All Forum Posts by: Bob Norton

@John Filippides You should consider the $800 per LLC as part of your insurance cost (and the cost of doing business in CA!). I'm not in CA, but if I were I would separate my properties in their own LLCs to keep them in their own fort and to minimize any lawsuit spreading (and sticking) to other properties. I do this with my current properties. You have to carry liability insurance anyway and should have the proper limits to protect you and your properties.

@John Colagross You didn't mention what your current interest rate is on your 15-year fixed mortgage.  Refinancing to a 30-year fixed mortgage will free up some cash flow and you can always decide to pay additional principal to pay it off in 15 years anyway.  Take a good look at the refinancing costs of the new loan.  With small decreases in your rate, the refi costs may not be worth it, even if they roll it into your new loan. (That's why I asked about your current rate).

I agree with @Aaron W. and @Joshua D. that a HELOC may be your best option. This will allow you to free up the equity in your home to invest using the BRRRR strategy. You do not have to borrow against the HELOC until you need the funds and you only pay interest on the outstanding balance while you are executing the BRRRR.

When you refinance the BRRRR then you can pay down the HELOC and repeat the process. Using a cash-out refi on your home will lock you into the mortgage payments for 30-years and will not save you any interest between BRRRRs.

Good luck!

@Matthew Metros Property taxes increases depend upon the locality.  They are based on the needs of the local government.  If the local government needs additional funds, they can reset the millage rates to raise more taxes (in accordance with state law).  The local assessor can also reassess the values of properties.  So, predicting property tax increases in the long run is not easy.

With that being said, I usually plan for property tax increases annually at the rate of inflation, unless I know that there will be a bigger jump due to property reassessment or announced millage increases.  That way when the property taxes do increase, you will have already built in some or all of the increase in your model.  And, then you can adjust your figures to actual and continue to project from there.

Keep in mind that your tenants are paying the taxes.  As long as you are adjusting your rental rates appropriately over time, the property tax increases should not be a big issue.  So, projecting the property taxes is especially important when making your purchase decision on a property.

@Michael Carpenter If you are living in half the property, then you won't be able to deduct all your house expenses against your income.  You get to deduct half of the common expenses against your rental income (mortgage interest, property taxes, insurance) and you get to deduct any direct expenses for the rental side of the duplex, such as repairs or maintenance.  You also get to depreciate half of your purchase cost of the building.

@William Zheng You should build up a cash reserve for each property to cover vacancy (mortgage payments with no tenant), maintenance, and replacement costs (Capital Expenditures).  Then, when you have sufficient reserves for each property, you can spend the cash flow for anything you want.  

@Brandon Heimsoth Not stupid questions at all. @Bjorn Ahlblad is correct.  You get to deduct your credit card expenses in the year when you charged them,  you don't have to wait until you've paid them.  However, you claim rents in the year when you receive them.

@Chase Maglangit You should begin with a simple structure for real estate investing, by setting up an LLC for your property in the state where the property is located. Once you have built up a moderate portfolio, you can setup a holding company in a state like Nevada and contribute your ownership interests in the rental LLCs to this holding company. That would be a non-taxable event, if structured properly. Talk to your CPA before doing this.

I have clients that went to a seminar and were sold into setting up a Nevada entity, only to discover that it was setup improperly from a privacy standpoint, and that it was very expensive to maintain.  

Once your income properties are generating enough cash flow to cover the costs to maintain a complicated asset protection plan, then you should look into this.  

Keep educating yourself about this topic as you build your portfolio, so that when you are ready, you'll know more about the topic and the right questions to ask your estate planning attorney.

@Jyothi Pandit Initially, you should use the cash flow to build up a cash reserve.  You don't want to have to come out of pocket for maintenance and replacement (capital expenditures) in the future, like @Dan Maciejewski mentions.  Once you have built up a sizable reserve, then you can use the excess cash flow for other investing.  The size of your reserve depends upon your property type and projected expenditures.

@Mary Jay I'm not a fan of putting real estate rentals in an IRA. Real estate rentals are a tax shelter already. If you put them in your IRA you lose their tax deduction benefits. Use your self-directed IRA funds for higher taxed activities related to real estate, such as lending, wholesaling, or occasional flipping.

With that being said, I would recommend that you keep your exiting rental in your pre-tax IRA and when the market is right, sell it for a gain. Then, you can move your funds from your pre-tax account to a Roth account in smaller amounts over time to lessen the taxes on conversion. As @Bill Exeter has pointed out, if you move the property from your pre-tax account to a Roth account, you will owe taxes on the fair market value of the property.

@Daniel Dietz You are correct that the value of your equity is what you are transferring. However, if you attach a loan to a property that you have in your IRA, you may have a taxable event. You also need to be careful that you are not entering into a prohibited transaction (which would be catastrophic). And a property with a loan attached to it within your IRA/401k will then be required to pay unrelated business income taxes (UBIT) on the earnings from your rental until the debt is paid off. This is an advanced strategy that should only be used after discussing the pros/cons with your tax advisor.

@Maggie Baesler Welcome to BP!