Are legal and accounting fees cash flow dream killers?

Question

I recently got started with great excitement in RE investing in single family turnkey properties, have spent a lot of time learning about the wonders of cash flow, and just refinanced my primary residence to cash out and invest in two new construction properties with good numbers. I have been very conservative factoring my expenses and determined that my cash flow for each would be close to $300 per unit. Pretty good from my rookie perspective.

Only after I began researching more closely have I come to find that CPA services that include tax advise starting at $150 per month plus return filing fees around $1000 per form are not uncommon. Some "nice" packages like silver, gold, and platinum offered by a firm run from $3000 to $9000 per year for just three properties.

In all my learning the suggestion of using CPAs and attorneys came up occasionally, sometimes as an afterthought, and only a couple of times I saw them used in examples with numbers that had no major impact (e.g. $27/month on a proforma... really!!?!??). At this point I am wondering whether I have started backwards and the whole CPA/attorney factor has even a bigger impact than the typical taxes and insurance on a proforma to influence the decision of whether to get in the passive investment business or not, and not necessarily for the bright side of the tax deductions.

My question is: am I missing something or can I truly expect to give up most, if not all (probably to a loss) my cash flow just for financial advice and its related “advantages” or “protection”? Would I be passively investing only for actively feeding my advisors and have almost nothing left to show in my monthly income? I know I could opt for doing much or most of the work myself but that would defeat my goal of independence by unwittingly getting into a second and less-enjoyable job, besides my current full time which I do still love.

Please excuse the rant but today I feel very much down after several months of continuous highs, to the point that I am even reconsidering the mess I might be getting into. I sincerely hope someone can reply showing me how I am wrong in all this and provide the much needed insight to rekindle the fire :).

God bless.

Matt Ziegler · Answer

Legal and account experts should be part of your team. They should be aligned with your goals and objectives.

Find these folks through referrals from other investors.

Lynnette E. · Answer

You need to decide if you want a CPA that is always available to meet with you or have a call for random questions, or if you can learn from books, and meet once or twice a year with a CPA. If you want an advisor on your 'team' then you pay a high rate and may or may not use them much, depending on how you operate. If you just want to meet with a CPA to see how YOU can keep your records and then transfer them to the CPA for taxes at the right time, then it is much cheaper.

Do you want to keep track of the income/expenses in a spread sheet and give the CPA that, or do you want to hand over a shoe box of receipts each month for them to enter into a database. Obviously one option costs more than the other.

Are you doing an LLC or a series of LLCs, are they scattered in various states? If so your CPA cost will be more than if you invest in the state you live in and can file only under your SSN such as your personal ownership or Trusts provide, and some LLCs.

The choices you make determine how much your cost is. I keep track of the income and expenses myself, providing my CPA a spread sheet for each property. My properties are in my name or a Trust that I file taxes for under my SSN. My tax preparation cost $100 more last year with 3 properties coming into service and the sale of one inherited property than it did the year before with out any rentals in service yet.

But in general answer to your question, people making $100 a door from the cost analysis spread sheets really make nothing after they count their gas driving to and from the property, the accounting, legal, gift giving, their time dealing with issues, etc. What lets them survive is the depreciation they can claim on taxes---until they sell it and have to pay back the depreciation.

Daniel Hyman · Answer

On the tax side, with a couple of turnkeys, you will likely need a tax return and a few questions throughout the year. I would not expect that your tax (or legal needs) would be too intensive.

Shop around and I'm sure you'll be able to find a CPA and attorney that are in your budget and meet your legal and tax needs.

Susan M. · Answer

I have noticed that a lot of CPA firms want to be paid on a subscription basis now, so they make more $. Many won't work with you otherwise. Find a smaller, independent firm instead of a big one or a specialty one. It's not necessary. Buying and selling homes and having rentals are not specialized fields. You just need to learn how to track your expenses and how to summarize them for your tax preprarer. I used to use Quickbooks, but it was a lot of work. Instead, I now download my credit card and bank statements at year end and categorize everything at one time, then hand it over to my CPA. I've rarely needed advice or information from a prior return, but when I do, I would expect that a short call or email to my CPA would be covered in my annual tax prep fee, but if not, I'd be willing to pay by the hour as long as they don't chit chat to fill an hour's time.

Same with attorneys. I use a legal plan and it's been a fantastic resource and extremely helpful, not to mention a LOT less expensive than the standard hourly rate system. It was perfect for my needs, and the attorneys are high quality.

So...no, you should not be giving away all your profit to firms that charge astronomical fees. Don't fall for the sales pitch. Good luck!

Same with attorneys. I use a legal plan and it's been a fantastic resource and extremely helpful, not to mention a LOT less expensive than the standard hourly rate system. It was perfect for my needs, and the attorneys are high quality.

So...no, you should not be giving away all your profit to firms that charge astronomical fees. Don't fall for the sales pitch. Good luck!

Sudhanshu Singha · Answer

@Juan F. Saa You should definitely shop around since you will definitely be able to find cheaper financial/accounting services. Also you may want to search for CPA's outside of the NOVA area since NOVA CPA's probably have higher billing rates due to higher cost of living. With the ease of doing business online now you should be able to find a cheaper out of area CPA that can handle you financial/accounting needs virtually.

Also you should check out the tax forums on Biggerpockets if you end up having some questions related to real estate tax concepts like 1031 exchanges, tax treatment for flipping houses, deprecation rates etc. since you may be able to find your answer there. They usually have a few CPA's who give really good advise there can probably answer any questions you have which have not already been asked.

Jill F. · Answer

We have a CPA do our taxes (59 units and another small biz) it's usually around 2-3k for two LLCs and our personal taxes. If we have questions, we can make an appointment and pay a couple hundred for advice. We have only done one eviction in the last 4.5 years so our legal fees are low

Jonathan R McLaughlin · Answer

@Juan F. Saa yea it can bite pretty hard at first. I remember our second accountant explaining the high bill saying "its just because you had a lot of activity this year"....you know, activity like purchasing real estate...THE REASON WE EXIST IN THE PLACE.

Our partnership had a couple of big transactions, new REP status, new to us cost-seg, asset transfers between entities blah blah blah and we felt much better having a large firm that offered experience and specialized knowledge since we couldn't afford to make a mistake. They also offered full audit protection and strategy planning and we found them very helpful. And with a partnership its good for the partners to have an outside party.

So thats the benefit, but I'm embarrassed to tell you what we paid (more than @Jill F. for far fewer properties :) and would love to cut down the expense.

However, yes, I would chalk a good accountant up to the cost of doing business. Like many things, you can do it yourself, but probably won't be as good at it and it will be less of an issue as you scale. Also, the expenses are deductible if you hire them out.

Kenneth Garrett · Answer

@Juan F. Saa

Don’t make it more complicated then it needs to be. When you start out you will need to find a CPA who either is an investor or understand the investor philosophy of taxes. I pay $1800 for two LLC, an S-Corp and my personal taxes. I can and get advice for no charge. I try to do my own research so when I do call I can Intelligently on the topic. Not wasting the CPA’s. Listen to podcast and read books. It has helped tremendously. I use a simple spread sheet to keep track of income and expenses and keep copies of your checking account. It’s very basic when you start out. As you acquire more properties it can get more complicated.

As far as an attorney, unless you need legal advice there probably isn’t a lot of attorney talk. In my market everyone uses attorney’s for there closings ( buy and sell). After that not much contact other then tenant landlord questions. Not every attorney charges for a phone call. Don’t abuse there time and you’ll be fine.

You need the right CPA and attorney. Check out your local REIA group for investor friendly CPA and attorney.

Jeff Stein · Answer

@Juan F. Saa

I recommend shopping around more. Those fees are very high and you may not need all the services they are offering. With regard to legal fees. The main things I use my lawyer for is to write a lease ￼￼template, compile an offer to purchase, and then someone different for evection‘s. Overall not that many legal fees. As far as tax and accounting, I now have my own business that does this, but initially I did my own bookkeeping I can tell you you may be offer services you don’t necessarily need for those kinds of numbers you mentioned.

Feel free to shoot me a message anytime. Happy to help. ￼

Juan F. Saa · Answer

Thank you all so much for your valuable and thoughtful response; your experience and suggestions really show how much I was off the mark. I was considering having a Wyoming LLC and one for each pair of LLCs as I'd heard Garret Sutton recommend but it might probably be overkill to start.

@Jill F., your numbers are really encouraging, although the 59 units to 2 LLCs ratio seems a little high; but I am speaking only based on Mr. Sutton's recommendation above. On the other end, @Jonathan R McLaughlin, I think the nature of your transactions are way complex when compared to my humble upcoming start in turnkey rentals, but I get your point.

Great recommendations @Lynnette E.; I don't mind (and actually like) keeping records on my own so I expect this to help a lot in reducing the fees, but the approach @Susan M. has taken in pulling and categorizing everything at the end of the year is very appealing; I will add that $100 per door you tipped me on as a rule of thumb to triage bad cash flow deals.

@Jeff Stein, you are right, unfortunately some companies/professionals do scare novices like me into getting services that may not be needed instead of providing the advice we need. Thanks for offering to help, will keep it in mind.

That's exactly what I think got me here, @Mark Fries, over-analyzing; I am struggling to find the proper balance between careful analysis and analysis paralysis :)

@Kenneth Garrett, I just bought a couple of books on real estate-related tax strategies that I already started reading.

Again, thank you all for helping me get my head back in the game.

Are legal and accounting fees cash flow dream killers?

Are legal and accounting fees cash flow dream killers?

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