All Forum Posts by: Daryl Luc

Originally posted by @Account Closed:

Hi, I'm really interested in learning to analyze deals/properties for future investments. I've noticed in pretty much every analysis in videos and blogs, the person will deduct the entire mortgage payment (interest + principal) as a rental expense, before going on to calculate Yearly Cash Flow.

But the principal is NOT a tax-deductible expense. So why is it included as an expense in their calculations? Perfect example, see here: https://www.biggerpockets.com/...

Shouldn't the calculation actually be:

Yearly Cash Flow = ( (Rental_Income - Tax-Deductible_Rental_Expenses - Depreciation) - Taxes ) - Principal_Payments)

If I'm wrong, tell me why. I just don't get how the principal (a non-tax-deductible expense) is always included as one of the tax-deductible rental expenses in all these calculations. It makes no sense to me. What am I missing?

Not sure where you got that formula, but anyway....Positive cash flow is what you use after all payments for the business are made, to run your business, pay taxes, acquire licenses, buy toys, food,certificates of deposit, etc. It's what is in your pocket to keep and use. Expenses and depreciation (which isn't an outflow but a 'gift') applied to your tax obligations only serve to modify what you owe on those obligations.

Negative cash flow means you're making/made too many errors in running your business.

pull the plug.  bill her security deposit when she vacates.  plug it back in for the next tenant.  

I just did this with one of mine...do we have the same tenant?  Word for word, why do you need a dishwasher blah blah.  I know how to repair, so I dumped all the crap (lemon seeds) from the spray arms and the chamber under the filter screen on the kitchen table for her.  There was even broken lightbulb glass inside the DW.  In my state, it is legal to itemize things in/on the property and exclude them from the rental and identify them as personal property left for the benefit of the tenant.  The decision to repair or replace is mine, and mine alone.  This applies to all appliances.  If I decide to abandon an appliance, it is up to them to repair or buy their own (but only after I have given written permission based on who will install etc)

Face it, honesty and good upbringing are rare these days.

Originally posted by @Jane S.:

OK one person wanted to start a day care in the home. He was up to date on the rules & regs, but his finances probably would prevent him paying the rent BEFORE he bought supplies & waited for parents to pay. It was a nonissue since his live-in didn't file tax returns or have a local bank account, huge red flag. Plus he had never started a business so I rather he make his mistakes elsewhere.

The other hopefuls were a pair of women who worked for a co. called HOST. They had 3 young adults living with them ("day & nightcare" ) not ready to be independent. That's how they made their money, the HOST WEBSITE, IT pays pretty well. But they had too many needs (laundry on first floor, more sq ft, different location, dogs) things i cant change. GIven their knowledge of the location I dont understand why they showed up to view. Waste of my time. They had 1 person who simply opened the door and went walkabout unpredictably, they are not allowed to lock doors. (How is that a safety condition) All kinds of issues plus more that would arise AFTER lease signed AS THEY ALWAYS DO. And the paying organization sets rules. GLad I moved on.

I have a wonderful tenant who uses the garage for his outside job in finish carpentry but they keep the house so perfect in & out and I never know when i will need him to fix something! I would never turn down a handyman or HVAC tenant LOL

BTW I love all the wonderful and useful advice from this network. It's worth the BP membership! 

With that explanation, here is what I can pass along to you.  Both of the examples you gave are, in almost every jurisdiction, needing to be licensed, inspected prior to licensing by at minimum both the agencies(state and local) who license such operations and the fire department.  In addition, specific insurance coverage is necessary beyond renters insurance. 

What frequently happens is that the overhead for these 'businesses' take too much of the cash flow and people try to circumvent by renting single family in areas that they think will help them with some sort of invisibility, no local taxes, zoning inspections etc. ie: grifters. I have encountered more than one of these gypsies looking for a new landing zone because they were discovered somewhere else. It's imperative that you require access to prior year state and federal year tax records, license documents, insurance cover pages and even check with your Secretary of State, Attorney General, and local health departments from where they are coming from to determine are they legit without infractions.   I will guarantee that if you do that, you will find them running off to some unsuspecting landlord.

The mixmaster at the concrete supply will only put calcium chloride into the mix if ordered that way. It is an extra charge.  Some supply houses do it at their place and others weigh it out and send it along with the driver to be added at the last minute.  It is used to speed up the cure with heat, since concrete needs and makes it own heat, and will work to about 22 degrees.  The opposite happens in high air temps, something as simple as sugar can be added to slow the cure speed so the strength of the pour when fully cured is maintained.

This might be a good time to check out a REIT that does the 55plus compliance portfolio.  If the income stream appears to be as you expect (you get operating reports just like a fund) and at any time you can withdraw your investment and parlay it into acquiring your own properties.  If you're unfamiliar with how REITs pay out, check with your trusted advisor of choice.  I own shares in three different ones.  I can say this: don't deal with the ones holding mall properties!  That ship sailed.

If your jurisdiction doesn't have any restrictions via ordinance, then it all falls to you.  The percentage of business revenue model was/is mainly a mall thing.  Notice how empty they've become?

That said, if you tried to dip into my business model after the fact (shame on you for not asking the necessary questions up front before crafting your lease) I'd first start laughing at you for the attempt at extortion, deny the 'opportunity' you're offering me by not agreeing to pay you anything above what's already contracted, then I'd start looking to relocate as soon as it was cost effective.  So then, you're back to where you started with a vacancy to fill.  In my opinion, unless your property offers some super spectacular rare something that benefits their business, you have nothing to offer in return.  I'm not sure what tax advantages you are thinking exist that exceed what they would benefit in contrast to renting an actual commercial space.  All expenses tied to the operation of the residence and rent are prorated on a space allocated to the business use as a percentage of total.  The only gain I see, is they aren't needing to depreciate the portion of the home v a mortgage payment.  If they file a business use of home, then they are way more visible to the IRS for invitation to come into the office for a review.  Been there, done that.

If a dehumidifier doesn't do it, then you aren't going to have a quick fix.  Not sure if you're experiencing puddles that you can see, or just a humidity that can be felt, or worse smelled.

In my experience, dampness can come from several locations at once, especially the older the property.  Concrete floors are permeable unless the pour was done since 1978 and the contractor used 6mil visquene as a moisture barrier over the gravel.  Go to the big box and buy a roll of the heaviest plastic they sell, it should be 6 mil or thicker.  Cut a 3 ft x 3 ft square and using furnace tape preferably or duck tape if that's all you have, tape the plastic to the floor by sealing it all around the edges.  Give it 24 hours and pull it up.  If there's water formed on the side touching the concrete, you have a floor that is passing water up into the space.

If your house is one that has red clay tile (again probably pre 1975-78) then you should see trails across the floor where they have collapsed and created a flow issue. That situation can also create streams and pools under the floor.

In freeze thaw locations with high clay soil, you can get as much as one inch gap between the outside wall and the soil all around the foundation.  When the wet season returns, the soil expands and in some areas enough to crack the foundation wall, even if poured instead of block.  The only way to solve that...dig away the soil and re-partch the exterior using today's technology. 

My point is that if you haven't brought in an expert to evaluate (not all foundation salesmen are experts!), then you may be fixing the wrong problem.  It might cost you a couple hundred dollars to find out, but it could be the best money you've spent.

WHY are they turning it off is the question. That's what you need to solve.

If the husband checks out, then go with your gut.  Even with credit and background checks on everyone on the lease, you have a statistical probability of good v bad close to 50%.  I've had bad tenants even with FICO's close to 800.  You get way more valid info from landlords that are two or more rentals in the rear view mirror just by picking up the phone.

Late to this party but...when doing deals that are so far into the future, one way to save aggravation on either or both sides of the transaction due to life changes (they do happen); use a right of first refusal option contract letter.  Some refer to them as a strike clause letter.  You charge a sum of money (the amount of the security deposit is a good start) from your prospect that locks them into moving forward when the property is ready to occupy.  If the lease is offered at that time and accepted, you (state in the letter) will apply the option money to the deposit.  If however (also state in the letter) the prospect declines taking possession at the time the property is ready, they forfeit the option payment they made.  Also, (state this in your letter) should you not be able to make the property available by or before a certain date, you will return the option money in full along with the notification.  

This establishes a win win, no one is put into a difficult position due to unforeseen changes of mind or life.  No lease exists that creates uh oh's and unnecessary breach of performance stress if something changes.

Also, a reminder, that in such a structure, the money is not required to sit in escrow since it's outside the lease until the lease is fully executed.  It is yours the day you receive it, but once the lease is activated, you need to shore up the escrow to match the lease numbers.  Since a lease is a contract, it is not in effect by any legal standards until money conditions of acceptance are made and signatures are executed. 

Peace of mind is a good thing.