Multi Family, Owner Occupant, and Taxes: Who owns it?

Question

I'm currently looking into an owner occupied multi-family deal for my first purchase, which is very daunting to say the least.

I'm doing my best to do all my due diligence - value cashflow based on local rentals,figuring out how much negative cash on cash return I'm looking at (-$300 to -$500 seems to be so far; much cheaper than my current rent and of course some of it becomes equity), etc. and most of my searching found me adequate answers to all my questions, except one:

How do I write off depreciation, how do I handle expense write-offs, etc. as just "the guy" that owns the house? Do I have to set up some sort of DBA or sole proprietorship, and is it still possible to get a 3-5% down conventional, owner occupant loan? Can I still write these off just owning the houses only in my name?

That being said, I intend to hop to another multi-unit property in a year, rinse and repeat. I'm already 30 and not getting any younger, so I'm much later to the game than most. But after building a "decent" portfolio, should I look into transferring these to an LLC or S-corp or similar? Is there any benefit, and if so - how would it work?

I know this is a bit long, but I felt the context is necessary. Thanks for reading all this!

Will Fraser · Answer

FHA loans are optimal for 3- and 4-units specifically because conventional loans (as I understand them) jump up to 15% down for those assets, while FHA loans are still feasible at 3.5% down.

FHA loans are notorious for being cumbersome and I've had some clients miss out on properties because of the loan, but when you're looking at a 3-4 unit the buyer pool is largely looking at the same metrics (cash on cash, ROI, etc) and that levels the playing field significantly.  For a single family home, though, you'd generally be better off going conventional.

With regards to management software I have been delighted with my experience with Hemlane (basic, not their premium service, which seems like it only makes sense in a few markets but does sound cool).  I used Cozy for my first several properties and it does the job, but I find it lacking in maintenance requests and the ability to handle those internally.   I tried Yardi and thought it stunk royally (mainly in terms of UX/UI, which is hemlane's strong suit for sure).  Buildium seems good overall, but not needed for portfolios until a certain point (at which point I would be pushing for Appfolio based on my professional experience with them.)

Will Fraser · Answer

Hey @Robert Hall, welcome to the Biggerpockets forums!

You'll want to buy the multifamily that you'll owner occupy in your personal name, so that you can utilize the 30-year low down-payment loans (ideally the FHA loan if you're looking at a 3- or 4-unit).  Your accountant will either be able to split out the expenses for the units you are not living in and write those off, or the tax benefit may begin after you move out (that's a good question for your tax pro).

If I had it to do over again I would start tracking all my numbers on Stessa from the first unit I owned.  It's free, it's LEGIT, and it makes your life easier in understanding and analyzing your investment properties.  I'd recommend it.

Last thing . . . dude, you're taking the right steps.  The right steps done repeatedly will produce the right results, period.  30 isn't "late to the game" unless you spend a lot of time of Insta and TikTok (which makes it feel like 22 is late to the game sometimes), but rather you are in a great position.  If you loaded up on properties in the next few years, Lord willing, you may get to see ALL of them paid down to $0, exchange those up for more valuable properties, and have some multiplies cashflow and value to "retire" off of!

Jonathan Pflueger · Answer

@Robert Hall

Lots of good advice from @Will Fraser, can't go wrong with what he gave you. Some of the things you are talking about refer to something called the Internal Rate of Return (IIR). This is specifically true when you start thinking about buying properties that are cash flow negative. IRR is a tool sophisticated investors use to measure the rate at which a real estate investment grows (or, heaven forbid, shrinks). It takes into account depreciation/appreciation, write-offs, rent increases, and various other factors. The easiest way to understand it is this: most investors evaluate a deal from year one numbers, IRR evaluates a deal over a period of ten years.

Stick with an FHA loan and get a CPA to answer all your entity and tax related questions - a good property manager might also be a good idea depending on how hands on or off you want to be. Read up on IRR and be familiar with it - it will give you insights into other factors that can, depending on your criteria and circumstances, drastically alter how you underwrite and approach real estate deals.

Jim S. · Answer

The first year do or attempt to do your own taxes, then set them aside and go to a CPA with lots of questions. The next years use your CPA forms as answer sheets and just put in the appropriate numbers. If you understand your taxes it will help you on self management. After a year or two you can decide what if any you want hire out.

Robert Hall · Answer

@Will Fraser @Jonathan PfluegerI don't think "Thank You" quite says how much I appreciate all the helpful information you both have given me! I'm going to attempt to manage it myself, since it's only one property and I figure I can always hire a management company later if I feel it's necessary. Seems to me that I need to concern myself more with extracting as much value as possible out of the first few properties and not comfort.

Robert Hall · Answer

@Will Fraser Would an FHA loan be a better option short term than conventional? It does seem like the rates may be lower, but I have excellent credit and didn't like the look of lifetime PMI that's now  on the FHA loans. Plus I've found FHA is less-than-competitive in my area, given how hot the market is for most houses (I was previously looking at single family homes).

Stessa seems useful, especially given that it's free - I've seen lots of mention of platforms like Cozy and Buildium for signing leases, collecting rent, managing requests, tracking expenses, etc. Do you have any recommendations on that front?

Multi Family, Owner Occupant, and Taxes: Who owns it?

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