All Forum Posts by: Andrew Gingerich

Hi there, I am seriously considering buying an investment property in Michigan north east of Detroit. I am wondering if I put the cash flow from the investment property into my children's MESP 529 account can I reduce my taxable state income liability? What is the tax rate in Michigan on net cash flow? And can I reduce my tax liability even tough I am not a resident of Michigan. I live in Washington State. I assume I would have to start filing a MI state income tax return if I invest in MI?

#Michigan #529MESP #MichiganCPA #Michiganstateincometax

Thanks!

@Bjorn Ahlblad Aberdeen?!?! Good grief. I guess Brando should have stayed put. Lol. Thanks.

@Charles Seaman THanks, good to know I am doing the math honestly. I don't know on CAP rates, but by the time debt service is put in, is there any cashflow left at CAP rates south of 7%? Are investors giving up cash flow and betting on rent increases? What are local and typical city CAP rates these days?

Thanks for the help.

Am I doing my math wrong? There is a 14 unit in my town listed for 3.6 million and a 30 unit listed for 4.1 million. 

Gross rents on the 14 unit are probably 21000 per month or 252000 annually. If I assume 45% of rents are going to expenses I get an NOI of 113400. At a 7 CAP the valuation should be just under 2 million. Yet it's listed for 3.6???

On the 4.1 million multi family I get 360000 annual gross. 55% NOI would be 198000. At a 7 Cap it's worth 2.8 million. Not 4.1 million.

What am I missing. Is it common to go to brokers with your own analysis and says... look this is what I can pay and it's much less than what you think its worth? Or, can you show me how you valued this property based on income? I haven't even asked for financials because they seem so far away from value. Both listings are being listed directly by the PM company that manage the buildings. Two different PM companies operate the two properties. 

@Caleb Benedict there is a great investor facebook group in the tri. Look it up. Very active group.

I wouldn't recommend "ripping the band-aid off". In doing so you have just identified yourself as a "my new rich and jerk-face landlord" in the conversations that your tenant has with her/himself and others. Of course, neither of which is true. Most landlords own 1-5 properties and are not rich or jerks, rather building something slowly over time. We provide a service to paying customers. But instead of making this emotional discussion let's do the math.

Raise the rent 20% and risk a great tenant walking for no other reason than they have established you as a jerk landlord. Even if the market rents are fair after the increase they may choose to leave simply because of the precedent you have set. 

But now you are going to buy them a new fridge to keep them there? The fridge costs you 400-600 bucks? That's the same amount you would lose if you fazed in a rent increase over several months. Or quarters. Did the existing fridge work fine before? Chances are they don't want a new fridge but and would prefer more modest rent increases. We have gained nothing here. Instead, your time of getting a new fridge installed and disposing of a new one is wasted. 

Having a great tenant walk and a vacancy for 30 days while you find a new one will cost you 950 bucks in rent plus turnover costs, which are never considered when we talk about vacancy. Are these costs worth the roughly 400 bucks you would lose in a phased in rent increase? 

I agree with @Nathan Gesner for 1. but 2-3 are strategies that I would not implement in my business. Let the math guide you.

@Frank Lo my biggest mistake has been giving someone who had a poor background check a "Second chance" I fell for the sob story and the tenant was a pain in my backside. Most of us are kind people and want to "help" people, but honestly it will backfire. It sounds awful but you need to stick to your criteria and find great tenants if you want to be a successful landlord. So that's the don't.

This is your Do...consider this your bible for tenant screening and qualifications https://www.biggerpockets.com/blog/2013-01-27-tenant-screening 

@Rocco Swinney This is a great question for a CPA. Which I am not. A couple thoughts come to mind. It may be worth filing separately even though you are married. My understanding is it is normally not worth it but there are a few cases where it might be useful to do this. Or, have you considered reducing your AGI through IRA's. You and your wife can each contribute 6000 a year for a total of 12,000. Is she employed with an employer that offers additional tax deferred accounts (401K? Health savings? Cafeteria plan?). Between the standard deduction for married filing joint (24,000) and two IRA accounts (12,000) I can get your AGI down to 124000 pretty easily. (80K+ 80K = 160K - 6,000 - 6,000 - 24,000 = 124K). If the game is to get under 100K you can probably find a way to do it. You can use the money in the IRA to buy more real estate as long as you are not actively managing it. Do you have a business like and LLC for your REI? If so you can probably open up a Solo IRA where the limits are much higher than 6K and you can invest in RE through it. There are other strategies as well that can keep your bucks in your pocket rather than giving them to Uncle Sam.

Congrats on the marriage! Way to be proactive in your planning. Very few do this and it fantastic that you are thinking about this. 

Best, Andrew

@Jamar Lockwood Do you have a copy of their existing lease? Have the seller and current landlord issue a estoppel certificate to the tenant that can be shared with you (you can find templates online). Ask permission to requalify them. If it were me, I would want to know i was inheriting a good tenant before I would worry about getting rents up. A good tenant is worth more than a couple hundred bucks a month. If you rely only on what the seller has said you may get burned. Ask permission to run a credit and background check. Also ask for proof of prompt monthly payments. Can the seller provide this data via statements from their bank? If you raise rents consider working with the tenant to phase in the rents over a period of several months. I 20% jump in rents on day one may backfire on the tenants "relationship" with their new landlord.  Consider 50 dollar a month increases until you get to market rents or quarterly increases over the next year. Most tenants are not well positioned to take a 20% jump in rents right away. Just something to consider.

@Matthew Irish-Jones et al. I really enjoyed Dave Meyers post here https://www.biggerpockets.com/... as a data guy trained in biological statistics I am much more data driven. While the currently markets I'm invested in have had great cash flow the price to rent ratios and price to income ratios give me pause. I wonder how many investors are doing these math exercises. Luckily our tenants are of high quality but markets with better cash flow are now on our radar and we will take the icing (Appreciation) when it is served up but only as a luxury.  Buffalo looks like a great one provided you can keep vacancies low and and tenants are of quality with predictable/reliable incomes. 

Note that @Dave Meyer combined approach towards the end of the article has Buffalo and Rochester among the top picks. A finding that has not been lost on me over the last 12-24 months.