All Forum Posts by: Costin I.

My understanding in this matter, there are several options for selecting the home basis for a cost segregation study:

A. Property appraisal (if you have one).

B. Tax Assessment – tax assessment for the property in question shows Land @ $48,920 and Improvement @ $174,300 (or a 22%/78% distribution from the total tax assessed value of $223,220).

Wouldn’t be fair to use the $174,300 valuation as the basis for the CSS? After all, I paid county taxes based on that.

Or, if we were mandated to use the acquisition cost (195K), shouldn’t we apply the same percentage to it (as in 78% of the purchase price)? 

C. Replacement/construction cost estimation as per insurance policy, $236K - can we use this one?

Whenever I tell the insurance the tax-assessed value of a property is X, they tell me is irrelevant, as they need to consider the replacement/construction cost for the policy premium.

D. Comparable sales

E. Engineering study

Can I use the one with the biggest value, and gives me the biggest basis?

CSS experts and Tax experts, what do you say?

@Colleen F. If you don't have true net metering agreements available to you in your location, you'll likely be on the losing end of the deal with a system "designed" to cover 100% of your annual consumption. 

Why? Because while the system might produce the same kWh amount you are consuming on an annual basis, when you are producing it is not going to match when you are consuming it. The excess production gets placed on the grid, benefiting your utility (basically you become a free energy producer for them). You'll get a very low rate for what you produce (excess you put in the grid), while you'll be charged a much higher rate for what you consume (get from the grid, likely at night).

There are other "payback" schemes that offer higher rates, but they are limited (basically efficient only for very small systems), or have charges that offset the higher rate. And presented in very complicated way, hard to bring them to an apple to apple comparisson.

One way to mitigate the lack of a net metering agreement is with a battery system (see Tesla Powerwall) - a very expensive way to become a truly self-sufficient energy producer (basically you become your own power plant), which rarely makes financial sense unless in a region with frequent power loss or in an off-grid scenario.

@Chris Murdien - I looked into this matter extensively, both for my residence and rentals, here are my 2¢:

1. There are no tax credits for solar installations on non-owner-occupied properties. Right there you lose some 30% of the financial incentive to do this on rental properties.

2. The efficiency of a solar installation is dependent on many factors - location (or average daily sun hours), house orientation (15deg SSE ideally), roof inclination, shade obstructions (on the roof and/or around the house), consumption, components used, inverter or microinverters, hail resistance, warranty, utility payback vs net metering. Each one of them can make a huge difference and the installer will not tell you much of all the hidden gotcha's (his interest is to convince you to install as many panels he can slap on the roof as possible, regardless of the ROI). Hint: look for a solar architect, who acts as an adviser and works for you and audits the installer project proposal.

Many states/utilities are no longer allowing net metering (kWh for kWh) and use instead all kinds of payback schemes (e.g. if you over-produce, they will gladly take your kWh for 3 cents and graciously allow you to take it back at night for 22cents - end result being, if your system is not properly sized, you will be producing energy for the utility and never recover the costs of the installation). The installer will not tell you about this, but will try to cover 100% of your consumption - the problem is, that your consumption and production do not happen at the same time.

3. The payback period on a system installed on a residence, with(!) tax credits, and with no(!) financing is 10-20 years, depending on a series of factors (see #2). If you finance it, it's much longer - IMO, you lose another 25% of the financial ROI, with the only ones making money being the installer and the lender.

4. And if you are looking into this just for the sake of saving the planet, 1. remember the solar industry is heavily subsidized, creating distortions in other areas, and 2. most of the solar brands manufacturing are not green at all, leaving behind a bunch of toxic byproducts + if you factor in the materials and energy consumed in the production of panels, they will never recover that during their useful lifetime. 

In short, it makes economic sense on your residence, in very specific and controlled conditions. 

@Joel Scarboro - are you asking if you can do a CSS on a SFH investment property by yourself? or without qualifying for REPS (real estate professional status)? The answer is yes and yes - you should be able to do a DIY CSS (using kbkg.com/residential-costsegregator or diycostseg.com) for under $500.

You do need to couple your question with the other ones mentioned in replies here - will you benefit from it, will you be able to use all those accelerated deductions? how does it fit in your investing strategy, short-term and long-term?

Tip: don't ask an insurance salesman if you need insurance.

@Joshua Bailey - If you are new to REI you should be primarily concerned with finding good deals and growing your business first. I would not suggest looking into establishing LLCs and asset protection strategies till you have at least $100-300K in equity(!) and only after you covered properly the "other" aspects of risk management (insurance, umbrella insurance, proper property management, etc.).

Here are some visual diagrams to help you in your quest:

Asset Protection Decision Diagram - to help assess the need for asset protection, and what to implement : https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-decision-diagram

Asset Protection Onion Diagram - what, when and at what cost one should implement in terms of asset protection - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-onion-diagram-v2

What is needed for a complete asset protection OR the domains that need to be intersected to find asset protection. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-spectrum-diagram

How a fully implemented asset protection layout might look. - https://www.biggerpockets.com/files/user/CosIorg/file/asset-protection-structures

 @Daniel Souza 

1. You can get a CSS for SFR property (under 1Mil cost basis) done for under $500 via kbkg.com .

2. FYI - Many of the answers in this thread are ChatGPT AI-generated answers - take with a grain of salt this suddenly discovered "expertise".

Wow...I raise your GPT with my GPT:  

As a property manager, keeping meticulous track of expenses is crucial for maintaining the financial health of your properties. Effective expense tracking not only ensures accurate budgeting but also facilitates streamlined financial reporting, optimizing property performance, and enhancing overall profitability. This guide outlines key strategies and best practices for property managers to master expense tracking.

1. Establish a Comprehensive Chart of Accounts:
   • Develop a detailed chart of accounts tailored to your property management needs.
   • Categorize expenses into specific accounts (e.g., maintenance, utilities, property management fees) for clarity and organization.
2. Utilize Digital Expense Tracking Tools:
   • Implement specialized property management software to streamline expense tracking.
   • Leverage cloud-based platforms for real-time access to financial data and collaboration with stakeholders.
3. Capture and Document All Expenses:
   • Develop a systematic process for capturing and documenting all property-related expenses.
   • Keep digital or physical receipts organized and easily accessible for auditing and reporting purposes.
4. Implement a Purchase Order System:
   • Introduce a purchase order system to authorize and track expenditures.
   • Ensure that all expenses align with budgetary constraints and are pre-approved to avoid surprises.
5. Regularly Reconcile Bank Statements:
   • Reconcile bank statements monthly to verify that recorded expenses match actual transactions.
   • Promptly address any discrepancies and investigate the root causes to maintain financial accuracy.
6. Track Capital Expenses vs. Operating Expenses:
   • Distinguish between capital and operating expenses to better allocate resources and plan for long-term investments.
   • Capital expenses are typically larger, one-time investments, while operating expenses are recurring costs.
7. Automate Recurring Expenses:
   • Automate the tracking of recurring expenses (e.g., utilities, insurance) to minimize manual data entry.
   • Schedule automated reminders for upcoming payments to avoid late fees.
8. Implement Vendor Management Practices:
   • Negotiate vendor contracts to secure favorable terms and pricing.
   • Regularly review vendor performance and explore cost-saving alternatives.
9. Regularly Review and Adjust Budgets:
   • Periodically review and adjust budgets based on property performance and market trends.
   • Factor in unexpected expenses by maintaining a contingency fund.
10. Train Staff on Expense Tracking Protocols:
    • Provide training to staff involved in expense tracking to ensure consistency and accuracy.
    • Establish clear protocols for expense reporting and reimbursement.
11. Document and Analyze Expense Trends:
    • Document and analyze expense trends over time to identify areas for cost reduction or optimization.
    • Utilize historical data to make informed decisions on future budgets and expenditures.
12. Stay Informed about Tax Deductions:
    • Stay informed about tax deductions related to property management expenses.
    • Consult with a tax professional to ensure compliance and maximize tax benefits.

Conclusion:

Effectively tracking expenses is a cornerstone of successful property management. By implementing these strategies and staying proactive in your financial management approach, you can enhance the profitability and sustainability of your properties while maintaining a clear and transparent financial picture.

@Erica K. - Here are two books that will give you all the information you need:

1. You should hire a good inspector(s) to inspect your target properties - it's worth the money (and you might need multiple of them, as they are specialized and a regular one might not be doing roof inspection or pest/termite inspection due to different license). Regardless, since you still need to understand how big of an issue (if it's urgent or not, risky or not, expensive or not, difficult or not, etc.) in what the inspector finds and lists in his report, you need to have a good understanding yourself on inspections - thus get this book: https://www.tauntonstore.com/complete-guide-to-home-inspection-071491

2. Since you are talking about a small multi-family, this is my recommendation for the book/checklist for inspections and due diligence: https://johntreed.myshopify.com/collections/real-estate-investment/products/checklists-for-buying-rental-houses-and-apartment-buildings

Spend the $100 for these 2 books and the time to read them and you'll save thousands in your REI path. My advice is free.

@Orhi Tahi - that is also a nice property, turn key and ready to go. 

I have no idea of the rental market in that area, as it is far from Austin - there is no way to cross the Colorado river, no ferry system, it's 30min to Cedar Park on small roads, and 1hr to downtown Austin, one way. It's a nice place to live if you are retired or working from home. It's a place "close" to Austin, yet so far away. I don't think there are too many employers close by, so unless someone likes to drive 1-2+hrs daily commute, I don't think there would be many "tenants" prospects.

First option on Bluebonnet is a better one than this one IMHO.  

@Orhi Tahi - here are my 2¢:

It’s a nice property, already recently remodeled (compared with Google street view from 2022), which means you’ll not be able to add any “sweat equity” to it, it’s already been squeezed of that.

It has a converted garage, otherwise, it would be a 1400 sqft house. Being without garage, it’s going to limit your interested audience.

There was a tornado that hit around that area in the past couple years, but it doesn’t mean the area is prone to tornados (one in the 10 years I been in Austin). I would be more worried about hail, especially with those solar panels, and especially without a garage for the cars.

You’ll never recover the solar panels investment (or whoever installed them) as they are shaded by the big trees in the front. Even if placed on East-West roof sides, the big section on the East side will be exposed to the sun and produce only half a day (and a good portion of that will be shaded by the trees); same with the back/West section, will produce only half a day. If I were to estimate, that solar array performs at 40% capacity, it will never pay for itself.

It’s a very nice house, but that area will bring $1 to $1.10 per sqft. In other words, the rent will be $1,900 - $2,100, maybe a bit more ($2,200) because it’s a nice house (but that would require a special kind of tenant, likely to not stay long term, thus more vacancies). Or to rephrase, it’s too nice of a house for the area and typical tenant that rents in a similar area and price point.

It has an HOA and, while not a lot, it adds up, or more precisely, it subtracts from cash flow. But it will give you a decent neighborhood and some decent amenities.

The taxes as a rental will not be anywhere close to the $4600 listed on Zillow – that is capped at 10% annual increase, a signal that it has homestead exemption. The taxes will likely be closer to $7000+. Check the tax rate and count of full market value without the homestead cap.

Make sure to calculate your cashflow correctly with the full tax and HOA.

Schools are decent 5/10. This is an important factor affecting vacancies (families with kids would look for good schools and stay longer), thus affecting long term success as a rental investment. Therefore, I would prefer/suggest better schools.

399K might be a bit overpriced for the area and similar recent sells. Run a CMA. All the houses around, and likely similar (this is an HOA neighborhood after all) are priced in the low 300K and below 300K. Basically, you are buying the nicest and most expensive house in the neighborhood, when you should be looking at the ugliest and cheapest one in a good neighborhood.

And my last point, don't ask an insurance salesman if you need insurance.