All Forum Posts by: Paul Choate

You really need to get inside. I have properties in that range and I buy them as well. You will be surprised with what some people will live in. $150-200 rent jumps are a huge difference in quality of homes in my area (east of OKC). There is usually a floor for properties that meet basic housing requirements. Beyond that, you have to have a property worth the premium.

O.k., I do not know why this is hitting me like a ton of bricks but here is what I thought (before receiving all of this excellent info):

I read all of the books about real estate before, during and after buying my first house. I purchased my first property when I opened my law practice right out of law school six years ago. My wife and I have six kids. Needless to say, I have not had to pay a lot of taxes until the past 3 years. I had just heard vague references to all of the tax benefits of real estate. I assumed that I could grow without any limits and that real estate had a magic shield to keep the IRS at bay.

Now after the above discussion- Here is my understanding of the rules:

You have to pay and pay and pay. It doesn't matter if I don't take a "distribution" personally. There is not a lot I can do to defer the tax consequences of each sale or principal payment.

I am in a fairly different situation than most of the examples I have read about on real estate investing. I can buy houses cheap and they cash flow like crazy, but I can not get bank loans very easily and they do not appreciate at all (because my area's economy is tied to oil which has risen and fallen and banks are leery of $20,000 houses). So, I have to pay them off with cash or very short term financing. I guess I am going to have to grow slower and stop reinvesting so much into the next house until the cash flow from the properties can cover the taxes generated by the principal pay downs.

I have liked the idea of the self-directed IRA (or Roth). The problem is I want to do this full time as soon as possible. I am not going to need a retirement plan if I have 100 houses ;)! I am 36 years old, btw. I like @Jeff S. suggestions about using the corp to pay toward it but it doesn't get me to where I want to be in 5-10 years.

Any thoughts or points I am missing would be appreciated...

Thanks so much for the info.

If I change my election on the LLC from partnership to S- corp can I retain earnings in the company for growth? What about C-corp?

Amazon is famous for not showing any profits because they are plowing everything back into the company so that one day they can own the whole world (hyperbole alert!). Everything I am reading is talking about how all of these corporations are sitting on so much cash. They do not pay taxes on all of that, so how can I do the same?

What business structure do I need to be able to grow without cutting of my own leverage? I don't care if I am double taxed or hit hard down the line because I assume I will have the money to pay it at that point. I don't need my real estate to live on right now. I am just trying to grow it as fast as possible so that I can switch to doing it full time.

Thanks again for all of your help!

I have certainly put the cart before the horse on many occasions. My biggest take away from all of my messes is to know more sooner!

Question on entities:

We are set up as an LLC and have elected to be treated as a partnership for tax purposes. Why can I not retain the earnings in the LLC to purchase more properties and not get taxed until they are sold and any moneys distributed to the members of the LLC?

I thought that might be the issue I am overlooking. My depreciation will never be equal to my principal pay-down. Unless I stop buying houses...

I feel like I am stuck in a vortex where I am going to keep swirling around until I can break free of the middle ground I am currently stuck in. I want to grow this to do it full time but that means I have two full time jobs and I am paying taxes where I am getting no immediate benefit.

Warning- This is long-

I just got my taxes back for last year and I am really confused. I have tried to grow my rental business a bit too rapidly and I am trying to figure out how to level this out so it works for my family.

I have used a couple of different CPAs and I am not comfortable with what they are doing. (BTW I am an attorney but I am clueless on taxes.) I thought I would go to the collective knowledge here to see where I am off track.

In 2011, I showed a loss on my rentals because I had just fixed up most of them and I did not take in much income because they were down for most of the year. I have been investing from my law practice into my rentals for years but this was a big loss for me ($20,000). Fun fact- If you apply for a loan after showing this loss, a bank won't care that you spent the money on income producing assets. I would have been better off going to Vegas and flushing the money down a toilet and then they would have given me a loan!

Flash forward to 2012 taxes, now I have my same legal income and this time because I had bought and sold a few properties, retained/ fixed up a couple more, my new accountant wants me to capitalize the improvements, I am showing double the income from the year before and paying 3x the taxes. Now I am going to take it in the teeth for the new healthcare requirements because I will not qualify for any subsidies etc...(not a political statement- its the law, I am just trying to deal with it).

Here is my main question. I paid the same amount of money to myself in both years. What I take home is not changing. I understand capitalization and depreciation but try explaining to your wife why real estate is such a good deal when you can't borrow money because of it and your tax bill is not dependent on what you take home at the end of the day. What am I doing wrong?

If it helps, my units cost about $18,000 and rent for an average of $500 per month. I have put most of everything I get out of them back into them to pay for the upgrades and any financing I do is paid back in about a year to 3 years by taking the money from the paid for properties to pay off the others. I bought my first one in 2006 and I now have 13. Is this just because I am growing or is this how it is down the line?

Also, this year I started a partnership with an investor. He loans the money to an LLC we jointly own. The LLC gives him back a mortgage which is amortized out over 5 years. Basically all of the income is going to pay off the properties and cover expenses. I wont make any thing for 5 years. We bought 2 since August and should have a couple more buy and holds this year. Am I going to be nailed again next year?

One last set of questions- We are also set to close on a couple of flips this month through the joint LLC. If I retain the profits from the sales of the flips in the LLC and purchase more properties will I get individually taxed on that? Is it better to distribute the money each time we sale a property to the members?

Thanks for any help.

Just a note on holding a title without recording-

I am an attorney in Oklahoma and that does not work in my state. Every state is different so speak with your attorney before pursuing that strategy. The recording statutes in your state are generally race, notice or race/notice and they determines who "wins" if you have a bad actor selling the same property to multiple individuals. If you don't record properly, you could be left holding the bag. Your only claim would then be against a criminal.

The reason I think it is possible he did not list it in the bk is you mentioned a 45 day stay coming from the bankruptcy filing. This is generally for renters so I am assuming that he did not list the property as an asset. If he had listed it as his property, the stay should extend even longer unless you filed a motion to lift the stay. This motion can be completed in about 45 days from filing so if that was the case, he may have disclosed it as an asset.

*please note this is not legal advice. I am just trying to explain what may have happened. I am only licensed in Oklahoma.

Will,

Sorry to hear about all of your problems with this case. I am a bankruptcy attorney by day and one thing you may want to check or have your attorney check is the squatter's bankruptcy filings. One of the problems with lying is keeping your story straight and if this individual used different attorneys then he may have said different things about his situation to different courts. The bankruptcy filings are sworn under oath. If he said he was married on them, then he lied (I am assuming you are correct on this point). If he said he wasn't then he lied on the state court proceedings. Additionally, if he did not disclose the house as an asset he also lied on his bankruptcy schedules.

This may not help your situation end sooner but it could make the squatter's life much more difficult if you can introduce criminal charges to the mix. Talk to your attorney or call the chapter 7 trustee listed on his case. You may also want to contact the U.S. trustee's office and the F.B.I. who investigates bankruptcy crimes. All of the bankruptcy pleadings are available online at www.pacer.gov. Good Luck! (Don't expect too much, trustees vary greatly in how much they care about this stuff. They aren't going to get any money from him so they may just take a pass on it. But, it might be worth a shot at this point.)

Does anyone have any experience when buying through www.auction.com with the reserve? Specifically, my question is can they lower the reserve or remove it as the auction progresses or does the reserve stay the same for the whole auction?