All Forum Posts by: Brian Schmelzlen

I think in general people are more comfortable with residential.  Most people understand it more because they either have been renters, or they own a house as a primary residence.  Another benefit of residential is that there are lower barriers to entry (at least in most parts of the country).

However, I tend to agree with you that commercial tends to have less hassles and better cash flow.  I like with commercial that you are able to have a more direct influence over the property's value, the tenants are businesses (except for apartments which are technically commercial) and therefore you generally only have calls from your tenants during business hours, and hopefully there is less wear and tear on your investment.

Hi @Account Closed,

That is great that you have all of your debt paid off except for your mortgage, and have an amazing savings rate.  You should be proud of that.

I completely understand hating debt and wanting to pay if off as soon as possible.  I share that with you, but I try to fight that in myself because I know that to an extent it isn't rational.

A fixed interest rate of 4.25% is very low historically, and because rates are increasing quickly I think it will be hard to get rates that low again without another major financial crisis.  I don't think you should prioritize paying it off.

Instead, I think you should prioritize using your savings to find investments that can make you more than 4.25%.  I think this is especially true if you are going to be borrowing to invest in rental properties; you will want to borrow sooner rather than later because most likely interest rates are going to be increasing.  You can then use your amazing savings rate to pay down that debt or continue to purchase more investments if you would like.

Hi Ben,

Congratulations on graduating college with savings, and having a nice paying job lined up.

If you are serious about starting a fix and flip business with your friend, I would seriously consider talking to both a CPA and an attorney.  My general advice for fix and flips is to set up your business as an S-corporation.  You will want to talk to a CPA though about what exactly that would mean for you, and how to structure everything (capital contributions, loans, etc.) to achieve the results you are looking for.

The attorney is probably even more important to talk to in this situation.  You are talking about going into business with your best friend, so hopefully you would both work well together but you need to do proper planning to make sure it does.  A point of frustration between the two of your (eventually, not right away) could be how to split income and responsibilities given that it sounds like you would put in 100% of the money and your friend would be putting in sweat equity.  You need to talk out everything in advance, and have it written into an agreement.

While you are still figuring out if you want to pursue this, I would start attending local REIA meetings and talking to everyone there.

When you are investing with a partner, I like the idea of using an LLC (because the default in that situation is a "general partnership" which has massive liability issues). This is not to say that there are not difficulties when you have an entity (such as working with lenders), but I think an entity is necessary whenever you have partners.

I would recommend an LLC over a C-corporation or an S-corporation. They are more flexible which should be helpful to you. The new Section 199A tax deduction slightly benefits LLCs over S-corporations because the deduction applies to more (with an S-corporation, if you take money out of the business you first have to take a "reasonable compensation" that does not could for the 199A deduction). Also, you are able to move property in and out of LLCs without any tax consequences, generally, which is not always true for corporations.

You will want to consult with a CPA and an attorney before you begin working with your friend.  You will want a CPA to do some tax planning with you to make sure you are set up optimally for your situation from the start, and you will want to work with an attorney to talk to every contingency and have it addressed in an operating agreement.  Investing with a friend can be great, but that doesn't mean that as good as you get along that there wont ever be issues.  It is better to work them out in advance.

There was an Italian restaurant by me that went out of business about 2 years ago, and they had a "going out of business" sign on the door for about a year prior to that.

While initially I think they had increased business because their customers wanted to make sure they got to go there an additional time or two, as time went on I think their traffic went down significantly.  I know I was less willing to go out of my way to go there in case they had closed (they never advertised when their last day would be, and their website was kept updated), so I would only go if I happened to be driving down that street already.

Before you close you should let your customers know, but I wouldn't advertise it more than a month or two in advance.

From an asset protection standpoint, an irrevocable trust would be better. However, if you already have an LLC the extra protection you might get may not be worth the negatives. When you put assets into an irrevocable trust, they belong to the trust (not to you).

I would talk to an attorney in your state that focuses on asset protection.  You don't want to create problems for yourself by creating extra complexity with only negligible additional benefit.

My intention with it is to refinance into an interest-only loan, if possible, because I care more about the immediate cash flow than building equity.  In the numbers I have run, this provided better cash flow than an amortizing loan because the loan constant is smaller, and provides tax losses because the entire loan payment is deductible and you still get to depreciate the building.  Of course, whether you can actually deduct those losses is another story due to passive activity rules, but deferring taxes for years on a positively cash flowing property is a big incentive to me.

This is the type of deal that I am looking for.

I don't think a 504 loan will work for this because of the 50%+ occupancy rule (subleasing doesn't work; they thought of that).  I think you would need a 5 year loan with as long of an amortization period as you can get.

I think for office hacking to work, you have to take a BRRR approach. I think you need to find a building in a decent area that for whatever reason has a low occupancy rate (50-60%) and at least 6-8 units. You would want to be able to easily identify what is causing the low occupancy (poor management, significant deferred maintenance, etc.) so that you can quickly fix it. Moving in yourself (paying full market rent to yourself), getting the building fully occupied, and ideally being able to increase rents over time with the improvements you make to the building will greatly increase the building's value. At that point, I would refinance to pull out all the cash you invested.

There are significant tax differences between the two options.

If you are developing the property for sale, all the units are inventory.  You would not be able to deduct any of the expenses related to the construction of each unit until the unit is sold.  At that time, they would be taxed at ordinary income rates (not long-term capital gains rates).  You don't get depreciation, and a 1031 exchange is not an option.

If you develop the property for rental purposes, you can begin depreciating the properties once they are "placed in service".  While operating them as rentals you would be taxed at ordinary income rates, but if you eventually sell them you would be taxed at long-term capital gains rates and  you would have the option of a 1031 exchange into a difference investment.  

Depending upon what path you and your father decide on also has a significant impact upon how you should structure the whole transaction for optimal tax results.

Hi @Spencer R.,

You are correct that traditional retirement accounts are not the right fit for everyone.  However, in general I like them because they diversify your assets.  I also like that they are a forced savings account.

My question is how much does contributing to a 401(k) plan really slow you down on your real estate investing goals?  If no longer contributing only gets you your first purchase a few months sooner, I don't see the point.

Another thing I would consider is, if your 401(k) plan allows it, taking a loan from your 401(k) plan.  If you are allowed to take a loan from your 401(k) plan, you are effectively having  your company help finance a portion of your purchase through their match.