All Forum Posts by: Brian Schmelzlen

@Ryan OMalley

You can incorporate without any assets, but that doesn't necessarily mean that you would want to.  I would strongly urge you to fully talk out your plans with your CPA and probably a business attorney to make sure that everything you are doing actually will accomplish your goals.

Hi @Andrew McAfee,

You will probably want to meet with your CPA (or hire one if you don't have one) to discuss this and other tax issues related to your new rental business.

Most of those expenses end up being capitalized (added to your property basis).  You would then allocate your property basis between the land and building, and depreciate the building costs over 27.5 years.

The city and county taxes, if they are property taxes and not any sort of transfer fee, are immediately deductible.

The funding of the escrow account is a non-event for tax purposes.  It is essentially the same as putting money into your own bank account.  You will be able to deduct the taxes and insurance as it is paid.

Hope this helps.

Hi Ronnie,

I know a few bookkeepers that my firm will work with in San Diego, if you are comfortable working with a bookkeeper remotely.  PM me if you would like me to put you in contact with one.

Hi Bernadeau,

I agree with @Todd Dexheimer 100% that you need to consider an exit plan.  It is one of the most overlooked things by partners when starting their business, and it can be one of the most problematic when only 1 partner wants to leave.  How will you value the business?  How quickly do the remaining partners have to come up with the money for that person's interest?  Does the exiting partner have the right to sell their interest to someone outside of the original partnership?  What happens if someone dies unexpectedly?  Should you have life insurance on everyone to pay out that person's family and to possibly hire someone to fulfill that person's duties?

I think you need to sit down and consider both how the business will operate if everything goes well, but also what is everything that could go wrong and what is everyone's responsibility in that event.  For example, lets say that there is a major repair that needs to be done on one of the rentals and there is not enough money in the business to cover it.  Will one person cover it as a loan to the business or is everyone required to contribute more capital?  If they are required to contribute more capital, what happens if that partner cannot for any reason?

It is great that you have already created an LLC and have drafted an operating agreement. It sounds like you are starting on the right track.

When looking at office buildings, what property class do you usually target (A, B, C, D) and why?

I am currently working on defining my search criteria for an office building, and I am inclined to go with a mid to low-grade B property.  My reasoning is that I want a building with good curb appeal in a desirable area (not only will I be using it as an investment, but I plan on moving my CPA firm into that building).  However, forced appreciation is important to me (I want to be able to refinance within a few years to pull some money out), so I need a building that has some issues that I can fix to improve the value.

Originally posted by @Stefano Grottoli:

Originally posted by @Brian Schmelzlen:

That is a workable strategy if you can find a partner willing to do it.

Although the loan would be in your name and thus there is more potential risk for you, you have to consider the fact that any potential partner would (probably) be looking primarily at how much cash you are both putting into the deal.  If I was putting in twice as much cash as my partner, I would not want only 29% of the profits.

I think the fact that you have the mortgage in your name and would be putting up 1/3 of the cash is a good argument for it to be a 50/50 partnership.  If you can negotiate a better deal with a partner, go for it, but that is my thought.

Also, I would spend a lot of time courting the right partner.  You are essentially marrying the person, so make sure you both are comfortable with each other and can work well together before either one of you commits so much money.

 Thanks for your inputs!

One question though - I didn't put half of the money into the deal - at the end of the day, I put 100k into the deal, and bought the whole house, which If I hadn't, we wouldn't even have a house to work on. Let's say I got a personal loan from a friend of mine on the whole 100k and would buy a house with that money into the same partnership model. It doesn't matter where my money is coming from. I decided to get it through a mortgage, which I will pay fully myself.  Am I wrong? 

You are not wrong, but most investors place a high value on cash.  Therefore, they tend to look at things from how much cash is on the line, and view debt as a cost of business.  Don't gt me wrong, the fact that the loan is in your name definitely means something, but I simply don't think that most investors would give it the same weight as the cash you are contributing.  I know I wouldn't.

There are other factors that should go into the profit-split calculation as well.  Who will be doing what work?  If you are only looking for a money partner, and you will be putting in everything you said plus be responsible for all the work I think 70-80% of the profit is reasonable.

That is a workable strategy if you can find a partner willing to do it.

Although the loan would be in your name and thus there is more potential risk for you, you have to consider the fact that any potential partner would (probably) be looking primarily at how much cash you are both putting into the deal.  If I was putting in twice as much cash as my partner, I would not want only 29% of the profits.

I think the fact that you have the mortgage in your name and would be putting up 1/3 of the cash is a good argument for it to be a 50/50 partnership.  If you can negotiate a better deal with a partner, go for it, but that is my thought.

Also, I would spend a lot of time courting the right partner.  You are essentially marrying the person, so make sure you both are comfortable with each other and can work well together before either one of you commits so much money.

You definitely are not alone.  I am horrible at visualizing how a property can look after renovations, even when it is described to me.  I suspect that people can start to develop that skill just by doing enough flips.

You have options in the meantime.  One is to hire someone to fill that role.  Obviously that will be an expense that you will have to incorporate into what you can offer for the property.  Another option is to partner up with someone who has that skill.

You will definitely be dealing with the sales people, but I would start talking to your community banks and credit unions.  They might have better rates and/or more flexibility with the fees.

Yes, it might actually be better. It means that you have more money available for a down payment on your investment property. Personal residences are not investments, they are lifestyle decisions. If you are in no hurry to own a personal residence, then you shouldn’t feel pressured to buy one first.