All Forum Posts by: Costin I.

@Reginald Ross - yes, this is much closer to my understanding. I didn't want to call it outright BS, but like you said is somewhere between "a bit of a stretch" and "bait and switch" for sure.

Same for the selective distribution of depreciation ("all goes to cash investor cause you investing with SDIRA can't use it anyway"). If that would be possible, then UBIT and recapture should also go only to cash investors.

Much to learn in this domain, and many bad apples around.

@Reginald Ross - thank you, but not really. The problem is not that I'm conflating the two separate events, but that they are combined in the promotion of the "deal" - as in "we'll do a CSS and [because of it] we'll be able to return up to 40% of the invested money in the second year". 

So, we are not talking about a refinance, nor increases in cash flow/rents/additional incomes, etc. but the CSS being the vehicle allowing returning a large percentage of the initial investment. And I don't understand how it's possible.

And then there are the other questions, about distributing the depreciation only to "cash investors", but not the UBIT, recapturing the depreciation when selling in N years (and not reflecting that in the deal exit numbers), etc.

@Rick Martin - if you are a "cash" investor (as in someone investing outside of a tax deferred/free account) and there are cash distributions (which assumes net income), then you can offset through depreciation. But what property produces that kind of net income in the first years (20%-40% of property value) to offset what a CSS accelerated depreciation might give you?

Maybe I'm confused and don't understand the mechanics here, but let's say I do a CSS on a 10Mil property (with, let's say, a rather good these days 5% cap rate...which will produce 500K in NOI annually) which gives me 2Mil depreciation in the first year...I will offset 500K, and I will have to bank the remainder 1.5Mil for the following year(s). In year 2, assuming the same 500K NOI and maybe 1Mil depreciation, I will again offset 500K, and now have to bank 2Mil depreciation for later.

Or will you be able to get the full depreciation and use it against income from other properties and investments?

And can you please elaborate on your statement "if there is still a portion of the depreciation left at the end of the hold, you can use that as well" ? Because if, at the end of the hold, the exit is through a sell (not a 1031 exchange), then the depreciation is recaptured and substracted from the "profit".

Inquiry to CSS, CPAs and MF experts:

Many sponsors of multifamily deals advertise the Cost Segregation study as a magic pill that creates money out of thin air, some claiming that by making one they will be able to return 40% of the investors money, even in the first or second year of the deal - how is that possible?

For all I know, a CSS only creates an acceleration of depreciation, that can be used to offset taxes on income. But that assumes you have that income from the deal, or similar. 

And then, if invested within a self-directed IRA, one can't take advantage of this depreciation. On that basis, the sponsor wants to redistribute the depreciation to "cash" investors only. Is that legal/possible?

And on the same basis, shouldn't then the UBIT be allocated only to same "cash" investors?

At the end of the deal lifetime ("selling in 5 years"), what happens with the depreciation (afaik it gets recaptured) ? And, is it correct/fair/legal to "be recaptured" by the entire pool of investors, or should be "recaptured" only from the "cash" investors that received said depreciation? 

Please help me complete/correct my understanding in these matters.   

@Tulika Tyagi, my 2¢:

1. Yes, it is definitely possible to buy 1990+ built, 1500-2000 sqft single family home, in $380-400K in the areas mentioned. The market is hot and bidding wars are frequent - you can probably count on 20+% over asking and very "lax" contracts (cash offers, no contingencies, no repairs, free long lease back, etc.)

2. Finding quality tenants it's an art and a relative term (to the house quality, amenities, location, property manager).

3. Prediction and appreciation in these areas - let's consult my crystal ball - "possible, likely depending on..." oh, it got cloudy, can't read a clear response. Interesting enough though, my crystal ball comes with a disclaimer at the bottom of it: "Past performance no guarantee of future result. All investments carry some degree of risk and all can lose value, if market conditions sour."

And with that in mind, you are missing the more important question: should you do it, should you buy a house in said conditions, in said area (given that you are hoping for a 300-500 monthly cash flow - are you ready to put 30-40% DP to achieve that kind of cash flow, fully realizing that your ROI will be under 2% for that DP?)?

And, also important, WHY? What is your goal? Short term speculation on hopeful appreciation? Parking available cash into an asset, away from likely inflationary trends? Long-term passive income? FOMO?

PS. You are not going to find a REA tell you "don't buy" LOL. Same like asking an insurance agent if you need insurance.

@Vipin S. - you can get the school ratings from Greatschools.org. 

And you can get the tax rate for a property from https://search.wcad.org/ - there is a table (e.g. 2021 ENTITIES & EXEMPTIONS) that lists the various taxing entities and the tax rate (e.g. 2.24%...which translates for 100K appraised value into $2,240 property tax). You should use that to get an idea of taxes in the neighborhood of interest (as it can vary quite a bit, from 1.8% all the way to 3.2%...and that can make a huge difference) and for the type of house you are looking for. Do not look at the current owner tax bill as they might have exemptions that you'll not have - learn how to find the tax rate applied and calculate it based on the likely purchase price, as that will be close to what you'll be paying.

@Iqbal Brar - you can't go wrong with RR and Buda, nor with Georgetown or Kyle...10 years ago. 

To hope that the crazy appreciation of last couple years or the absurd FOMO current craze will continue for next years is wishful thinking. Or maybe not, if the printing presses continue output by the trillion.

For sure, I would not call that investment property, especially when the thinking is "the cash flow is not the smart play". Once again, never heard of "buy high, sink money in it, hope to sell even higher". Speculation, sure. Smart investing, not. 

Bonie, help me understand the "cost seg study can give you extra cash-flow upfront" - the cost seg provides an acceleration to the depreciation deductions, not necessarily tax savings. You'll deduct more in the front years and less in the later years - and it's a deduction, which means you need to have the income, the cash flow in order to save more from taxes. No cash flow, nothing to deduct that year either. Yes, you'll not lose it, it will accumulate and you'll be able to deduct it when you'll have the income. But also, it will have to be recovered if and when you sell the property (unless your exit strategy is to die and pass it as inheritance, or 1031 exchange, and both if there are no changes to the legislation governing).  

Now, it might give you a boost if you have several properties that produce income and help you offset some of that. But if you have one property, and the property has little to no cash flow, a cost seg will not help you create it. Correct me if I'm wrong.

@Kha Nguyen I'm not specialist, but for all I know, transferring title through a quit claim deed doesn't preserve the title chain and might invalidate the title insurance. You should use a warranty deed. Or at least, check what happens when you use a quit claim deed in your case vs using other type of deeds for transfer. Also, make sure the LLC is not an S-corp.