All Forum Posts by: Brian Schmelzlen

Inherited tenants are always risky.  I would ask to look over the tenant background check (if they ran one).  If the tenant has been there for a while, I would want to make sure that the tenant has been consistently paying on time.

You do not want to inherit a nightmare situation.

@Nick Broce,

Like the others have said, congratulations on being at such a great spot at 22.

If your main interest is in flipping houses, I would advise you to do a live-in flip.  Under Section 121 of the Internal Revenue Code, if you live in the property and owned the property for 2 out of the 5 years prior to the date of sale, you can exclude up to $250,000 of gain ($500,000 if married filing joint).  This means that you can do your first flip without having to pay taxes on it (unless your gain is incredibly large).

If you decide to rent out a portion of the property while living there (house hack), talk to a CPA about how that will affect this strategy.

Also, before you get too involved with any real estate strategy, talk to a CPA.  There are too many people who cost themselves a lot in taxes unnecessarily when they start off because they didn't talk to a CPA (pay a few hundred bucks in tax-deductible fees to save thousands in taxes).

One of the benefits of an LLC that people often bring up is that there is liability protection if you get sued by your tenant, etc. If this is your only concern, this can generally be accomplished through a good insurance policy.

However, an asset protection talk I attended last year (that was focused on California law, so you will need to check to see how this applies in Michigan) pointed out that if you are sued personally (say you are in a car accident) having property in an LLC can protect it from being seized as damages.

From a federal tax perspective, there are no real differences between having rental property in an LLC or owning it individually.

@Paul Ewing is correct that there are definitely more costs associated with having an LLC.

I would talk to a Michigan CPA and/or attorney to talk about what is right for your situation.  There is general advice than can be given to you, but without knowing your personal situation we cannot tailor the advice to you.

You are correct. I mistyped; I meant traditional 401(k) and then a Roth IRA.

Hi Bob,

I would start off by trying to educate them, so that they would at least be more willing to continue to negotiate.

Paying them $535k+ would just be ridiculous given their NOI (if they want to put in the work to improve the NOI before selling to you that is different, but don't pay them for work you will have to do). However, it may make sense to pay them more than what the property is worth based on the income method IF they give you amazing owner financing terms in exchange. If they were willing to charge you interest close to AFR rather than market, it may be worth overpaying for the building especially if you can get it cash-flowing quickly.

Hi Joe,

Technically, it depends on what shares were sold.  My understanding is that it is generally FIFO (first in, first out), so it would be long-term capital gains (the shares purchased 10 years ago would be sold first).  To be 100% confident though, I would ask your financial advisor how it will be reported on your 1099-B.

What I generally tell my clients is that in making this decision you need to consider what tax bracket you are in now (biggest factor) and what tax bracket you expect to be in when you retire.

If you are in a very low tax bracket now, you don't get much of a benefit from contributing pre-tax (401(k) or Traditional IRA). This is especially true if you are in a low tax bracket now and expect to be in a higher tax bracket when you retire. In that situation, I would strongly recommend contributing to a Roth IRA.

If you are in a high tax bracket now, there is a much stronger case for contributing to a pre-tax retirement account (401(k) or Traditional IRA being the most common). That is because your immediate tax savings will be much greater.

Of course, there is always the middle ground strategy if you are not maxing out your retirement contributions but are in a position to do so. In that case (especially if you are in moderate to high income tax bracket), you can make a max contribution to a Traditional IRA and then a max contribution to a Roth IRA (or, depending upon your situation, a non-deductible Traditional IRA that you will immediately convert to a Roth IRA).

In my opinion, owning rental real estate does affect your overall investment strategy but does not directly impact whether you should contribute to a retirement account pre-tax or post-tax.

I would recommend talking to a CPA and/or financial advisor who knows your situation better.

The expenses all matter because even though you can write off all the business/rental expenses the cash effect is only equal to (total expenses * tax rate).

If you have an expense of $100 and are in the 25% federal tax bracket (lets say no state taxes), at the end of the day you are still out $75.

There is not a maximum amount of valid expenses that you can write off.

In terms of what percentage of income should you be able to write off, there is a general rule of 50% of the rental income will be spent on operating expenses (after that you have to figure in your debt service expense).

Hi @Account Closed,

You win the bottle of Tito's.

Only the interest payments will show on the p&l.

While, indirectly, the principal is being deducted as well, it is being deducted in the form of depreciation on the building and improvements (not land).  There can be timing differences as a result of this.

Hi BP,

I wasn't sure where to post a request for a new calculator. Can you create a BRRRR calculator designed for commercial properties? I tested the residential real estate BRRRR calculator, and it seems great for houses but it is built on assumptions that don't necessarily work when being applied to commercial properties (such as there will be no income during the rehab phase; with commercial there probably will be).