All Forum Posts by: Lisa Marie

Hi, my beach house STR needs some replacement kitchen chairs. When I bought the house, all the furnishing came with the house so I didn't have to do anything. Now, a couple of years later, several of the chairs are banged up pretty bad and need to be replaced. Those are clear plastic chairs -- very good looking, and because it doesn't have any upholstery, super easy to clean. I can understand why the previous owner bought them.

Now it's time for me to replace them, I am wondering if the the clear plastic chairs are too much on the "cute" side, not enough on the "sturdy" side.  I would appreciate recommendations on good kitchen chairs.  Because it's for a beach house, I would prefer to stick with non-upholstered kind.  But more important than anything else is the sturdiness.  I don't mind paying more for good quality, but nowadays, price and quality are not necessarily correlated.  A $500 chair can be just shoddily built as a $50 chair.  

Thanks for your help.

Lisa

@Caroline Gerardo Appreciate your input.  We tried to stay on the right side of the law with everything we do -- that's why we have been following the accountable plan for reimbursement on everything we buy or spend for the rental house, as if we were employees working for a regular company. On the other hand, we also don't want to leave money on the table if we are legally entitled to get reimbursed for some expenses such as the home office.  

For the record, we don't spend a lot of time in that "office" room (about 8~10 hours a week for each person -- communicating with the PM, coordinating with contractors, shopping for furniture and home decors, working on the guest book and website, etc.), but we don't use that room for any other purpose. Before we had the LLC, that room was basically unused; so we truly can claim that we use the office exclusively for business related to the rental property.

Having said that, we know we are entering unfamiliar territory with the home office reimbursement, hence we are asking for help.  You are right -- it's not realistic to expect a comprehensive answer on the forum.  I was hoping to get some responses from the regular CPAs, and then maybe engage with one of them deeper offline in a professional arrangement.

Hi, my husband and I are the only two members of an LLC (partnership status for tax purpose). The LLC owns a property outside the state where we live. We have a dedicated office in our primary home that we use exclusively for LLC related activities. We purchased the property in Jan 2021, so tax year 2021 will be our first tax return.

My question is about the reimbursement of the home office expense.  We have read various articles and watched various Youtube videos and are getting conflicting messages.  

1. Is it legal as a partner of the partnership to be reimbursed by the LLC for the home office expenses? We have established an Accountable Plan and a reimbursement policy, which governs how we reimburse ourselves when we travel from home to the property to do maintenance and repair work, or when we buy supplies for the property. We file an expense report every time and get reimbursed, using receipts for purchases, and IRS mileage for driving our cars and per diem rate for meals. (I used to work as a bookkeeper at a company, so I have been using my previous employer's travel/reimbursement policy as the template for our LLC.)

So the key question is: Is it legal to be reimbursed for the home office expenses as members of an LLC? Can we file an expense report in the same way as the travel expense?

3. By the way, we prefer to go through the reimbursement route instead of taking a deduction on Schedule E -- based on what I have researched, we would actually get more money, and it's cleaner and hopefully would rouse less suspicion from IRS examiners.

4. I know there are multiple ways of calculating the home office expense.  Based on what I learned from the internet, it seems that the best way is to count the number of rooms in the house and take a percentage of the total household expenses, i.e. we have 4 bedrooms, 1 living room, 1 dining room, 1 kitchen, 1 office, so the office expense should be 1/8 of the total expenses, including property tax, utility, home insurance, etc.  

5. I plan to wait until the end of December to do the home office reimbursement for the year, since I will need to know the exact amount of utility expense for the year.  I won't know the Dec utility expenses at the time of the reimbursement, but I plan to estimate it based on Nov's utility expenses.  Is that ok?  Alternatively I could wait until Jan 2022 to reimburse myself for the 2021 home office expenses, but it will become a part of the 2022 P&L calculation, so it will not help us to reduce our taxable income for 2021.  

6. Since my husband and I are both using the home office and we are the two members of the partnership LLC (it's set up with him having 75% and me having 25%), do we have to get reimbursed for the home office expenses along the ownership percentage, i.e. he gets 75% of the reimbursement and I get 25%? Or can I just file one reimbursement form and get the whole thing and he will not get any reimbursement? Our income tax return will be married filing jointly, so it doesn't matter for us if he gets 75% and I get 25% or I get 100% and he gets 0, but does it matter as far as the tax return for the LLC is concerned?

I know we have several CPAs frequenting this forum.  I am probably going to hire one of them to prepare the partnership 1065 and K-1 in 2022, but I don't have a CPA right now.  I don't want to wait until we hire a CPA in 2022 and then discuss this issue with him/her at that time.  I want to make sure we have the proper procedures in place and be able to take the reimbursement before the end of 2021.

I would really appreciate any feedback on the plan I have outlined.  Thank you for all your help.

Lisa

$26,000 operating expense seems to be way too low. I don’t know how they estimated it but the back of the envelope calculation shows a house that generates this kind of revenue would require much higher expenses. I own a beach house and I spent more than 20 K annually just on fixed overhead (tax insurance electricity water sewer and internet). That’s before any guest even even walks in the door. But every house Is different and every location is different, so you just have to be careful with your estimate 

My husband and I have been looking around Massanutten area for a while, but couldn't find a good enough deal to pull the trigger.  @Keith Long, if you have more details on this property, we would be interested in taking a look and see if it makes sense to partner.  I will DM you.

I have posted on Massanutten before about the lack of returns of available STR deals. But if this place is more of a fixer-upper, the numbers would work out differently. https://www.biggerpockets.com/...

I am by no means an expert or even a veteran in real estate, but I have been on BP for a while and can’t help noticing that more and more people are coming on the board with a question like “I have decided to get into this business. I have $20k to spend, and no experience or skill otherwise. Please tell me where to buy the houses so that I can make the most money/ do the least amount of work.” If this is a forum for medical doctors, I don’t think there would be somebody announcing “I have never gone to medical school, but I have decided to open my own practice. Should I be an anesthesiologist or a surgeon? Which one makes more money?”

Real estate business is just like any other business. If you want to be good at, it takes passion and hard work. It is not a get-rich-quick scheme. Malcolm Gladwell famously said that it would take 10,000 hours for somebody to become truly good at something. We can debate whether it takes 10,000 hours for real estate business, but I think everybody gets the point.

However, in my opinion, real estate is also different from other business in the sense that it has a special status, due to the fact that the government wants to encourage home ownership, and consequently sets up all kinds of programs (Fannie and Freddie, tax deduction, etc.) to make it easier and cheaper to buy houses. Those of us who run real estate as a business are unintended beneficiary of this government policy. In my mind, that’s the biggest advantage of the real estate business vs other small business like a food truck or a barber shop. 

The real estate business really has 3 components to it: rehabbing/flipping, passive landlord, and property management. Real estate investors often do all 3 components without being fully aware what role you are in at any given time. The problem is that people tend to mix these components when they talk about their financial results. When you buy a fixer-upper, renovate it, furnish it, and set it up as an STR, then manage it yourself, your return on investment will certainly be a lot higher than somebody who buys a turn-key property and hires a PM to run it. That doesn't make you a better investor. That just means the money you make is a combination of the passive income from being a landlord, plus the profit from flipping (effectively you sold the newly renovated house to yourself), and plus the fees you would have paid to a PM but now you are paying yourself. I cannot count the number of times when a person comes on the forum and asks "how to find property managers in area X" and be greeted with a chorus of "don't use property manager, do it yourself". The OP just wants to be a passive landlord, but the others are trying to convince him/her to get into the PM business. It is the equivalent of your neighbor paying somebody $40 to mow his lawn vs you cutting the grass yourself and claiming that you made $38 more than your neighbor because it only cost you $2 of gas.

So if you are a new investor, you really have to ask yourself – what value am I bringing to the table? What role do I want to play? Rehabber/flipper? Passive landlord? Or Property Manager? If you have no skill in #1 and #3, or if you have a busy career earning a good W2, then you should stay within your lane and just be a passive landlord, but accordingly, you need to adjust your expectation. A passive landlord is basically the money man who came up with a 20% down payment and used his personal credit history to borrow the rest. If the professional money man (bank) is lending out money at 3% or maybe 5% (for a hard money loan), then you really should not expect much more than 3~5% on your return on investment. Don’t get distracted by all the other posters on BP talking about how much they are making. They are earning the money as a flipper and/or property manager. On the other hand, if you want to do this as a career (or if you have an easy W2 job which gives you a lot of free time), then you can invest your time and energy to become either a flipper or a PM, which of course will bring you more income, but then you are taking on a second job. At that point, you should ask yourself “am I good at being a flipper or a PM?” If you are honest with yourself, you may realize that you would be better off driving for Uber in your spare time instead of trying to renovate a house; or you may be better off working harder at your day job and trying to get a promotion and bigger paycheck.

Sorry if I sound grouchy. I am just feeling that we have so many people getting into the business without fully thinking through the ins and outs. Ultimately, this is a business and we are in a capitalist society. You can make money if you have something valuable to offer. If it's your skills in renovating a house, great; if it's your skills in marketing and hospitality, fine; if it's your vast amount of money, that's good too if you can leverage it into multiple loans, but different skills have different values and they bring in different amount of ROI. Just be realistic in what you can offer and what you expect to receive.

@Kingsley Thomas You are right, $500k house making $60k gross is not great in the STR game, but based on my research, that's about as much as one can make. By the way, these revenue numbers and expense numbers come from the current owner who has the incentive to sell the house, so if anything, he is likely to make the numbers sound better.

I am just not sure if there are that many $200k houses making $60k. We have been looking in the Massanutten Resort area for SFH. Based on what I am seeing, $500k is quite a reasonable price for a 4~5 bedroom house in good condition, in an area suitable for STR. (I am not into fixer upper.) And I have looked at AirDNA as well as old fashioned VRBO/Airbnb scouting. Almost all the houses in Massanutten rent for between $200~400 a night. 70~80% occupancy is on the higher end of the spectrum. Assuming 250 nights x 300 = $75k, but that's what people are paying, not what I will receive. After CC fee and platform charges, the gross income to the owner is about $60~65k.

That's why I am curious to see if anybody who has successfully run a STR in Massanutten is willing to share some real numbers. Then I can learn from them and see where my estimates are off and where I can find a way to goose the income or reduce the expenses.

@Paul Cox and @Justin Knighten, do you self-manage the rentals? Do you mind sharing your numbers in terms of ROI? My husband and I are looking at a couple of different properties in Massanutten, but we just cannot make the numbers work: if we self-manage, we will barely break even; if we hire a PM, we will be paying thousands every month.

Before others jump in and tell me how easy it is to self manage, I just want to say that we have stressful W2 jobs and live 7 hours away, so self-manage is not an option we want to take on. We don't need a huge return on this investment. We are looking at it more as a diversification from the stock market investments, so we would accept a low ROI as long as it's cash flow positive, but we have not found anything that makes financial sense.

Here are the numbers we are looking at: $500k house with 4 or 5 bedrooms. Annual gross income is about $60k (estimating 40 stays). Tax and insurance premium are about $5k, utility (including internet) is $9k, cleaning fee is about $7k (based on 40 stays), maintenance $2k, wear and tear items $3k, and set aside $5k for big ticket items. That's $31k total expenses. If I put 20% down, and get a $400k 30-yr mortgage at 5.5% interest rate, annual mortgage payment is about $28k. Right here, without paying the PM, my annual expense is basically equal to the income. In other words, I have to come up with $150k up front (for mortgage down payment and furnishing the house), and spend the time and energy to run the STR business, to just break even.  In other words, for the privilege of owning the house that we may use once or twice a year, it will cost me $150k.   On the other hand, I can put $150k in a mutual fund or ETS, doing literally no work, and getting 4% dividend payout which is equal to $6k, and I can spend that $6k to rent a house in Massanutten for 2 weeks.  (Note I didn't count the possible appreciation of the house, but I didn't count the possible appreciation of the stocks either.)  

That calculation doesn't include the PM expenses. If we hire a PM, the going rate in the area is 22%, so we will be negative $13k in cash flow.  

Is everybody investing in this area looking at similar numbers?  How are people making money in this setup?

I don't own a STR in Adirondack, but I am interested in the answer. I own a STR near a beach, and would love to diversify with a second property in the mountains. Adirondacks is on my radar, but I have not found anything good to buy.

I have heard through word of mouth that there is a pretty big demand on STR in the area. However, a lot of areas in Adirondack are really remote -- no electricity, no sewer, etc. Therefore, the house will have to be well designed and constructed to have creature-comforts such as solar panels, rain barrels, septic tanks...

@Lindsey Martzke If you want to use a loan to buy an investment property (which will be held by an LLC), I think you have 2 ways:

1. Take out a loan against your personal property such as a primary residence. Basically you are finding cash outside the LLC and use it to contribute to the LLC as your capital contribution. It doesn't matter whether you got the money through a loan against your personal property, or if the money comes from your savings, or from trading bitcoin or Gamestop shares. :-) But if you do get the money from a loan against a real estate property, the interest may be deductible.

2. Take a mortgage in the name of the LLC, against the equity of the investment property. Most of the normal mortgage lenders won't do that, but a few places will. One of them is called Visio Lending. My husband and I looked into Visio when we bought a STR beach house, but we eventually didn't go that route because we wanted to be able to offer full cash in order to make our bid more competitive. We ended up taking a HELOC against our primary residence and use that money, i.e. we did method #1.