision on the fact that in Maine the pool is really only usable for about 4-5 months per year.  He also said that maintenance costs were another factor.

My point to this is if you had an appraisal done prior to purchasing the pool, the appraisal may say something about the pools value.  

Hope this helps.

Ed

@Scott Kim

An LLC is designed for asset protection and has nothing to do with tax savings. If you form a single member LLC it is taxed on your personal 1040.

A multi-member LLC would generally file a partnership return.

If you are doing buy and hold investing then a single member LLC may fit your needs.

The best thing you could do from a tax standpoint is enlist the help of a good tax preparer. If you network with a REIA, ask for referrals. Sit down and tell your tax pro your goals and they can provide you with the information you need to make an informed decision.

Good record keeping is a must and will make your tax pro's life easier (and your bill smaller).

As far as the financing area and how an LLC impacts that, I would consult your local banker. I am in the process of establishing a relationship with the commercial lender at my local bank. I might not need him right now, but when I need him in the future I am a known commodity. Not to say that the relationship will guarantee me any loans, but it can't hurt.

I hope this helps.

Ed

@Anna L.

Another consideration is that unless you have a side business that generates income, a Solo 401k might not be an option. You could roll those old 401k dollars into a self directed IRA, but as @Dmitriy Fomichenko said, if you are flipping within said IRA you could be subject to UBIT.  Not that UBIT is a deal breaker, but you need to have all of the facts so you can make an informed decision.  If you are using the funds for buy and hold rentals, UBIT does not apply.

Also, verify that your current employer will allow you to roll the old 401k into your current.  

Finally, check the loan limits on your current plan.  Often you are restricted to a max of 1/2 of your current balance or $50,000, which ever is greater.  This amount may or may not be enough to fund your flipping goals.

Hope this helps.

Ed

@Sergio Rodriguez

Thanks for the question.  This is one I have asked myself and got a myriad of answers.  My reason for wanting to get my license is so I can look at property whenever I have a chance without relying on a realtor.  In fairness to my local RE pros, they are trying to make money and I realize that I will take up a lot of their time looking at "clunker" homes.  Even if I bought one or two, these properties have low price tags and won't net an agent much commission.

That being said, I have heeded the advice of many who say that the costs of maintaining the license and a seat in a brokers office are substantial, especially if you are not closing many deals and only using the license for your own investment activity.

Here is what I have done:

1.  I found a local RE school that offers the Maine Sales Agent course through correspondence.  This costs approximately $400.

2.  I went to Amazon and found an older version of the text to one of these courses for $4 including s/h.  I am going to read this text and see how much I learn.

3.  I continue to use the web to look at houses on sites like Zillow, Realtor.com, Craigslist, etc. and do desktop analysis on properties that I think might fit my criteria.

My goal is to buy one property this year and get it rented, whether or not I am my own agent.

Good Luck Sergio and keep us posted!

Ed

I would start sooner.  I am trying to educate my high school age daughter and help her to capitalize on opportunities that I never knew existed.  School does an incredibly poor job of educating our kids on issues of money, so I am trying to show my kids how to avoid some of the pitfalls that I jumped into.

@Dolores Waldron

At first glance, the numbers don't look good, but first you have to consider what your goal for this property is.  What are you trying to accomplish?

The cash flow looks pretty meager, but is there any room to raise rents?

Are you really going to pay someone to manage the property?

There is no hard and fast answer. I believe many on BP would pass this one up. I would based on the numbers you have, but what works for one investor doesn't work for another. I think you should set some criteria for what you want your investments to produce and incorporate those criteria with your REI goals in general.

That should help you decide whether or not something is a good investment.

Ed

@James Barnhart

To me, business is all about relationships.  You have to be able to trust and respect those whom you do business with.  I see this as two separate issues:

1.  Did the wholesaler misrepresent the property, and

2.  Is the property still worth buying despite the deficiencies.

I am not sure of the exact wording of what you received, but "rehab" could mean different things to different people.  What you are describing sounds like repairs to me, and not rehab.  When I think of rehab, I think of something between updating (paint, flooring, light fixtures) and a gut job.

If the numbers still work, and this is a good deal, I would have a discussion with the wholesaler to "clear the air" and make sure everyone is on the same page.  I like to think that most people are honest and the oversight of some repairs might have just been that....an oversight.

If it were me, I would reanalyze the numbers based on what the repairs might cost and see if it still makes sense.  If the deal still fit my parameters, I would sit down with the wholesaler and have an honest discussion about the situation and air my grievance, while trying to close the deal and nurture the relationship.

Hope that helps.

Ed