All Forum Posts by: Joe Splitrock

 Is this the standard in Canada or are you citing US IRS definition?

The IRS defines this based on when the house was placed in service as a rental. That is not the day you buy a new primary residence. It is the day your old property is ready to rent and being advertised as a rental. My interpretation from reading IRS documents on this is that you can only start depreciating the home and declaring expenses when the house is rent ready. That would generally mean after updates are completed and you place the property for rent. Here is a specific example the IRS gives that I copied and pasted from an IRS website publication: 

"On April 6, you purchased a house to use as residential rental property. You made extensive repairs to the house and had it ready for rent on July 5. You began to advertise the house for rent in July and actually rented it beginning September 1. The house is considered placed in service in July when it was ready and available for rent. You can begin to depreciate the house in July."

What you will need to do is talk to an accountant. Depreciation and capturing expenses will begin on the day the house is ready to rent. They will work with you to establish a depreciation value. The depreciation value is not what you paid for the house. There are a couple methods to establish current depreciation value and let your accountant decide what is best. 

I am not sure I would worry about claiming the improvement expenses. Any major improvement expense would be depreciated. Since you are establishing your depreciation value after improvements, your improvements will increase value and therefore increase the amount you can depreciate. I guess the point is you cannot double dip. For example if you put the house in service as a rental March 1, then spend $10,000 replacing flooring in April, you would depreciate the flooring expense. If you spend $10,000 on flooring in March and then put the property in service as a rental in April, your depreciation value will most likely be $10,000 higher to account for the improvements. In either example you get benefit from the improvements. Technically you are not supposed to put the property in service until the updates are ready. Basically this means the day you start advertising it for rent is the day it is put in service. 

Some accountants may claim your property went in service before the updates, but I would be careful because the IRS is pretty specific on this. Would you get audited and caught, probably not.

https://www.irs.gov/publications/p527/ch02.html#en...

Please talk to an accountant. I am not one, so my input here is just based on my lay understanding.

I think 15 year is the shortest I have heard of in the last 20 years, but the industry has changed considerably over time, so obviously this 95 year old could be talking about something available more than 75 years ago. I did a quick check and 75 years ago, in 1941, the average house price was $6900 and average salary was $2050. 

I found your topic interesting and located an article talking about historical mortgages. The article explains before 1930 the mortgages typically had short terms, high down payments and variable rates. The article said until the 1930's the only terms available were 5-10 years. Mortgage debt at that time was around 20% of your income. Loans were typically 50% loan to value. Property values dropped 50% or more during the great depression and foreclosures rates went sky high. As a result the government established the FHA and then Fannie Mae was created in 1938. The purpose was to back loans and encourage banks to lend. In 1948 the maximum mortgage term raised from 20 years to 30 years as a way to stimulate the housing market. I didn't see anything specific in the article that talks about a 7 year loan, but clearly that term would have been common at one time for sure in the 1930's. The article stated back then home owners had to renegotiate their loan rates annually. I think it is fair to say the 7 year loan he is remembering was nothing like our fixed rate, 15, 20, 30 year term loans we have today. It would have had higher down payments and variable rates. Of course we all know when you talk to older people, they remember the good old days.

Full article link:

http://repository.upenn.edu/cgi/viewcontent.cgi?ar...

 There is a good point here looking at the big picture. Still, I would argue he needs to find out what the deposits were and if the tenants know they will not receive them back. If the tenants do expect the deposits back, then this is an out of pocket expense he should plan for. If he plans to not give them anything, that could land him in small claims court down the road. My point is regardless of whether he goes after the owner for money, this needs to be addressed with the tenants. Some people would take the attitude of dealing with it later, which I would caution against.

My biggest fear would be that when the tenants move out, they produce a lease that shows you owe them a security deposit. @Oscar TurnerI don't agree not involving the tenants. You should get something signed from each agreeing that there is no deposit owed them and if they will not cooperate the owner needs to transfer the deposits. Why do you feel the tenants will have no incentive to take care of the property? You shouldn't assume that lack of security deposit will make them take poor care of your property. Also if your tenants have no money coming to them at move-out, they should know this ahead of time. If it is legal to deduct late fees like the owner did, then I assume he needs to disclose it to the tenants. The owner could be breaking the law and you need to get this out in the open and clear it up with the tenants before you take ownership.

Look at it this way. They may not be happy, but dealing with it now at least it becomes the old owners problem. Dealing with it later, it becomes your problem.

If the woner lets the deal fall through, good luck to him dealing with pissed off tenants that are angry at him. Something tells me he will make this work.

@Nicole A.and @Mike Cumbiewere correct to point out the risk of doing work in a property before you own it. I only do that if I am willing to lose my investment. Usually I limit it to things like cleaning, patching holes and other low cost items. It is true you would lose that if the deal fell through, so part of the decision depends on how solid the deal is. I have never had a deal fall through at the last minute, so for me the risk is worth the reward. I would never undertake a major rehab or sink anything significant in prior to closing. It is nice to close on a property and put a sign in the yard the same day, but that is just my opinion.

Perfect response and the best reason to be in real estate. You get freedom to follow what you feel passionate about. I will be interested to hear about your first deal. Please make you update us on your progress. Of everything you have posted, the fact that you are ok living a frugal life, is the most powerful gift you have. Too many young people blow hundreds at the bar, on cars, clothing, etc. Much respect to you my friend. Good luck!

Even aside from complete scammers, I notice on forum posts lots of people offering to help. Someone advertises how should I spend my $50K and magically three or four people have a great way to give them double digit returns. Some people are probably legit. There are lots of new investors on this website and I wonder how many of them have been scammed. 

The statement that they are unaware of where the deposit is makes no sense and is not legal. They are obviously holding back information, because either they kept it or they didn't. This is pretty simple. The tenant paid $350. When they moved out, the owner either gave them back the $350 or kept the $350. If they kept the $350, there needs to be an accounting of how and why they kept the money. It varies by state, but typically they are going to send a letter to the tenant showing deposit deductions and the reason. For example if they took off $100 for cleaning, $50 for a broken thermostat, $100 for carpet damage, $100 for wall damage, then they need to use the money for remedy.  You are not guaranteed the money, but you should get an accounting of how the money was spent. If they chose to keep the money for damage, but not remedy the problem, then the money should go to you.

You need to decide how far you want to push this. At best you will get $350 probably minus the cost of the thermostat. You could threaten to delay closing or cancel the deal and basically call his bluff. It is only $350, so most reasonable people would just write you a check to make sure the sale goes through. If he loses this deal, then he left with a vacant unit to rerent, so it will ultimately cost him more than $350. 

My bigger concern would be getting the unit rent ready. Time is money and one month of lost rent is more than $350. I would be trying to make arrangements to get into the property before closing to get cleaning and repairs done. If it was me, I would agree to let them keep the $350 only if they let me into the unit to get it ready. That way on closing day you can have the property advertised and ready to rent. You will make back the $350 with a fast turn. It is win-win. The seller gets his $350 and you get someone in sooner.

@Craig MooreI think your goal of one property per year is a reasonable. I have read some other people starting out that have crazy high goals. I am not sure with that goal you will retire at 30, but maybe if you keep going you could retire at 35. Most likely you will not want to retire at 30. Although it sounds good today, you will want to be doing something even if it is actively building your rental business. I wouldn't worry about retirement today, because you will know the right choice when the time comes. It is great that you are frugal and willing to save your money. 

As far as your numbers specifically. You are saying you could live off $12-$15K per month. I do not think buying one property per year for 7 years will get you there. That will mean that each property will need to cash flow around $2000 per month. Even if each property is a 4-plex, that is $500 per door. That is going to be challenging. 

I guess to summarize, I think one property per year is a good goal, but I would move out my retirement plans. You could alternately increase the number of properties per year, but I am a firm believer in keeping goals achievable. I would start with one property, then see how it goes. Revise your goals each year. You may find after two years, you change your goal to 3 or 4 properties a year. It is hard to say, because so many factors play into this.