All Forum Posts by: Robert Taylor

Hi Nathan,

Well, way back when I was in college, I did get my bachelor's in accounting and could've been a CPA (graduated in 98, just before they raised the CPA education req to 150 credits in WI and I think many other states) but soon decided public accounting work wasn't my bag and ended up after a long and winding journey in the RE investing biz, which I really enjoy, for the most part. I do remember a few relevant points, although I know we have several BP members far more well versed on this subject than I am, so I'll stick to what I'm pretty sure on here.

First off, much of what you're asking are questions that either I or a much more qualified practicing CPA would likely have different answers on, depending on many other factors involving YOU and what your goals are, other income and assets you have, etc, etc so I'd HIGHLY recommend that you get with a local CPA and do some work on figuring how this fits into your overall financial picture now as well as plans for the future. Yes, it will cost some money, but I can almost guarantee you 100% that it will be money very well spent! If you need to find a CPA who's well versed on the RE investing end of things, I'd say check with the WICPA first for possible candidates. 

Also, I'd highly recommend you read up on "active vs passive investing", in fact I'd say to throw "real estate" into that search term as well, so your search will return articles specifically relating to real estate investing. Yes, on the one hand you'd think your flip project would fall under cap gains rules (thus if held for less than a year it is taxed at your normal rate based on your adjusted gross income or if held for over 1 year it falls under the much lower cap gains rates, assuming you have a fairly high income otherwise) BUT if its considered an active investment then it can well be considered income just like from any job, as far as the IRS is concerned. 

Of course, anyone can claim whatever they'd like to on their tax return, but when the IRS catches someone not playing by their rules the penalties can be severe and that fact, combined with the fact that our current US tax code is both massive as well as often ambiguous leads me to very much recommend that you talk to a practicing CPA who knows the rules and preferably one who's very well versed on real estate investing in particular!

Good luck on your project too!

Yep, I got it thanks @Bill S. !

Azita, obviously you're dealing with the same type of rules there, so you're on the same page then and as long as you play by their rules, you shouldn't have any problems but don't be shocked if they want you to do some extra work here or there, depending on just how "deep" your rehab work goes. As I think I said before, I've never personally done anything in Shorewood just by chance, but from multiple people who I think are pretty credible, yes they are tight there and can be tough about meeting their standards, but as long as they know someone's not trying to cut corners or pull any fast ones, they're fine to work with on things and Shorewood always has buyers looking!

Good luck Azita!

Thanks @Brie Schmidt  I hope things are going well for you here and yes, I guess I'm rarely at a loss for words! (except on THIS comment!) Also, I see Azita is from OR and not AZ, I think it was the AZita that threw me off on that one!!!

OK, one last one here, I haven't posted in a while so I think I have a bit of room left here, please DO NOT let my comments discourage you at all, I'm just saying to have a plan as far as dealing with the municipal officials you'll be undoubtedly dealing with and I mean put some time and good thought into it, its huge! 

If you get off on the right foot and make a good first impression and let them know that regardless of whether you live in Shorewood, elsewhere in the metro or on the moon, that you'll be adding value to their community and will be hiring people who play by the rules and that when complete, the village officials and the neighbors will be happy that you took a probably neglected or maybe very neglected house or property here and left something much improved! If you do that, I don't think you'll have any issues, other than having to put some time into dealing with them from time to time on whatever and that's how it goes anywhere when you pull permits. (which at least here in WI where I work, I think is INSANE not to do!) I think letting them know how accessible you'll be to both them as well as the people working here for you whenever you're back in AZ is a major component of that point. 

If you do that, as I said before, Shorewood is a hot market and you'll have interested buyers for any nice home for sale!

Also, just to touch on J Scott's point about buyers being "crazy" at times about a rehabbed house here and I have to agree with him on that one. That part ties into the whole "flip" part of it, don't even use the F-word around here! 

I've noticed (since I'm the listing realtor as well and take all the showing calls for my sales) that especially in the last maybe three years, that the buyer's realtors will ask well over half of the time on the FIRST call they make to me, either to set up a showing time, or just to get more info "Is this a FLIP" and it is NOT said in any sort of complimentary manner, either. 

It takes us realtors usually a few minutes on the mls and tax data sites to find out the place was just sold recently for much less and then it says that the place is all redone in the listing and its totally obvious that its a flip, so be ready for that, just how it is here!

Then, the final stage of that is the permit part. 10 years ago or even 5 years ago, you probably could rehab a house in many places here and not pull permits and your only worry at that time is if somehow the inspector randomly finds out, like a neighbor calling it in and as long as they didn't know, you could sell it just fine. (BUT still be open for potentially massive liability for years, due to what I mentioned before. If that place burns, even half burns and especially if someone is hurt or killed, between the ins co and the fire dept, they'll go through that place like any CSI TV show crew would and figure out in court, under oath just WHO added those outlets that no one got a permit for!)

Now, over the last few years I've seen it change where the buyer's realtor or the buyer will check to see if permits were pulled (some cities have it all online, or 5 min at the village hall is all that takes) and if they somehow don't, lenders have also grown wise to all of the "s$#t shows" who were or are running around, probably after watching too many episodes of "Flip My House" or whatever and cutting corners, covering up, not getting permits and when that appraisal comes back saying "recently rehabbed _________" they'll want the permit info, if the appraiser didn't already check.

A lot of great info and ideas directly related to your OP question there, regarding the project manager question, I'll focus on some important issues involved because it is in Shorewood and these are truly important issues.

I lived right over the Shorewood/City of Milwaukee border on the east side of MKE for years and know a fair amount of people who have and now live in their own homes there, a few people who've owned rentals or lived in half of a duplex and ONE person who rehabbed and flipped there and made some profit, not sure how much.

Shorewood, more than ANY other suburb in the entire metro area, is from what I've heard over 10+ years of doing this and other RE investing related stuff, TIGHT about what goes on with any property in the village and NOT a place where you want to be employing any contractor who's going to be cutting any corners or anything like that. In fact, ANY contractor doing a job in Shorewood MUST be licensed by Shorewood, besides being state licensed. 

Now, every day on cragislist, etc here you have hundreds of people, crews, etc running around who aren't even state licensed and getting work daily and from what I've heard many times, if you want to do a rehab there and roll one or more of those crews in, chances are very good the inspectors will come down on you like a ton of bricks! 

I'd say a MAJOR issue for you, or even your #1 issue prior to any work being done is to introduce yourself to the inspectors (its a relatively small village, can't be many of them) and I mean IN PERSON. I've heard multiple stories from very credible people of someone, like even a long time homeowner, getting a new roof and not getting a permit, not hiring a locally licensed contractor (its a pretty nominal fee and just requires WI license I believe) or doing something else wrong and they'll be all over them QUICK! I mention the "in person" part as well and I'm NOT saying to hide or obfuscate the fact that you're from AZ at all, but I'd see that part as raising a HUGE red flag for the handful of inspectors they likely have.

Now, I NEVER advocate anyone rehab in WI and not pull ALL needed permits in any city here, besides problems with the municipality, you're leaving yourself open to massive liability for many years after you think that house is sold and long gone of anything goes wrong, like an electrical fire in a house where unpermitted wiring was done. (and in WI, basically any electrical or plumbing work needs a permit, which can ONLY be pulled by state licensed master plumber/electrician)

This may sound crazy or draconian, but I can understand where they are coming from. Shorewood is small, ranges from middle class to high end huge mansions close to Lake Michigan and I'll bet 90+% of the housing stock is pre-1970, a lot of it going back to the 1920's or earlier. So, they've got a fancy area that's been pretty well kept, why risk it? I've also heard that as long as they're happy with what you're doing, they're just fine to work with as well, but don't be surprised if they ask for more work to be done on who knows what and or maybe require higher end supplies to be used, who knows!

So, please don't take this like I just told you that you're doomed to several months of hell here, not at all. I think it all comes down to getting off on the right foot with them and letting them know that you're NOT one of the corner cutters, or people who rehabs an entire home with zero permits and from everything I've heard they'll be fine to work with, but if its the opposite, then get ready for all sorts of issues or having the whole thing "red tagged" which means ALL work stops NOW, or the cops show up!

The good part is, that Shorewood is a "hot" area and if you turn out a high quality rehab, you'll likely have buyers ready to look on day one that it is on the market!

I might be able to help you on this one Ed AND the guy I'm thinking of is not only very competent, but he just happens to work as his full time job for the city of Milwaukee DNS! He's also a nice guy and easy to deal with and I'm 99.9% sure he is a licensed architect as well. 

I will PM you within the hour, just have to take care of a couple of important issues first.

Hi Jason,

Just a few quick thoughts, having played both the role of the guy doing the work or getting the work done as well as the investor looking for a GC who could handle everything for a price where it is both reasonable for me as well as worth the GC's time, I know this situation fairly well, but again these are just a few quick thoughts off of the top of my head. 

-Obviously, many investors would probably LOVE for you to do a profit sharing arrangement where if you don't get it done for the right amount of money, or if the quality of the work isn't up to par and in the end it doesn't make much profit, you eat that as well. Yet, even an accepted offer is never final, so profits can not be figured until closing, which is normally at least 2 months after your work is complete, as most conventional loans take 6 to 8 weeks to close and houses are usually on the market for a while. Now, unless you're rollin in dough, (in which case you'd probably also be the investor!) you want to get some of that pay long before closing and as you mentioned, draws are the common method in most construction jobs. In that case, maybe you can work out some sort of equitable split where you're making enough to cover what you need to make and keep yourself afloat, but also show the investor that you're willing to shoulder some risk as well. 

-Also, this investor ought to be able to sell him/her self to you as well. Have they done this before? Can they stomach laying out whatever sum of money it will be, knowing that even when complete it could still take a while to sell and then longer to close and they don't get a cent until closing day! Its easy to say they can handle anything on day 1 or before day 1, but its a whole different story down the road a bit, especially if any delays pop up, which are common when rehabbing. 

-Last thought right now is, rehabbing and flipping a home is a FAR different biz from 10 or even 5 years ago. I got into this part time around 2004 and back then I'd heard from a bunch of guys who'd flipped houses that basically, "you can pull permits if you want to and in some suburbs you probably should but as long as the inspector doesn't find out, its no big deal" and they were probably right, for the most part. 

Now, I think not pulling permits is insane! Besides the city, the buyer's lender will certainly have it appraised and the appraiser will certainly mention the fresh rehab and chances are pretty good that the lender will ask if permits were pulled or not and if not, they might back out. Also, being the listing realtor as well, most realtors and many buyers are now savvy to the flip biz and know that along with the people honestly trying to produce a quality product, there were also a lot of clowns out there who sold rehabs that were simply junk and they'll want to know about permits as well. This is something both you and the investor should be on the same page about, because here in WI, legally ONLY a licensed master plumber or electrician can do anything but the most basic of work and can pull a permit for work. Permits add expense and time to a project, often hassle as well, but without them you're also taking on MASSIVE liability too. Anyone who insists on a non-licensed person doing some wiring or whatever that should have a permit (even though its admittedly not that hard to do correctly) is asking for trouble!

Condo taxes vs single fam home taxes for the same value property in the city of Milwaukee should be the same amount, there's not a much lower rate for condos vs single family homes, they both pay at the same rate. Although, for whatever reason (probably some simple explanation I'm not thinking of right now) they vary slightly for the same value home or condo. For instance, I can pull up several homes or condos all assessed at $99.500 and some will be the exact same amount (just under $3k/year here in high property tax Milwaukee County) but a few will vary a bit, but probably no more than $200. 

I just looked on mls and right now we have 18 condos listed asking $20k or less, one is asking $7800! The whole NW side of the city has many wildly contrasting areas, you'll see some areas where people are building new, single family homes that are selling for over $300k in new subdivisions that look just like what you'll see in many of the middle or upper middle class suburbs, but there aren't a lot of them. Then, there are also areas here and there that are downright rough in spots, not quite as rough as some parts of the near north side can get, but close. If you drive down any of the main streets, like 76th st running N/S, Brown Deer Rd, Good Hope, Silver Spring Rds running E/W, you'll see a fair amount of blight in the commercial properties as well, but there are some better areas as well. It is a hard area to classify as nice or not so nice, on the upswing or the downswing, etc. There was a massive indoor mall, Northridge Mall which now stands abandoned and is pretty eerie looking if you drive around the parts of the "beltway" around Northridge that they allow you to drive on now. Yet, at the one end of the mall, they knocked down one of the former anchor store's building and put in a large new supermarket and a large Menards store, along with some other small strip malls, fast food joints, etc. so there is some hope for the future over there.

The condos can sure be cash flow machines as Dawn is laying out for everyone here, that's quite a nice return there! The condo market in that area has some wildly varying extremes as well. There was one huge complex called "North Meadows" that was built around the same time as Northridge Mall (1970 or so) that when it first opened was apparently quite a big thing. (I wasn't born until a few years later, so I wasn't there for it!) It was right next to the gleaming new Northridge mega mall and things were looking great for a while, but then they took a turn for the worse and as THIS story from the Milwaukee Journal explains, things got pretty rough in there for a while:
http://www.jsonline.com/news/milwaukee/53312447.ht...

Now they've been fighting hard to turn them around and apparently are having some luck and that complex is where the $7800 unit is currently for sale, so maybe it could turn into the buy of the decade!

One other point, someone asked the obvious question, why would people rent them from an investor if they can buy them and pay a much lower mortgage payment? As @Paul Ewing said, many banks won't bother with mortgages even under $100k, when they add up all of the fixed costs that come with writing ANY mortgage, there's NO profit to be made on their end, so there's no way they'd even consider writing a $20k mortgage! Plus, there's also that all important FICO score as well, we have a large number of people in the US today who have a decent and steady income, but one way or another have trashed their credit scores. Also, ever since the 2008/2009 crash, which hit condos harder or much harder than SFR's in many places that were way overbuilt with condos, banks also want to know all about the HOA for any condo complex someone wants to get a mortgage for. Anyone looking to buy an investment condo with cash ought to do the same thing, analyze the balance sheet of the HOA or have someone who knows how do it for you, because there are still a lot of condo complexes out there with HOA's that are a disaster waiting to happen! When every building will need a new roof in maybe 3 to 5 years and each building's roof is a say, $100k job but the HOA has a grand total of $638.42 set aside to pay for new roofs on all TEN buildings, well that million bucks is going to have to come from somewhere and you can't live there anymore if it starts raining inside every time it rains outside! So, buying a condo now means auditing the HOA as well.

I think this is a great opportunity for someone looking to cash flow and with cash to invest!

@Jon Huber beat me to it, but city data can be a great way to get info from people who live someplace as to the true "vibe" of any area, which I've never seen any stats or demographic info that truly pinpoints that kind of info, although some may give a fairly good idea. I don't think I've ever checked out areavibes but city data has forums like we're on here, for all the major cities and most medium and even many smaller ones as well. You can post on there and get some info just like getting RE info here on BP!