All Forum Posts by: Erik Kubec

We bought several properties over a 13 month span from Dec '11 to Jan '13 in Adams County.  According to both my Realtor and Zillow (please no Zillow bashing here) the properties have collectively appreciated about 40%.  Or in other words,  I would need to pay %40 more than I did to get these same properties.  Vacancies hit a 20 year low in the past year (per regional stats and my property manager who has 200 properties and has been in business for 25 years).  Can't find a deals  (at least I can't) like those anymore.

Good questions.

Spend less than you think you should.  You being a new landlord, you are wired to want the place to look like you would want to live in it.  But you are renting to a renter, who may or may not turn out to be someone who takes care of your property.  I can speak from experience, spending $15k on a rehabbing a property only for the tenant to trash it.  

Additionally, I would suggest that the rent you are able to get is mostly a function of the market, the size of the property, and the location.  In other words, you won't get $200 / month more on a property because you spent a lot of money if that $200 makes it much more expensive than comps.  (would love to hear from other BPers if they agree with this).

Now the math on this changes if you are in the 'Executive' high end rental market.

With regard to the carpet, if it is nasty, tile the floor.  The entire place.  Don't put new carpet in it.  One stressed cat will ruin that investment in one year.

Replace curtains with cheap metal blinds?  I wouldn't do it, unless the curtains are nasty.  Appliances?  If they work and are clean, leave them in.  

The thing I would recommend is inspect and replace all plastic/rubber plumbing parts.  This is fairly easy to do and will give you piece of mind that you won't be getting calls from the tenant complaining about leaking faucets or pipes.

I concur with OP and Jon. 1.5 years of smooth sailing, +++$$$ above PITI every month, and then BOOM: 1 property with non payment of rent, destruction, eviction. another property with early lease termination, pet urine soaked carpets, and bed bugs, and another with likely bed bugs. So $3k of expense for repairs and clean, $4k for cap ex on tiling one property, no rent coming in for a month on both of these, and bed bugs still dealing with.

Pretty much a rough quarter.  On the bright side, 2 of the 3 properties had rents increased 10 - 20 % and quickly found what so far are good tenants.  The one with tile should not have carpet cleaning costs again.  

It did force me to look at financing and cash flow management. The $4k for tile is a capital improvement in an asset that is designed from my retirement. So I decided to create an LLC whose 'job' it is to do maintenance on these properties, manage contractors, etc. Then I created a Solo 401(k) (through equity trust company) and rolled my self directed IRA into the new 401(k). Now I can borrow against the 401(k).

I understand that borrowing against the 401(k) is generally a bad idea, however, in this case it is 'like for like.'  As long as I am using the loan for capital improvement (eg. tiling a house), I am borrowing from my future self to capitally improve assets that are held for my future self.  Then I am paying my future self interest (with a slight hit for double taxation on the interest, but at least that interest is going to future self rather than another bank).

The 'trick' is obviously to keep a 'firewall' of the loan money and not let it seep into consumer spending, or not let it cover non capital expenses.  Nothing 'disqualifying' about that, but it is bad money management.  

But yes, having essentially a $10k hit was rough this quarter, and put stress on me and my family.  Having a way to handle that if/when it happens is important

My property manager advised to allow pets, since everybody seems to have them.

One of the properties we acquired had all carpet, and the carpet was in good shape when we rented it out.  After they left and a new tenant moved in, they complained about the pet odor, even though they have 3 dogs (only 2 allowed on the lease).   They wanted something done about the carpets.  

Technically, the carpet was the same when the signed the lease as when they moved in.  But their kid had a reaction to something, has an oxygen machine now, and they attribute it to the carpet. Again, they have 3 dogs.  

The way I looked at it was sure I probably was not 'on the hook,' but if they moved out, the carpet would still be nasty for the next potential renter.  The additional dog?  Do I really want to evict over one additional dog?  So I bit the bullet and had the whole place tiled.  No more carpet cleaning bills or urine seeping into the carpet pad and floor board.

Thanks @Loren Whitney. Yes, makes sense. Yes, I was not clear about the IRA held property. I don't touch that. Property manager handles it, I just send the checks to ETC.

Thanks @Eliezer Davidson. That is what I thought--single member LLC, pass through to by personal tax return. Not sure what the guy at ETC was talking about, but he was fairly junior

Hello folks,

I have had a Self Directed IRA at Equity Trust Company for a couple of years and highly recommend the company.

As part of our retirement plan, my wife and acquired 4 investment properties as follows: 3 SFRs owned by her and myself, and 1 condo owned by my IRA held in trust at Equity Trust Company.

Well, there is a good chunk of cash in the Self Directed IRA, and recently one of the SFRs incurred a $4,000 capital improvement in the form of tiled floors.

I want to be able to access the $$$ in the retirement account to pay for capital improvements only on the properties, since both 'accounts'/'assets' have the same purpose:  setting us up for retirement.  So with a solo 401k, I can borrow up to 50%/$50k for any purpose.  

So I began to initiate the process to convert the SDIRA to a Solo 401k.  

First, I set up an LLC. On a regular basis, I personally perform work on and for the properties ranging from maintenance to 'asset management': hiring contracts, sourcing materials, etc. This adds up to a few hours a month. So I registered an LLC here in Colorado with me as the sole member, and no employees. The idea is that now the LLC will be performing that work, or more specifically, Erik Kubec as Sole Member of the LLC is performing the work. So the properties will have Schedule E expenses where the money goes from the properties to the LLC.

Now the LLC has to pay Erik Kubec (filing jointly with wife a 1040). The plan is for the LLC to remain a 'disregarded entity' and the income to flow into the 1040, and to pay the self employment taxes.

I got a call from a junior guy at Equity Trust after I had submitted paperwork in which he said that 1099 income is not considered eligible for solo 401k contributions, but W-2 is.  He mentioned that the IRS can only recognize 'earned income', and 1099 is not that.  To further confuse the matter, he said that some folks had found a 'loophole.'  He ended, of course, as he should have, by reminding me to consult a CPA or tax accountant.  

So the question is how will the LLC pay me? As a sole member / no employee LLC, I believe I do not need to run it as W-2, or as 1099.

Do I need to pay myself a regular salary? If so, must I set up a W-2 or can I just pass through? Can I just pay myself pass through profits at the end of the year? I believe I need to pay my self a reasonable market rate for the work I do under/as the LLC, which is fine. And I need to pay the SE tax on that.

Any thoughts on this?

Hey folks,

I have been looking on BP forums, but can't find the info I am looking for.

I am looking for some SaaS/cloud software (eg.--run from the browser/web and require no download) to help with managing income, expenses, and taxes.

The key feature I am looking for is the ability to upload images of receipts. I have found the best way to manage receipts is to take a picture of the receipt immediately after purchasing and then email that pic to myself, which acts as a reminder.

I have been using easy rental tools, which I really like, but it does't have this upload capability.

I only have a handful of properties, so the more enterprise ones are much more than I need.

-e

I don't know what the rules are for transferring $$$ out of an active 401k in which you are participating to that of a SDIRA. I had 3 401ks from previous jobs that I rolled into an SDIRA to fund it, but again, these were previous employers.

Not sure how you are going to buy a $49k property for $20k. Technically it is possible to get a loan for your IRA, but it gets complicated. First, you are going to be charged high interest as it is a non-recourse loan to an entity that has no other assets or ability to earn. Second, UBIT taxes kick in when you use leverage. This means that part of your IRA's income--if it comes from leverage which it would--would be subject to taxes.

Please don't take this as tax advice, but rather conversation around a concept that is related. Talk to a tax person.

I took about $55k total from 3 401ks and rolled them into a SDIRA, and then directed the IRA to purchase a $35k condo which I now rent out for $850 / month

So I would guess that a lot of land lords like me scour craigslist trying to get things 50% of new / retail.

But Craigslist can be a bit dodgy.

Just the other day when i was trying to source just the right sized fridge, I found an older lady on Craigslist who had such a fridge that she was unloading from an estate from her recently deceased mother. We ended up meeting twice: first for me to measure and pay for the fridge, second time for me to come and get it. The second time she told me that she had a concealed weapons permit but that she wasn't armed now (implying she was the first time we met).

Another time a few years ago, I found a great deal on Craigslist for one of those configurable aluminum ladders. I went to pick it up on a Sunday morning and was met by a very anxious looking guy without a whole lot of teeth. Further, he had a roommate that kept repeatedly opening the door of a bedroom, checking on our progress, and then shutting it.

My instinct told me that this guy was tweaking/jonesing and needed to sell the ladder for cash for drugs. I got really nervous and then it dawned on me that this ladder seemed 'out of place' for this guy--likely it was stolen. But I was in his apartment, I had cash--which he knew--and the best thing to do was to give him the cash and take the ladder and be gone. On the way out the door he said "Keep my number, I can get things."

But the worst and strangest experience was when I responded to and ad for some oak cabinets in a well-to-do neighborhood. I get there and they are still installed. The guy appears to be moving out of the house. We start dismantling the cabinets and I ask him what is going to go in their place--thinking he is renovating the kitchen or something as part of a sale. He doesn't really give me a straight answer. I am swing away with a sledge hammer, and poke a nice hole in the dry wall, and he doesn't seem to care. After ripping those out and cutting my forehead with a shard of tile and thus needing to wrap my head in a bandage to stop the bleeding, I load the cabinets in my truck and drive off. About a mile down the road, a cop pulls me over.

He asks me, "Where did you get those cabinets from? I told him and he says, "they weren't that guys to sell. Follow me back to the house so we can get this straightened out." Remember I have this bandage on my head as well at this point.

So I head back to the house and there are about 4 other cop cars there.

After 30 minutes, the cop comes back and says "You are free to go" (with the cabinets)

Hmmm. I think I seriously need to consider paying full retail price for more things.