All Forum Posts by: Stephen Sawrie

so i now see the rub. have been researching this "smart leverage" method, aka BRRRR. makes all the sense in the world until you find out that my local banks have absolutely no appetite for anything beyond 10 year cash out refi. they will do 15 but will call it in 5 and either refinance at current (potentially higher) rate or just call it altogether. this is no big deal if you already were planning on putting in about 20%, but if you were trying to refi and recoup all your money it just ain't happening with a 10 note. furthermore, kiss cash flow goodbye.

i am sure i am missing something.  thoughts?  is the local banking similarly conservative in other markets?  what they tell me is that they wrote off a ton of bad debt on the overly leveraged SFHs in the past and simply don't have the stomach for it anymore.

As usual, apologies for ignorant or overly basic questions, typos, etc...

so over the past year i have successfully converted a traditional ira over to a sd ira with checkbook control and have had good early success with cash purchase and rental of 5 single family dwellings. on the post-tax side i am am about to pull the trigger on my first leveraged investment property, also a sfd on which i have an executed contract and will close in a few weeks. i have wrapped my mind around the BRRRR method and its variants, in particular what i have seen referred to as the "smart leverage" method wherein i buy a distressed property, rehab, and refinance at 70% LTV, allowing me to recoup my money and, of course, repeat. my questions are as follows:

1. i plan on using a low 6 figure unsecured LOC for purchase and rehab up front. is it smarter to do the initial deal with downpayment or just buy it outright. the sale price and LOC amount will allow either. i plan on refinancing after rehab either way.

2.  is it still common for banks to require 6-12 months before refi?  i use a local bank and am fortunate enough to be in their wealth division, but how long does the typical bank continue to do acsh out refis before they cry uncle?

3.  anyone out there used quicken financing? wondering if that would be an option if and when the bank says enough with the refis.

4. how many notes can i hold at once. the properties will be in an LLC but i don't think that is relevant to the question (although i may be wrong). it is my understanding that one can only hold 10 mortgages at any given time? how are others accumulating > 10 units (please assume all sfd for now)? my insurance policies have recently been rolled into one commercial policy. is there something like that for mortgages?

any and all guidance would be greatly appreciated.

Steven Hamilton II Thanks for the reply. Nope, I don't understand that at all, hence the post. Left you a voicemail. Would love to chat at your convenience.

As always, my apologies for overly basic/simple questions, although I am not sure this one would qualify for either. My apologies also for the length of this post, typos, etc. Anyway, here goes…

I am trying to establish my nonworking wife as a “real estate professional.” While I say she is non-working, she does an enormous amount of work with researching, acquiring, financing, and managing our properties, among other things. I know that this topic has been discussed frequently in the past, and I am aware of the basic requirements set forth in many of the superficial articles discussing the topic. However, I stumbled on an excellent article outlining these requirements from a tax code and tax court perspective (http://www.forbes.com/sites/anthonynitti/2014/07/09/tax-geek-tuesday-the-irs-finally-figures-out-the-real-estate-professional-rules/#699c23d84760) and it has led to a question or series of questions that I would like to pose to the community as I want this to be airtight. I will try to significantly shorten the article by pointing out the highlights which then form the basis of my question.

The often cited two quantitative tests from Section 469(c)(7):

1. More than one-half of the personal services you perform in all trades or businesses for the tax year must be performed in real property trades or businesses in which you materially participate (you must spend more hours on real estate activities than non-real estate activities, to prove that you earn your living in the real estate world), and

2. You must perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate.

How to establish “material participation” (Section 1.469-5T):

1. You participate in the activity for more than 500 hours during the year,

2. Your participation in the activity constitutes substantially all of the participation by all individuals (including non-owners) in the activity for the year,

3. Your participation is more than 100 hours during the year, and no other individual (including non-owners) participates more hours than the taxpayer,

4. The activity is a significant participation activity in which you participate for more than 100 hours during the year and your annual participation in all significant participation activities is more than 500 hours. [A significant participation activity is generally a trade or business activity (other than a rental activity) that you participate in for more than 100 hours during the year but do not materially participate in (under any of the material participation tests other than this test),]

5. You materially participated in the activity for any five tax years (whether or not consecutive) during the 10 immediately preceding tax years,

6. For a personal service activity, you materially participated for any three tax years (whether or not consecutive) preceding the current tax year, or

7. A generic facts and circumstances test.

Putting it all together:

1. Participate in a real property trade or business as defined by the statute.

2. Materially participate in that real property trade or business under one of the seven tests of Reg. Section 1.469-5T.

3. The time spent participating in real property trades or businesses—but only those real property trades or businesses in which the you materially participate—must exceed the time you spend in non-real property trades or businesses; i.e., your day job.

4. The time spent participating in real property trades or businesses—but only those real property trades or business in which you materially participate—must exceed 750 hours.

By achieving these four requirements it is my understanding that one can safely be called a “real estate professional” in the eyes of the IRS. However, if you continue reading the article, this is only the first step in being able to declare losses on one’s W-2. The next step is proving that you materially participate in YOUR RENTAL ACITIVITIES, and this is where it gets tricky (he gives examples in the article of how one might qualify as a real estate professional but not prove material participation in his/her specific properties).

SO….this is easy if you only have one property, but becomes more difficult if one owns multiple properties, where it might appear that you are expected to spend at least 500 hours materially participating in EACH property. He therefore goes on to discuss two different grouping elections (Section 1.469-4 & Section 1.469-9) in which you group your properties such that material participation in your rental activities can be summed across all properties. He cites several court cases that examined this very issue.

Question(s): Has anyone out there taken the step of a grouping election for their multiple properties, and if so could you elaborate. For instance, how is it done? Is it just an addendum to one’s articles or OA? What has your CPA or tax atty had to say about this if you have pursued something similar? Is attaining “real estate professional” status even worth it? It is my understanding that it comes into play only if you take losses for the year with your rentals, in which case you can deduct from your personal (active) income.

Stream of consciousness is also welcome.

Thanks in advance.

Brian Eastman Gotcha. Was afraid of that. No, definitely not necessary. Was just going to consolidate if possible. Mark Nolan Well, I am a University of Alabama School of Medicine graduate. But my allegiance is with my undergraduate alma mater, University of Florida. But I will be watching the game! I'm not sure I will be able to handle these guys, however, if they win another national championship.

Mark Nolan Sorry, should have been more specific. I'm familiar with their differences. I'm just wondering how they are treated and tracked once they are mixed in a self-directed IRA. One chunk has been taxed while the other hasn't. Hope this makes more sense.

Mark Nolan thanks for the reply. Are the monies from the traditional versus Roth and any revenue generated from those monies treated any differently?

as usual, my apologies if this is an overly basic or even stupid question, but here goes...

i have all of my money from my traditional IRA now in a SD IRA with checkbook control and have been using it successfully for several months now. very happy with the setup. i also have a much smaller sum of money currently sitting in a roth. its enough for a property or two. can it be rolled into my SD IRA? and if so, what are the consequences?

thanks in advance

@Dan Shelhamer this is also my first year and have only four investment properties to date.  my CPA told me (as did an internet search) exactly what yours did.  if your income is above a certain threshold (i thought it was 150K) then you cannot take ANY of the tax breaks available to those who earn under that threshold, but you can take them ALL at the time you sell the property.  if your business in 100% real estate (such as agents, etc) than this threshold disappears.

i use Quicken for Mac and download my transactions daily and then categorize them appropriately, if there is any associated documentation (i.e., receipt, invoice, deed, etc) i scan it and attach it to the appropriate transaction.

no clue whether 1031 is on the chopping block

@Account Closed gold, thanks