All Forum Posts by: Lane Kawaoka

Just taking the other side of the coin here although we do cost seg our apartments:

Thinking of selling within the next 5 years? Maybe hold off on that cost segregation.

Can't use the losses? Remember to plan 5 years ahead and also look back 5 years for taxes. If your income isn't high enough or you're limited with your PALs or limited suspended passive activity loss, it might not be the best move.

If you're not saving at least 2X the cost of the study (I'm talking about cash savings, not just depreciation), then it might not be worth it.

Be cautious with 1031 exchanges. There are a couple of ways to calculate the depreciation to carryover. And speaking of 1031 exchanges, make sure the federal 1031 doesn't land you with hefty state taxes on the state 1031. Just a heads up, many states have their own rules for depreciation and personal property eligibility.

Ever thought about if the 179 expensing method might be a better fit? Especially with its limitations.

10k units 2.1B in assets... I'll kick things off with our story. It really sheds light on where we're at with deals today. When we first dipped our toes into the syndication real estate waters, we were buying these, let's say, "less than glamorous" properties. Think 50 units, barely big enough to have a property manager's office. Sometimes there wasn't even an office for the PM - ee'd use one property as a hub for a few in the area.

They weren't big enough to have a full-time handyman. But hey, that's all we could afford and manage at the time. We were limited by our networks and our ability to get loans. We were the ones guaranteeing those loans after all and the Key Principal team needs to have the net worth greater than or equal to the loan. That's why you see newbies teaming up and having multiple general partners. Most can't raise funds unless they're borrowing from family. That's how we started too.

But, working with class C properties? Man, it's tough. I remember this 168-unit property we had in Fort Worth. Even when things were going well, we had about 20% of tenants not paying month after month. But as time went on, we got smarter and our network grew. Around 2020, we started tapping into class B properties, bigger than 200 units. That was also the year we surpassed a billion in assets under ownership. Big milestone for us and a big sticking point for a lot of syndicators who go to GP syndication school!

We eventually stepped back from the day-to-day management. No more weekly calls with property managers for me. We hired pros for that - those who worked for PE firms on the ops side. But even with class B assets, there are challenges. The pandemic and eviction moratoriums didn't help. We then shifted our focus to more deals and I started looking for reliable operators to invest as an LP too for my IRA stuff. It's hard to sift through the "fake it till you make it" crowd.

We noticed many experienced players moving to more institutional asset classes or diving into property development.We started developing in 2020. Our edge? We're operators. So, if we build an apartment, we can run it. Take our 200-unit in Huntsville as an example. We started in 2020, finished in late 2022, and despite market shifts (lumber 4x), we managed to complete the build and refinanced and leased it up instead of selling it unoccupied cause the market was not prime for a sale at the time - most developers would be distressed sellers cause they are not operators.  Today, it's over 90% occupied.

But with inflation and rising costs, especially in insurance and taxes, it's been challenging. Interest rates play a huge role in our decisions. That's why we've paused on multi-family value-adds and shifted our focus to developments. It's a different ball game, every approach has its pros and cons. Larger properties? They come with their own set of challenges. But they also offer stability and a chance to build robust systems. On the flip side, when things go south, the impact is more $$$ignificant and we have always prided on financially backing the asset through tough times but with a bigger asset its a bigger amount that might be needed.

Anyway, that's our journey so far. Would love to hear your thoughts and experiences!

welcome!

@Gordon Cai I started investing in my home state back in 2009. A few years later, I dove into long-distance investing in turnkey markets. Between 2013 and 2015, I got heavy into OOS 11 rentals in Birmingham Atlanta and Indianapolis. It was a solid move for me back then, especially as a non-accredited investor.

But here's the thing: today, I often advise folks that if your net worth is over half a million or you're pulling in more than $150,000 annually, it might be smarter to lean into syndications and private placements. Maybe consider at MOST one or two out-of-state rental properties mostly because its not scalable. This strategy helped boost my net worth past that million-dollar mark.

Back in the day, I was getting $90,000 properties that rented for a grand monthly in decent class B areas. Now? Those same properties will be about $120,000 and might only fetch you around $1,050 in rent. The math just isn't as appealing anymore. I've noticed a lot of newbies on these forums are gravitating towards short-term rentals. I'd advise caution since it is relying on discretionary spending from the tenants.

I'm still big on investing in workforce housing and apartments. People always need a place to stay, even during economic downturns. One heads-up for out-of-state investors: watch out for property managers. When you're remote, some might take advantage and overcharge for simple repairs, like a $900 plumbing job.

If you need any advice or insights, don't hesitate to reach out. Cheers!

Looks like you have making the podcast rounds. Good i suppose but.... it's always better to connect with other purely passive accredited investors. You might discover some gems who aren't necessarily the best at online marketing. 

To answer your question, a lot depends on your income and, crucially, your net worth. If you're diving into long-term rentals and your net worth is hovering around the 250k-500k mark, it's worth considering some protective measures. An LLC structure, or even a dual-layered one with a holding company, could be a smart move.

But if you're leaning more towards syndications and private placements as a limited partner, you might want to think about this when your net worth hits a million. If you're below that threshold, you're not a prime target for lawsuits, especially when you're an LP rather than directly owning long-term rentals. Just some food for thought - not a lawyer but I do see what investors do behind the scenes!

@April Santos 

CPA doesn't necessarily have to be local. We're talking federal tax returns here, and with today's software, everything just funnels in seamlessly to the state stuff. That said, while there are many seasoned CPAs out there, I've noticed that a lot of them can be a bit rigid. In fact, about 95% of our clients end up switching to a CPA who's more, let's say, in tune with modern strategies. It's crucial to find someone who understands strategies like using passive losses to offset passive income and the nuances of real estate professional status.

But here's the thing: YOU should be the captain of your tax strategy ship, not your CPA. It's a bit unfair to expect them to know everything about your investment plans, risk profiles, or future deployment strategies. They're there to handle the technical paperwork, but you need to be the one steering the ship. Think of it this way: CPAs and lawyers are your contractors, but you (or someone you trust) need to be the architect.

One crucial document you should get from your current accountant is the Form 8582, which details your suspended passive losses. But be wary; some might withhold it to keep you from switching.

PS I'd like to offer a word of caution. Many CPAs nowadays are essentially internet marketers who white-label their services. This means another entirely different firm might be the one actually handling the tax returns and doing the work. It's become a lucrative strategy to build a brand this way, but it's essential to be aware of this as the client.

@Heather Johnston 

Back between 2012 to 2015, I was buying turnkey rentals. I intentionally steered clear of the big-name providers, you know, the ones with a massive online presence. From my research, it felt like you were just paying extra for the brand name (and implied reliability). Sometimes even an extra $5k to $20k compared to smaller turnkey providers (mom and pop house flippers).

I opted for providers who were the actual flippers, not just the marketers or brokers. This strategy got me better pricing, and I felt like I was being clever about it. Over time, I acquired five properties in Atlanta, four in Birmingham, and one in Indianapolis but it caught up with me as the real issue here is property management abuses OOS owners. I'm still on the side of having your PM not being under the roof of the TKP for a few reasons.

But as I grew and became an accredited investor, my perspective shifted. While turnkeys are a great starting point (especially for building your net worth), many accredited investors eventually transition to syndications and private placements where there is aligned interests with the GP but I would caution on working with those who have done at least 1B in assets.

Turnkey rentals are still a solid choice for starting out, especially if you're in an expensive market. I was in Seattle back then, and local properties just weren't feasible for me. Plus, with a demanding engineering job, I didn't want the hassle of managing everything hands-on and especially taking on the risk of BRRRR.

Your decision might depend on your current income and net worth. But... if you're looking to save a bit, maybe consider smaller providers over the big names. BUT if that $5k to $10k isn't a big deal for you, then go for a reputable brand for peace of mind.

@Alex Ng  

Not sure if you're local to Birmingham, Alabama, but if you're an out-of-state turnkey investor, tread carefully. I used to buy properties there from 2012 to 2015. Back then, I het a class B property for $90,000 that rented for 1k/month and my ou might be looking at $120,000 to $130,000 for the same house. I know because I sold many of my properties a few years back at those prices. But the rent? It's only nudged up by about a hundred bucks.

Speaking of neighborhoods, many investors flocked to Center Point. I was relieved when I sold my properties there. The hassle with permits and the municipality was real. Plus, it's become mainly a renter neighborhood as more out-of-state investors poured in. Stay out of Endsley that's the worse area.

Watch out for those turnkey products. They were a good starting point for me back in the day. But if you're an accredited investor you, maybe consider moving past the landlord gig. Dive into syndications and private placements as a passive LP partner.

Birmingham was my first out-of-state investment experience, so it holds a special spot for me. Wishing you all the best on your journey!

Heloc is good for starters to allow you to access without fees, cons is that you cannot get at all the equity but again it will get you going. Next to tap more equity you go for a refi. Then when you realize owning a home is not good you sell it 😁

@James Jiang 

investing a bit more, maybe a grand or two, for your taxes.

One thing software often overlooks? Using passive losses to offset passive income. This can even help reduce some of your ordinary income. 

But a word of caution: many big CPA especially with podcast/youtube platforms use overseas staff and just white-label other firms. Need a connection to one I use who... Feel free to reach out.

Interestingly, many of the newer companies are the ones you'd want to work with. The old school CPAs who might have a good reputation... they're a bit stuck in their ways. They might not be up-to-date with strategies like using passive income to lower taxes. And, most CPAs will advise on 401ks or Roth IRAs. Personally, I think that's a bit outdated. 🤙