All Forum Posts by: Simon Lee

Quote from @Noah Laker:

Quote from @Simon Lee:

I just looked up the Sacramento STR laws and it appears to be accessory use only, meaning you can rent out a room (house hack) or ADU, but you must be a primary resident of the property and prove it. That's a bummer. I have family in Sacramento and Roseville and was hoping to deploy some capital there.

*The short-term rental must remain an accessory use to your full-time occupancy.

Under no circumstance shall the short-term rental services become the primary use of the property.*

 This is for the unincorporated County area. The City is much more agreeable. 

Thanks! That's very good info.  I have a few multifamily listings that I am interested in getting more info on.  Can we connect?

Quote from @Vikranth Biradar:

Quote from @Simon Lee:

Some already good advice in this thread...

I'll try and add a few more tidbits.

It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that.  In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you.  One good way to do that is to purchase towards the end of the year and put the property into service.  That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.

Also, another good one, is that material participation does not count until you are in contract on a property.  

I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K.  You multiply that with your tax rate to see your tax savings.  

You can target larger homes with cheaper land to get a bigger cost seg.  For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.

There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume.  You can always 1031 exchange to kick the can down the road.

Also, bonus depreciation is a tax strategy.  It is not free money.  You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.

Thanks for this answer. It is really helpful. 

I am not sure what you mean when you say - material participation does not count until you are in contract on a property. Can you please elaborate? Thanks a lot 

Sure.  It’s probably best explained with examples.  If your realtor shows you a few properties and you don’t end up buying them and it takes 3 hours, that isn’t considered material participation.  On the other hand, if you have a signed contract on a property and you are present at the inspection and walk the property for 3 hours, that is considered material participation. 

I just looked up the Sacramento STR laws and it appears to be accessory use only, meaning you can rent out a room (house hack) or ADU, but you must be a primary resident of the property and prove it. That's a bummer. I have family in Sacramento and Roseville and was hoping to deploy some capital there.

*The short-term rental must remain an accessory use to your full-time occupancy.

Under no circumstance shall the short-term rental services become the primary use of the property.*

Some already good advice in this thread...

I'll try and add a few more tidbits.

It looks like you are going for the material participation test where you do 100 hours and no single individual is going to exceed that.  In the case of an audit, not only do you have to prove that you did at least 100 hours but you also need proof from your vendors that they did not do more than you.  One good way to do that is to purchase towards the end of the year and put the property into service.  That way, you will likely already have hit your 100 hours of material participation, but your cleaners, for example, would not have exceeded you since you would have only had a few bookings before the end of the year.

Also, another good one, is that material participation does not count until you are in contract on a property.  

I'll echo @Alyson Gordon's that the bonus depreciable items (less than 20 years depreciation schedule) will most likely be 15 to 20% of the 80K.  You multiply that with your tax rate to see your tax savings.  

You can target larger homes with cheaper land to get a bigger cost seg.  For example, I have a cabin near the smokies that I purchased for about 1.1M, the land cost was only 50K, but had a lot of bathrooms/fixtures, 2 kitchens, window coverings, etc., and my cost seg firm was able to hit 30%, so I got to write off about ~300K against my W2.

There will be depreciation recapture when you sell, but it is a lower tax rate (25%) than what you are at currently, I assume.  You can always 1031 exchange to kick the can down the road.

Also, bonus depreciation is a tax strategy.  It is not free money.  You are borrowing against your future depreciation (in year 2 onwards), as future depreciation will be less since you took a huge chunk in year 1.

Quote from @Jason Harty:

Hey all!

It is with super excitement that I share that my wife and I are in contract for our first investment home that we intend to rent out on a short-term rental basis. The property is located on the beautiful Lake Norman in Mooresville, NC. The property is located just 30 minutes north of Charlotte and just a few minutes off of I-77. The property is a SFH outside of any HOA and we are purchasing from the original owners of 30 years. The property can use a little TLC, but not much at all. I am a contractor by trade and will be doing any renovations myself quickly to get the property listed for use ASAP.

I would love to speak with people in the Lake Norman area that are currently renting on a short term basis and learn from what you are doing.  Thanks to all who comment or reach out!

 Congratulations!  Best of luck on the reno!  Would you recommend the realtor you used?  I'm considering investing in two properties this year in the NC/triad area and Mooresville is very compelling to me.  

Quote from @Caroline Gerardo:

You live in CA you work in CA. You owe CA taxes and they aren't going to be friendly when they grab your bank account or take you vehicle. Move to Nevada or Wyoming, not Washington I hear they are moving to have state income taxes.

Calling an unknown attorney, they don't know if you work for Franchise Tax Board... there is that.

Thanks Caroline -- I don't necessarily have issues paying taxes. I've been paying the highest CA tax bracket on the W2 side for many years now and have done nothing to mitigate the income. My question is really about the $800 franchise tax which consumes a part of the investment return. As I mentioned, I think I'll need to eventually use DSCR loans to scale up and most (or all) of them require closing in an entity. Are all of your properties in LLCs (CA or foreign registered in CA) and you pay $800 annually per LLC in CA?

Quote from @Travis Biziorek:

Hey Simon, I scaled from 0-12 doors in about 2.5 years.

You know what my legal structure looked like? 

Buying everything in my personal name and carrying a large umbrella insurance policy.

It's highly unlikely your LLC structure is going to protect you if push comes to shove. That's not what your lawyer is going to tell you, of course. But they make money when you create these complex structures.

Spending a lot of time on this is also a great way to head down the analysis paralysis rabbit hole. It's preventing you from actually getting started.

I remember thinking through all this in the beginning as well. I got frustrated that I was spending all my time and energy on something that wasn't moving the needle forward. 

Finally, I asked my lawyer one basic question: "How many times have you seen a client with the proper LLC setup sued and ultimately have the LLC provide the protection it is supposed to provide".

Silence... then, sheepishly, "none".

That was all I needed to hear.

Thanks Travis -- I do think perhaps I am spending too much on the entity structuring side of things.  I intend on having the first few properties under my name personally, but will quickly run into DTI issues.  I think to scale properly, I'll have to use DSCR loans which most (or all?) expect for the property to be closed in an entity.  Were most of your properties cash deals?  Is that why you hold them personally?

Are there alternatives to Anderson and Royal Legal Services for the formation of a Statutory Trust (Wyoming or Delaware)? From forum posts on here, it seems like both have had client service issues recently. I don’t mind going with them, but I’d like to hear of alternatives if possible.

I'm based in CA and plan on rapidly scaling this year with 2-3 out of state properties and perhaps 4 to 5 next year, so I'm trying to build the proper asset protection/liability and for tax optimization purposes would like to avoid the CA FTB franchise tax per LLC.

My understanding is that the de-facto standard for doing this is with Delaware or Wyoming Statutory Trusts with properties held in Land Trusts, and then possibly layered with an operating and holding LLC. Ideally, I'd

The alternative (but maybe temporary) loophole that has been floated around is to use a disregarded limited partnership in CA as there was a 2019 FTB ruling saying that they are not subject to the $800 franchise fee.

I’ve talked to a few lawyers about how to structure things and they say they would have to “refer” me out and would get back to me. I’ve tried searching on avvo.com but virtually all the results for trusts are for estate purposes.

I’m actually subscribed to a new all-inclusive financial management platform/service that is supposed to do it all (access to CFP/CPA/attorney, tax strategy/filing, trust document formation, review insurance policies, cash flow analysis, etc), but it seems like every question I ask them they are hearing for the first time and aren’t even sure it is covered by their service even though they advertise that they do it all.

Thanks gurus!

Quote from @Account Closed:

Hi Simon. I have STR homes in 'four corners' (solara and windsor at westside) and my company manages a number of higher-end STR homes in reunion and other resorts in the 34747 zipcode. We also have 3 young kids, and I picked these locations as the clubhouses are great, 7,8,9 bedroom houses hold their value well, and close enough to disney, and away from Champion's Gate I-4 traffic corridor.

Windsor Hills has a lower HOA, and it is an older resort, so building repairs and expenses will be higher. You'll still get high occupancy, but nightly rate demand is usually lower, so ROI will be affected.

Windsor Island is very different to Windsor Hills and for your budget you will get better ROI from Windsor Island, Westside, Solara and some areas of Reunion and Championsgate. If you can't find a custom build in Reunion for your budget, it might be worth considering splitting your budget to see if you can purchase two $750K fully furnished homes, as bedroom count is king for passive revenue.

I can message or even better talk over the phone, about the guest and homeowners pros/cons of Reunion/Reunion Encore, along with Margaritaville resort as they offer different business models. Bottomline, Encore wont let guest use any facilities, if the homeowner doesn't use one of their PMs. Reunion is a little more tiered and flexible to its homeowners/PM/guests. Happy to connect further. 

Andy Betts

Thanks Andy!  
That’s good info.  I also looked up your management company and really like your pricing model.  I’ll be in touch and will exchange info with you.

Hi everyone,

I'm based out of CA and have been considering investing in a Four Corner resort area turn-key STR. I've done a lot of reading and want to make sure I have all my facts lined up before I pitch this idea to my wife and financial team.

Budget-wise, I can go up to 1.5M comfortably, so I'm willing to buy a turn-key STR with furniture, theming, and future bookings in place.

I do have some trepidation around the competition in the Orlando area for STRs, but I'm hoping since I am playing in the higher end of STR properties, I'll be able to stay cash flow positive/stay ahead of the game.

I'm a high W2 earner (near seven figures), and am planning on satisfying one of the tests for material participation, so I can get some cost segregation / bonus depreciation for year 1 against my W2 income.  That's going to net me about 75 to 90K, so that's a big boost to my Year 1 "revenue", even if no one rents the place! LOL!

Here's what I've learned from you all so far about the resorts/locations reading the forum (thank you!):

Higher ROI, Very cookie-cutter, can use any PM, requires good theming to set property apart

Champion's Gate

Solera

Solterra

Windsor Properties (Hills, Westside, Island, Cay)

Lower ROI/restricted to use preferred PM, custom homes, still requires good theming, more expensive overall, better for extended personal use

Reunion

Question about Encore -- does this have access to Reunion amenities or just Encore-specific?  This development doesn't seem to be custom, and very cookie cutter, so it's kind of like the worst of both worlds?  It's cookie cutter like the other non-Reunion developments, but still restricted to preferred PM, and overall more expensive?

I do really like Reunion and its amenities. I have three young kids, so the idea of the personal use aspect up to 14 days is appealing to me/my family. I suppose it's really an investment intent/philosophy decision. Am I willing to get less ROI for a "better" resort experience for when we do use it personally? The club membership aspect is also very confusing to me. It sounds like my SRT guests can still access the resort amenities if I'm myself a member of the club (social or golf), I use their partner PM (higher PM fee/worse customer service?), and the guests pay a per-day resort fee?

Did I miss anything?  Are there any resorts I'm missing that I should be thinking about?

Thanks all!  Look forward to seeing you in Orlando!