All Forum Posts by: Troy Zsofka

Thanks @Mike H., I'll have to run this by my accountant.

I qualify as a full-time real estate professional because investing is all I do, but I also manage properties owned by my mother, and she owns a psychotherapy practice. My accountant says that we can no longer use the losses from the depreciation in order to offset her Sch C income from her counseling business (we used to be able to because she filed jointly with my father who did qualify as a RE professional, but he passed away). I'll have to check with him to make sure we are using whatever portion of the allowance we are allowed based on her Modified Adj Gross Income.

I appreciate the clarification and the valuable info.

@JD Martin, I agree 100%; which is why I have never felt bad about buying REO's.

I think the main difference is that, even with a bank who has to be the bad guy and foreclose on someone, they didn't go into it with that in mind. They did their due diligence through underwriting and felt that they had a solidly qualified borrower who would perform on the mortgage obligation. With NPN investing, the investor is voluntarily entering a difficult situation.

However, as explained by @Mike Hartzog and reiterated by @Wayne Snell, if the initial intention is to come to a conclusion that is mutually beneficial to both the investor AND the mortgagor, I think that the moral issue does not apply, and a the mortgagor who is unwilling to compromise is probably the kind of person who doesn't feel bad about failing to meet their obligations anyway (and therefore deserves no consideration in return). On the other hand, if an investor is just looking to foreclose on the note and then flip the property (either for resale or for stabilization and hold), then that investor is sacrificing moral fiber for profits. 

The world is full of both, but I do believe that NPN investing can be done in a way that looks to benefit both the investor AND the mortgagor.

I must say that I find the idea of purchasing Non-Performing Notes to be somewhat fascinating. With a degree in economics and a stint in commercial finance, the complexities of the moving parts attract my mind's interest. However, I have one main hesitation, and it's not based on any sort of financial risk analysis. Rather, it's 100% rooted in the one thing that should never be a part of any responsible business decision - emotion.

I've been buying post-foreclosure properties for several years, and my father before me for many years prior. Never felt guilty profiting off of the fact that someone didn't pay their mortgage. The main reason I haven't felt a single ounce of guilt, regret, or hesitation, is not that the people got what was coming to them for not paying, but because of the 1 degree of separation. They were kicked to the street by the bank, before we ever entered the picture, and we had nothing to do with it.

Now, I'm a firm believer that if you sign the dotted line and cash the check, you are responsible to make your debt service payments. We're all adults, and the idea that people need to be protected from their own irresponsible financial decisions is ludicrous. You're a big boy now, so pay your bills or suffer the consequences. However, things are not always so simple. Sometimes, people default on their obligations, not because they bit off more than they could chew, or because they didn't prioritize responsibly (and bought a shiny object with their tax refund rather than putting it in the bank), but because of something out of their control, like an accident, or an illness. Now, call me weak, but I don't want to be the person who makes the decision to kick a family out of their house when default was for a reason beyond their control (like death or illness of the bread-winner). Maybe buying the house after the bank has done the dirty work amounts to the same, and I'm just hiding behind that one degree of separation, but I don't think so. 

You see, similar situations can happen with tenants. The difference being that I didn't personally put myself in that morally difficult situation. They qualified at less than 28% DTI (meaning that they earned over 3.5 times the monthly rent in gross income) when I signed the lease. With NPN's, on the other hand, I would be intentionally investing into the situation already knowing that my exit strategy may be to force a family out of their home.

That still leaves the door open to the idea of purchasing a NPN at enough of a discount that you can take a haircut on the balance, thereby reducing the mortgage payment to something they can afford, and still make a nice profit. In fact, I think that is likely one of the main strategies of note investors. Problem is, I'd need more exit strategies than just restructuring, and if I'm not committed to kicking them out without hesitation, it's probably not the business for me.

Perhaps if I researched it a little more and found that the vast majority of NPN purchases ended in either a loan mod resulting in a performing note, or in a mutually agreed upon deed-in-lieu arrangement, I wouldn't have these hesitations. I guess I just don't want to go into a situation where I already know I'm likely to have to be the bad guy, regardless of how profitable it may be.

Welcome to the community @Lucas Croteau. I've been investing in NH for several years and am happy to help you out with info and guidance. 

Meanwhile, through your current business, if you come across any experienced and motivated tradespeople looking for a full-time W-2 gig, I'm currently looking to hire another person for maintenance on our portfolio and renovation of new acquisitions.

Welcome to BP @Seth Tucker.

I'm from your neck of the woods and have been at this for a while. Feel free to reach out if I can help you out.

Welcome to the site @Zachary St Laurent. 

I have a single family rental on River Rd in NoWeare, and I have a couple friends from other parts of Weare. 

Oh, one more thing:

If you sell the property before you ever use those passive gains, I believe that they will go to directly offset your capital gains liability on the sale; so you will still get to use them. Not sure if they are property-specific in how the carryovers are applied, or if they are entity specific and can be utilized across all properties owned by an entity (meaning you personally, an LLC, Trust, Corp, etc).

I'm not a CPA, but this is my take based on research I've done:

In order to write off your "passive losses" against your personal income, you must qualify as a "real estate professional" as defined by the IRS. This includes many parameters but I'll just mention a couple:

-You must generate more income from your real estate activities than all non real estate related activities. From my understanding, you do not.

-You must put more time into your real estate business than anyone else puts into your real estate business. Given that you hire a property manager, that would be an incredibly tough sell.

What does this mean? Well, it doesn't mean that you lose the losses, it means that you have "passive loss carryover" that can be used to offset future "passive gains", which means income from when you eventually cash flow in the future (and I mean cash flow on paper, after depreciation). 

So, while not undermining Mike's entire argument for holding the property and using the $30K to invest further, don't count on writing off the losses.

$1,500 per year for repairs is over 15%. What's coming up that's consistently costing that much?

Is your handyman over-charging you for simple repairs? I know that sometimes property managers will get a kickback from a contractor for referring them the business (which can translate to the contractor/handyman upping the price to cover it).

Was it not fully renovated prior to renting it out? If you put some of your funds into renovating it fully could you get a higher rental rate out of it? I don't know your market, but here in NH a house worth $125K rents for around $1,100-1,200 if finished nicely. That would result in more cash flow through greater revenue AND less repairs expense. Am I suggesting that you vacate your tenant to remodel the whole place? Absolutely not. However, consider whether or not its condition is linked to the rents and the repairs expenses you're experiencing, and perhaps when they move it might be a good idea to take some time to make some improvements.

The 15% repair costs is a red flag in my opinion that suggests something is wrong. Is fixing it going to make it a cash cow? Obviously not, you bought it for no money down at a price higher than its current value. However, ratios out of the ordinary should be identified and addressed regardless of the other variables. 

Nice find. My father bought a hoarder house years ago at auction that no one else wanted to touch. The gentleman who had owned it prior collected everything and the yard was full, including more than 70 lawnmowers, over 120 bicycles (not kidding), and an interior that was almost as bad. He had worked at the town transfer station his whole life and brought home anything and everything he apparently thought had value. Took a skidsteer and 7 fills of a 40 yard construction container to clean it up. Once empty it was in decent condition and needed relatively little in rehab. Flipped it, and it got foreclosed on about a decade later, in much diminished condition. I picked it back up as an REO off the MLS in 2012, rehabbed it again, and now own it as a rental. It gets my attention when I see a house full of abandoned belongings. People can't seem to see though the mess, so I'm likely to pick it up for significantly less than otherwise, and emptying out costs relatively little.