All Forum Posts by: Ben Raygor

Without knowing anything else about this tenant, I think you need to prioritize the numbers first and communicate that up front to the tenant.  "Hey, just letting you know that we anticipate raising the rents up to $$$ per month.  I hope that works for you, but if not, start considering other options or reach out to me with any questions."  

Maybe they'll want to converse with you and try to make a case why they are an amazing tenant, plus they know the property and can help out.  Who knows?  And as Michael Swan said on a recent BP podcast, "When you get an amazing tenant, you should treat them like royalty" (not an exact quote, but close).  That could be quick response time, more money spent on them by choice, or less rent demanded from them.  

But if there appears to be nothing special about this tenant, then stick to your numbers, because the math matters a lot.  It doesn't matter if the tenant used to be the owner before the current owner selling to you.    

It depends on your purchase contract.  Specifically, look for the home inspection section which will outline your rights and protections as a buyer. 

It would definitely be a good way to learn a part of the business.  You would get a lot of in depth exposure to the paperwork side of buying and selling a property.  You would observe a lot of negotiations happening between buyers and sellers.  You would probably complete a few purchase agreements, just to have your agency/brokerage give it back to you and tell you what you're missing.  All good learning experiences.  Plus, you'd probably meet RE investors along the way and learn a lot about the market that you didn't know before.  

And of course it COULD be a good angle to learn as an aspiring investor.  Many RE investors get their license for different reasons.  My brother had around 8 rental properties when he quit his day job.  He then proceeded to get his license 1) so that he could save thousands of dollars as he went about his own investing, and 2) so that he could have another stream of income available to work on when he wasn't working on his own investment properties.  

I am NOT saying that every investor should get their license.  I know nothing about you, your skill sets, or your investment goals.  You need to decide whether getting your license is the right step in your journey or not.  For most investors, getting a RE license is NOT a part of their strategy.  Most investors are simply committed to outsourcing that work to somebody else who rocks at it.   

The IRS is going to look at what your intent is. Your intent is to purchase a property and sell it quick with $2,000 as compensation for your efforts.  It looks like you are acting as a dealer in this case.  You had no intent to hold onto the property as an investment, so reporting as a short-term capital gain is less likely.

You should be receiving a 1099-S for the property sale, so the IRS would be expecting to see gross proceeds somewhere on the return.  The usual spot for that would be either on Sch D as a capital gain transaction or on Sch C as a house flip.  Your efforts appear to be active income to me, not investor type income. 

I don't think your assumptions are correct, because it seems like you are hoping to report your net income for $2,000 as Other Income on your 1040.  That's not the right way to report a sale of property.  Schedule C seems like a pain, but it will be your safest reporting option.  If you are bothered by paying 15.3% on that $2,000 net income, I would just raise your selling price to account for your SE taxes if you want to pocket $2,000.  Plus, you'll be able to deduct mileage expenses on Sch C.  

Your $2,000 is compensation for your time.  Taxes are generally setup so that 15.3% of compensation "for time/efforts" gets paid in.  This would apply to larger transactions as well.  It is hard to argue that you are not flipping the property.  You appear to be actively involved in rehabbing the property, even if it's just calling in contractors to do work and purchasing new appliances for example.  Filing Schedule C and paying SE taxes should be the assumption anytime you flip properties unless you know of some tax rule, or have a purchase intent, that allows you to avoid it.  

What Nancy said makes sense.  Realistically, few small investors will do their bookkeeping that way.  But it's a good answer to your question about "the best way to book keep...".  

In the earliest stages of bookkeeping, especially if you just use an excel spreadsheet, I would not create escrow liability accounts (although I think they could be a good idea when you get on Quickbooks and can automate the escrow account), but would would make sure to keep track of your estimated tax liability or estimated repairs/capital expenditures that are likely to happen during the year.  

If the roof goes bad 7 years sooner than expected, and insurance doesn't help you out, your roof escrow account will probably run dry pretty quick and you will need to fork over cash out of your personal pocket.

To me, it seems like keeping a budget nearby (such as directly below your excel income statement) is going to serve the purpose you're needing.  For some people, a "budget" is just an estimate of likely expenses to happen this year.  For some people, setting a "budget" means they will not spend any more than xxx dollars on improvements that are not absolutely necessary and it's a hard line in the sand.  

If you have an escrow account from January - September for a new furnace that will be replaced in November, your cash flow statement wouldn't actually take a hit until November.  An escrow account would tell you that a portion of the cash in your account is "designated" for a specific purpose - new furnace.  That's all.  

Most early investors seem fine with keeping those capital expenditure amounts in their head or as a side note until they happen.  Some people estimate yearly cash flow by using a 10%-of-gross-income capital expenditure (or whatever percentage you pick).  When you get more properties, the system you put in place (creating an escrow account) will become more important and Quickbooks will be more valuable to you.  Following Nancy's advice then would make more sense for you.  As your cash account grows and you're tempted to take money out for yourself, you just always need to be asking yourself if you will have enough for repairs and cap exp, expected and unexpected.  

IF there is a property management company involved, make sure to ask the tenants about whether or not the PM company resolves their issues in a timely manner.  That should tell you a lot about the PM company and whether you need to look for another PM company or not.  

In your case, I can't tell for sure, but it sounds like a PM may not be involved.  I would ask them a few general questions about the property to gauge the condition.  But I would really try hard not to forget to ask them about the area/neighborhood.  Is it nice?  What do they like to do for fun? (I'm sure there are better questions than that)  This may give you insight about future tenants who'd move to the area once these current tenants leave someday.  

Find a local real estate investor and beg him to let you tag along with him as he goes about his business of landlording/flipping/deal-finding.  Better than that, offer to ADD VALUE to him by performing some work for free in exchange for him letting you tag along and converse with him.  I don't know what this last year of education in real estate has looked like for you - maybe you have been spending time with professionals, but maybe you've just been reading articles/books and listening to podcasts (all great things).  

For many beginner real estate investors, they will hit a wall with the banks at some point and will be forced to tap into other financing options.  My opinion is that you should utilize as much of the banks money as possible and as soon as possible (that's just a general statement that may not be the best approach depending on a person's situation).  

The banks will make sure your debt-to-income isn't too high for them and will have a bunch of other checks and balances.  As long as it's a good deal, get the property and try to use the banks money if possible.  Then you'll free up your private financing options for the next deals in the future.  

Jered Sturm, on BP, said that he hasn't used private financing for any investment deal that he didn't first use his own cash and bank financing for.  He said it gave him credibility when he tapped into private financing.  I'm not saying that's the only solution, but there may be good reasons for using that approach when possible.  

How important is a business name when you're a "newbie to real estate investing"? 

I understand wanting to own everything in an LLC, but I'd put "looking for a property" above "coming up with a business name" on the task list. I'd save the $199, business card and website expenses until you have some properties to market to potential tenants. I'm a newbie investor as well, and all I can say is that I have no idea what my brand as a real estate investor even is. Who knows what types of properties I will own, manage, or flip in the coming years?

I'm making assumptions that by "newbie", you mean no deals done.  Sometimes people use that word to mean "little experience" which could mean one flip and one rental property.  In that case, I'd say creating a name would be fine, just not worth spending too much money or time on.   

I've heard people say that paying a few hundred dollars to crowdsource a logo was well worth it, and I've heard of people using Squadhelp and saying it was nice how they did a trademark and URL check for each name.       

Thanks Joe.  Way to encourage everyone to stay calm in the event of an audit.  My team and I were just discussing how people respond to notices from the government or the IRS.  Many people assume it's always bad news for them.  Sometimes it's just a copy of a receipt for a payment that you made...