All Forum Posts by: Denise Evans

@Bill Walston, my bad for not being clear.  I see I posted at 6:21 in the evening. Note to self:  "Remember, you are a morning person who usually rises at 5am, and not at the top of your form in the evenings. DO NOT POST after 3pm!"  That probably explains why I started looking for legal precedent on this issue and then gave up and was satisfied with a nudge in the right direction!  I'll see if I can find some more definite guidelines to share with everyone. It's often not the IRS we have to convince, but our own accountants. :)

@Bill Walston, I was not saying that was the decision of Byram, I said to take a look at it.  It is the beginning point of research on this topic.  I am comfortable with the advice I gave, and have no need to spend hours on the legal research finding the support.  If someone else wants to do that, I gave them a starting place.  No, the decision is not relevant to the typical wholesaler. It is relevant to the original question, which related to a desire to engage in some flips to generate capital for long term capital gains. That is defensible as investment income, not ordinary income.  And, while you are correct that only 7 flips were at issue, the  history of 22 sales was a factor in the analysis.

@Marcus Perkins Sr  The former owner can redeem at any time during the 3 years after you take possession of the property, even if you have a tax deed.  Some experts believe that if you have 3 years of possession starting with the tax certificate, then the former owner does not get an additional 3 years. Some experts believe the former owner gets at least 6 years from the tax sale, no matter what. Please send me an email off-post, and I'll send you my phone number so we can discuss. It is very fact-specific. 

If you've been cleaning and fixing up the property, you are entitled to the VALUE of these "preservation improvements."

If you have access to Federal Court reporters, you might want to read the case of Byram v. Commissioner, 705 F.2d 1418 (5th Cir. 1983) for a decision that 22 flips in 3 years were, nevertheless, investment properties.

If your business plan has a goal of flipping SOME properties in order to raise capital for your long term investments, then the flips are not considered "dealer" properties and you can take advantage of tax benefits designed for investors.  MAKE SURE your accountant does not report the income on Schedule C.  If your accountant is not on board with this, get a new accountant!  You can't flip a lot of properties and rely on a business plan to "hide" your from the wrath of the IRS. But, if you strategy is truly to do a few flips to raise capital, you should be okay.

I also have a free article that tells you how to set up an online repair request system, if you don't have one of the property management packages that handles that for you.  It's on my website, under the same landlord/tenant tab.

Go to my website. I have a book that's a landlord's desk reference and forms book. It is for Alabama landlords, and large chunks will not be relevant to you. BUT, click on the link for the table of contents and the list of forms, to give you ideas about forms you might need to collect or create. 

When drafting forms, I like to see titles of forms, and then not read them right way. I like to create a list of problems that might be solved by that form. THEN I read the form, and see if it covers all of my needs. If I read the form first, then I get "channeled" in my thinking, and have a tendency to just go along with the form, without revisions.

Also, Appfolio has an excellent collection of forms you can modify.  Have you taken advantage of their 14-day free trial period?

Hi Milan, Even when self-managing, enter a management fee comparable to what 3rd parties choose. If you enter only 5% because that's all you charge yourself, then any lender or future buyer will enter a different number to reflect actual market conditions.  I like to avoid any opportunity for people to even THINK about tinkering with my numbers. Once they get started "recasting the financials," then goodness knows where they will stop. The more they increase those expenses, the lower the price goes, as you know.

The estoppel letter is for tenants to say they have not prepaid any rent, the security deposits are as represented by the current owner, there are no side agreements either oral or written, there are no unresolved repair requests and the tenants have no claims or disputes with the current owner. The last thing you want is to buy a property and then half of the tenants say, "I TOLD the prior owner there is mold in the spare bedroom closet and he said he'd fix it but he never did, and now I want YOU to fix it or else" or "I had an agreement with the prior owner that I could pay a $50 fee and cancel my lease early." You might win in court on either one of these, but you would be out a lot of legal fees and aggravation. The estoppel letter avoids many problems.

9-cap is great for such apartments!

I like to include a "Rules, Regulations and Fee Schedule" as an addendum to my lease. This is the place where you spell out the rules, and attach a price tag to breaking the rules.  For example, "No pets allowed. If we discover credible evidence you have been keeping an animal, you will be notified of the default and informed of the steps you must take. There will be a fee of $____ for the notice, and a fee of $____ per site visit to follow up regarding this issue. Site inspections might increase to as many as one per week for up to three months after the default notice, to make sure the problem has not recurred. These fees are for the increased work involved with having an illegal pet. You may also be liable for damage to the premises, and any problems you cause with other tenants because of the illegal pet."

Be sure to post and tell us when closing has taken place. We all like to hear the happy ending to the stories.

Are your tax and insurance numbers real, or just an estimate? Property management expense should be increased to 10% unless 5% is routinely available in your marketplace. This will affect your NOI, and your valuation. Is a 10-cap average for this type of apartments in your market place? I seem to recall modest apartments with large percentage of Section 8 selling on an 11- or 12-cap. Although, with some paint-up/fix-up and a security system, you should be able to shave at least a point off the cap rate.

Depending on the age of the apartments and the appliances, you might need to increase repairs and maintenance, or set up a reserve for capital improvements. The deal still cash flows like crazy, though.

I really like Appfolio, because it is more robust. The $160 per month price difference will seem insignificant when you think about how much you will have to do manually if you don't use Appfolio. I also like their commitment to their clients with continuing education, blog advice, and other assistance.  The property inspection module alone is well worth the price, with the ability to do inspections, take photos, assign property conditions to each room and take notes, all on your smart phone which then synchs to the desktop.  No scanning reports or photos. No filing. No putting together before-and-after photos or timeline comparison reports. It all happens in the software. So easy, a temp or intern can do your inspections for you. We all know, the easier it is to do inspections, the more likely you are to do them, and the more problems you will avoid or catch in the early stages.

I like to get everybody on my own lease form.  It cleans up a lot of poor drafting problems that can create headaches. If you decide to do this, offer a $25 incentive for people to cancel their old leases and sign new ones at the same rental rate and other important terms.

If you did not get this during your due diligence, immediately obtain estoppel letters from all of your tenants.

Think about cost segregation depreciation to increase early-year deductions and shelter more income.  If you are not greedy with your allocation of components, you usually do not need to hire expensive professionals for such a small project.

Finally, are you 1031-ing into this project?  Look before you leap. Are you confident that long term capital gains tax rates will remain low for many years into the future?  Many experts think those days are very limited. Depending on your own crystal ball and tax bracket, it might make more sense to take the hit this year and pay the long term capital gains taxes, rather than defer to a later year when the rates might be higher.

Good luck, and congratulations!

Hi Erica, what types of investments interest you or strategies interest you? How can I help?  Denise