All Forum Posts by: Brad Gibson

I use Compass Property Management in Lubbock. Burkley McAllister has been fabulous to work with. 

Howdy everyone. I'm considering the purchase of a small home in Western Washington as a STR. One of the intriguing things about adding this home to our portfolio would be the potential tax benefits of doing a cost segregation study and receiving the 80% bonus depreciation this tax year. What I'm not clear on is approximately how much an average cost segregation study will show as available for that immediate depreciation.

Here are the numbers:

Sale Price $300,000 

Value of the land per the county assessor: $9.000.

Value of the structure including fixtures and contents: $291,000

Current tax bracket: 32%

The wifey and I both have high paying W-2 jobs and it would be nice to count that depreciation against her or my salary.  I know the rules for ensuring that the "loss" counts against W-2 income in a short term rental.

Is the standard estimate about 25% of the structure and contents what would be yielded as an immediate depreciation based upon a cost segregation study.  I'm also aware that in 2023, only 80% can be bonus depreciated.

Thanks in advance for the insight.

Quote from @Richard F.:

Quote from @Brad Gibson:

It seems in the last year, I've been running into turn costs of several thousand dollars.  $3,000 to $7,000 at times.   I've taken prior tenants to court to collect the debt.  I've won the judgement every time, but have collected $0 on those judgements in 6 years of doing this business. 

Does anyone have any tips for avoiding the large damage type turns when a tenant leaves?

1) Quarterly inspections of the units to note issues and bill the tenants while they are still leasing. 

2) Not going to court for a judgement, but rather reporting the bad debt to a credit agency. 

3) Raise the qualification standards for renters.  Right now we require 600+ credit score. 

 

Aloha,

1) Quarterly inspections are pretty intrusive, even if you are "just changing filters". Aside from that, an actual inspection is necessary. I've had good success with this strategy: Initial Rental term is six months, with prospective Tenant advised that our intent is "long term", but want to make sure the property and relationship is a good fit for both parties. To that end, I assure them we will perform an inspection shortly prior to the six month mark, and if everyone is happy, we will renew for 12 months without an increase. Going forward, we perform annual re-inspections prior to annual renewals, and evaluate the market at that time to determine any changes in terms before offering options to Tenant.

2) The collection agency needs the judgment to effectively work toward collection of past due amounts. You pay for it one way or another. When seeking a judgment, you need to evaluate the possibility of the named parties EVER being in a position to make payments. In other words, if they are just young and dumb, making some bad choices, MAYBE one day they get married, or want to buy a home, and will find it advantageous to correct their past mistakes. If, on the other hand, they are past their "prime", odds of significant change in attitude or income are much less...probably not worth the effort. If you DO get a judgment, they typically need to be renewed based on local law, usually every 7 - 10 years. Be sure you follow through with that, and that you remain in contact with the collection agency/attorney that is chasing them.

3) 600 score is not much, please review the chart below which gives you the odds of a delinquency within 24 months. In general, tighten up your screening process, study the details and try to obtain additional information to review. You should be looking for Good Habits, and Bad Habits. Usually if one area indicates a series of bad choices...whether that is financial, court records, character, job stability, housing stability, or other factors. Dig deep and see that everything fits and gives a clear picture of a responsible, rule following, adult.

 Thanks for the response. Love the credit rating chart & it makes a great deal of sense. It seems you have the 640 to 659 range boxed. Is that your sweet spot for your rentals as far as credit scores?

I've had units with garbage disposals.  First call, I had the clog fixed by our maintenance guy.  Second time they called, I indicated we would send someone out, but it would be to remove the garbage disposal.  

Tenant protested.  I indicated that blockages of the plumbing were their responsibility.  They can get it repaired at their expense or I would simply remove the device.  Tenant handled the clog and got it fixed themselves.  

I'm a pretty experienced landlord that has been at this for 6 years.  Just acquired my 29th and 30th doors, but of late I've been having trouble with BIG bills to turn units when tenants move out.  I usually charge 1x monthly rent for deposits and also offer sayrhino.com as a convenience for some of the units.

It seems in the last year, I've been running into turn costs of several thousand dollars.  $3,000 to $7,000 at times.  Those are really cash flow killers and the deposit or sayrhino.com policy don't come near to covering the repair bills.  I always do disposition of deposit letters which indicate the amount owed, but have never been paid for damages beyond the deposit.  I've taken prior tenants to court to collect the debt.  I've won the judgement every time, but have collected $0 on those judgements in 6 years of doing this business.  The court expenses and the time required to do the small claims court or pay someone to handle it just add to the misery of needing to repair the unit.

Does anyone have any tips for avoiding the large damage type turns when a tenant leaves? Here is what I have in the works or I'm considering.

1) Quarterly inspections of the units to note issues and bill the tenants while they are still leasing.  We will do these under the guise of replacing the air filters for them.

2) Not going to court for a judgement, but rather reporting the bad debt to a credit agency.  Not sure how I'm going to go about this since it seems a business needs to have a significant money relationship with the credit agencies to report.  I'd love to have suggestions on what might work well to get this done.

3) Raise the qualification standards for renters.  Right now we require 600+ credit score.  Clean criminal history and no evictions. 3x the monthly rent in income.  I use mysmartmove.com to run the reports.

Any folks dealt with the same issues and have ideas?  Part of it may be where my rentals are located.  We are in the oil patch of West Texas.  Many of the renters are (former) low wage workers who have come to the oil patch for the great wages that don't require special skills or degrees.  It means they're more transient and harder on the homes, even though they have the income and usually the credit to qualify.

Thanks in advance for the tips.  At this point, an option would be to repair and put the homes on the market for sale when they become vacant to take advantage of the strong housing market.  I'd rather not do that as the initial intent was to buy and hold long term.

You get up to 10 conventional mortgages before Fannie & Freddie say "no mas".  Those ten loans will be the best terms you'll get for your entire rental portfolio until you reach a scale where you've got some pricing power and have great relationships with local lenders/banks who can be flexible with terms.  Most of the local banks will want your deposit business to go along with their financing of your real estate investment properties.

I would got with personal name and a very good liability policy on each home plus an umbrella policy after that to ensure you have layers of protection.

Best of luck.

 Thanks for all of the great responses. The advice from the forum has been really helpful. 

Just wanted to update. I secured a 90 day rental from a traveling health professional on a contract over in Odessa (Midland’s sister city) which is about 15 miles away. That came through FF. I also had a Airbnb request for a 30 day stint come in today. Could only take 1 so I went with the 90 day. 

That’s some positive news and hopefully a harbinger of some steady activity for the months after that. 

 Thanks for the response.  I think this helps me.  We are experienced operators.  We have over 30 doors across the three communities we work in along with fix & flip, as well as new spec construction.  We rolled the dice with a new niche & it appears to have come up snake eyes.  Just wanting to try all options before eating the investment and converting it back.

 Thanks for the input.  The local commodity thing is the gist of my original question.  If the pricing power doesn't seem to be there for MTR's to merit the risk (furnishings, utilities, & broader vacancies), what time frame and adjustments do you give, before simply going to LTR?

What margin should be seen for an MTR to justify the added expense and bigger labor commitment to compete in the space?

Thanks for the response. The competition is really not from SFR's from what I can gather on Furnished Finder & Airbnb. The competition is would seem to be from higher end apartment complexes that have moved into the furnished spaces as well as some mom & pop guest quarters that have moved into the MTR space.

There is widespread use of "man camps" across the Permian Basin.  Think dorms for workers. Many are very nice and provide chefs, cleaning service, & great recreational rooms.  The rules on those are sensible, but restrictive.  No illegal drugs or alcohol.  No fighting.  No outside guests (meaning women/men who aren't workers).  You know, basic things to keep the peace.  That's not the market we are competing among.  Those man-camps are usually out in the rural areas to be closer to the work areas & privacy is significantly diminished.