All Forum Posts by: Lane Kawaoka

@Ross Alcorn

It's important to consider your unique situation. Don't just focus on the short-term benefits, think about whether it's worth spending some money now if you plan to sell the property next year or within a few years. The timing varies for everyone, but if you hold onto a property for less than two to three years, it might not make sense to go for certain strategies.

Another thing to consider is your personal situation. Many passive investors make the mistake of chasing after deductions they don't actually need. You may not require passive activity losses if your income isn't high. Take a look at the tax brackets. If you're making over $364,000 (for married filing jointly in 2023), it might be worth pursuing strategies to lower your taxes, and having passive activity losses can help. But if you're below that threshold, you might not be paying a significant amount in taxes.

Remember, it's important to focus on finding good deals rather than getting caught up in the pursuit of passive losses. Don't let taxes dictate your investment decisions. Also, if you're not doing real estate professional status (rep status), even if you have a lot of passive activity losses, they might just end up suspended on your tax form and not help lower your adjusted gross income (AGI).

Lastly, for many accredited investors, owning rental properties might not be scalable or worth the high liability once your net worth increases. As you move up in the wealth-building journey, you'll likely consider selling those smaller rental properties sooner rather than later. Spending money on cost segregation studies might not be worth it if you plan to sell the property shortly after. So, keep your long-term goals in mind.

In the end, cost segregations can be beneficial, but it's not a one-size-fits-all solution. It depends on your specific circumstances, including your tax bracket and future plans. Feel free to reach out if you have any questions or want to discuss further.

@Jay Ben 

It seems like you are in the right circles (exploring the BiggerPockets and the Meetup scenes) IF you were wanting to find newer operators dealing with class B and C properties in Sunbelt states like Texas, Florida, and Arizona. 

It makes sense because these states tend to have better landlord laws on their side. I've actually invested in NYC myself. The cap rates might be low, but it's a relatively safe bet since those cities rarely see a decline in value. However, I've stayed away from California due to the tough landlord laws they have, which is common in many blue states.

As for finding a directory or community, unfortunately, it's a bit challenging. It's more of a relationship game. Local real estate clubs might not be the best help since you're likely to come across lower net worth individuals focused on flipping or rehabbing BRRRRRRRRR properties. What you need is to connect with purely passive accredited investors and learn about their investment locations. But keep in mind that many investors prefer to keep their identity status private, so it can be tricky to find those communities.

One thing to consider is whether you're looking for more institutional operators, where the returns for past investors might not be as good, but there will be higher fees involved. I've seen acquisition fees as high as 7% to 10%. Alternatively, you could explore newer or less established operators with assets under $1 billion. You might find better profit splits there, but the reliability might not be as solid since you'll be working with newer operators.

Keep an eye out for trustworthy individuals who have experience and knowledge in the industry. They can be incredibly valuable, just make sure they're not trying to get you to invest with them haha.

@Al Lee, welcome to BiggerPockets! It sounds like you're heading in the right direction. I started investing in turnkey properties back in 2012 and had 11 of them by 2015 (Atlanta, Birmingham, Indianapolis) before I eventually sold them to move into more syndications and private placements. It really comes down to your net worth and when you can make the move to get out of the landlord game.

I have to say, being a landlord sometimes felt like I was being taken advantage of just because people thought I was some wealthy person from California or Hawaii. Plus, with prices going up in recent years, it's become really tough to make decent cash flow from rental properties, especially if you're buying in a lower-class area.

However, if your net worth is below a quarter million or half a million, you might have to start with those small rental properties like I did. But overall, good luck! Real estate can definitely help you save a lot on taxes. If there's anything I can do to assist you, just let me know.

@Kyle Swengel 

it's awesome that you discovered bonus depreciation. I wanted to mention that for smaller properties, there are some vendors out there who offer what they call "fake" cost segregations, where you have to get insurance along with it as opposed to the real ones that cost 5-15k. It might be worth taking a chance on that, but for our bigger projects of $10-20 million or more, we usually go with the more expensive real one.

But here's the thing, you gotta be aware that these cost segregation vendors are always emphasizing the benefits and not talking much about the downsides. I'll be honest with you, one of the cons of cost segregation is that when you sell the asset, you'll have to give back the depreciation in the form of depreciation recapture. So, if you're not planning to hold onto your properties for a long time, like maybe three to five years or less, spending money on cost segregation might not make much sense. Sometimes, on our larger syndications we even choose not to do it on our properties.

However, keep in mind that this is your individual situation. Most investors start with single-family homes, duplexes, or quadplexes, but as they become more experienced and creditworthy, they move up to larger syndication deals as passive LP partners. They leave behind the hassle of being landlords and dealing with rental properties - and litigation behind!

If you're like me, who used to own 11 turnkey rentals and sold them all, and many accredited investors go through a similar process, then doing a cost segregation may not be the best choice. It would mean giving up that benefit and spending money for little gain when you step up to those types of investments.

Of course, every situation is different. If you're pursuing real estate professional status or making over $360,000 a year, then cost segregation might make more sense. But if you're below that income threshold, it probably won't provide much benefit.

These are just some things for you to consider. Going into all the details might not be the best fit for a forum post, but it's important to think about these factors.

@Jay Ben

So, here's the deal. As some others have mentioned, it's not a good idea to factor in the tax benefits when evaluating your proforma. The reason is that we can't accurately predict the extent of the cost segregation benefits or everyone's unique tax situation.

It really varies from person to person. For instance, some individuals qualify for real estate professional status or have high incomes exceeding $400,000 per year, while others have lower incomes under $200,000 annually. Consequently, the personal benefits they receive from passive activity losses can differ significantly. It's crucial to avoid making specific claims about the benefits of cost segregation for each individual.

In the past, what we've done is provide the facts and acknowledge the variability involved. Let's say we have a $30 million property in an area with low land values. We might assume that around two-thirds, or $20 million, of that property's value is depreciable. As a general rule of thumb, a 100% bonus depreciation cost segregation study typically results in about a third of that amount being claimed as losses in the first year. From there, we can calculate the impact on your equity based on an LPs proratta share.

Now, here's the thing: if you want to go further and get a more accurate estimate, we can ask the cost segregation vendor for their input. However, keep in mind that this approach requires individual analysis for each investor, which can become quite complicated. It's important to consider the potential risks and complexities before deciding to pursue this avenue.

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Probably time to move past turnkey and SFHS. It took me to 11 of them in 2015 to realize that accredited investors move away from direct investments in non scalable rentals. 

pull out the equity via Heloc, refi, or sell the asset...

...put into rentals/syndications depending on where your net worth is.