All Forum Posts by: Allan C.

@Travis Boyd you’ll lose more in interest rate increases, potential property taxes increases, realtor commission and other transaction costs than you’ll pay on any future cap gain taxes. If your primary has a net $1M appreciation you’ll only pay $100k cap gains tax - that’s a lower alternative than what you propose.

Focus on keeping your family happy and find another means of funding your investment. Your current plan seems like a lot of sacrifice for limited gain.

@Christine Aledam LLCs will affect your future loans/refinance so you can't simply just buy in your name and operate as LLC. Single owner LLC also doesn't protect you as you think, and you're more than likely going to commingle everything and ruin any separation of entity.

Short answer to your questions is if you have a properly set up LLC then all transactions (lease agreements, invoices, etc) are under the entity name. But you are many steps away from this so please do more research on LLCs. Lots of threads on this forum and cheap books you can buy.

@Hsin-I Hsu one other thing to consider is tax shielding. If you buy primary you only exclude $750k loan interest if you itemize deductions instead of taking standard. You also max out property tax deductions.

If you put those same dollars to investment property you get to write it all off.

@Albert Blair I agree with other replies- Don’t Do This! Slight possibility it works out, but high probability it doesn’t - put the odds into your favor.

I did this 10 years ago and pursued a heavy renovation with contractor/tenant. Biggest issue is contractor realizes they have leverage over you, so timeline slips and costs escalate. And oftentimes they don’t make rent payments and hold you hostage to advance construction draws in order for them to give you back your own money as rent.

The other issue I ran into is contractor took on other jobs during the day and did renovations at night - didn’t go over well with neighbors.

@Bruce Woodruff I always scope now as well. I’ve had 2 properties with $20k+ sewer repairs and a few deals I’ve backed out of due to sewer issues that seller wouldn’t retrade on.

One property I didn’t scope and ate the $20k myself. On the other property seller adjusted sale price. It’s cheap insurance for a costly potential, depending on geography.

@Whitney Bivins if you exit this situation what makes you think you won’t end up in a similar spot a year from now? Since you’re learning on the fly, there are many more unexpected items that you have still yet to encounter. Selling your property now will incur commission fees, so you’ll take additional losses on the transaction.

One of the most important things for you to know is that REI is very capital intensive. It's guaranteed that you will need to replace roofs, HVACs, appliances and many other components. When you purchased the current property you should have expected many of your repairs if you performed an inspection. It's why you'll often hear about keeping adequate reserves. Alternatively, you could potentially have negotiated a lower purchase price… or just walk from the deal if it doesn't meet your underwriting criteria.

Ultimately, given the limited info I think it’ll be best for you to stick it out and keep learning.

@Greg Hammond not paying capital gains is enticing for sure, but you’re only saving $40k. I think your biggest asset is the 2.25% rate and the 2019 CA property tax basis.

For every $500k borrowed, you’re going to pay $20k/yr more on interest rate alone, plus higher property taxes. You’ll also pay transaction fees disposing the asset, likely in the $40k+ range.

I don’t think you have a clear-cut answer here, but you’ll need to rack up all the financial trade-offs to make an informed decision. My hunch is you won’t find a replacement investment in this market that is much better than what you have, especially if you are looking to redeploy $500k+ equity.

@Linda Tong Boston is the wrong market to use CoC metric. CoC works well in Midwest markets that cash flow more than appreciate. As Joe says, CoC is just a spot in time and you need to understand long term cash flows.

In my markets (similar high appreciation to Boston), I typically start with low CoC… and often negative cash flow. But within 3-5 yrs it'll flip to positive cash flow, and 5+ yrs out CF will be significantly higher than most other markets.

I don't use CoC as a metric since it's meaningless for my markets, but I use IRR and NPV. IRR is helpful for markets with changing cash flows. I also like Joe's recommendation to see how much time it takes to recover your investment. I suggest calculating time to recover 1x and 2x investment as simple screening metrics if you're not comfortable using IRR.

@Brody Veilleux yes you can have deferred taxes from regular operating expenses, but it depends on cost of building. If your building value is only $100k that’s small annual depreciation vs a $1M building.

You should read more books on this topic because you haven’t even scratched the surface. For example, you can have a large capex event like $20k roof replacement, but you can’t necessarily deduct it in a single year.

It’ll be helpful for you to study up on expense vs capital expenditures, and then read up on safe harbor allowances.

@Becca F. Have you performed an amortization analysis to see when your net earnings after depreciation starts to become positive? Given your strategy and limited exposure to cash flow markets you likely will be stuck with suspended PALs for 10+ yrs. It’s not the end of the world but it doesn’t feel optimal.

There are likely other creative options, but perhaps you can buy cash with your next purchase and then lever up after you’ve clear your PAL bank. I balance my portfolio so that I always have a slight buffer of PAL.