All Forum Posts by: Brian Schmelzlen

I agree with the others, I believe that diversification is a good thing.  I also think it is a good idea to minimize your taxes now, while positioning yourself the best you can for the future (where everything is an unknown).

It certainly would not be a bad thing to also use your retirement accounts to invest in real estate (as long as you are very careful to follow the rules- avoid self-dealing!).  It would allow you to shelter any income coming from those properties from taxes.  Of course depreciation on those properties would be relatively worthless to you, but run the numbers and if it benefits you more to have new investments in your retirement accounts you should pursue that.

Hi @Daniel C.,

It is in service once you hold the duplex out for rent.  That can be before tenants are actually placed, but you must be prepared to actually place tenants at that point.

If the work is done before the tenants are placed, you simply have to wait until it is "in service" to begin depreciating it.  If the work is done after the tenants are placed, it is already in service so you would begin depreciating it immediately.

Without looking at the the costs of replacing the siding with vinyl (and other costs relating to the property), I am going to make the assumption that the work does not qualify for any of the safe harbors under the repair regulations and thus would have to be capitalized.  Therefore, as long as everything is done in the same tax year the actual tax differences in the timing of the work is minimal.

Hi Darren,

Diane and Michael are correct; under Section 121 of the Internal Revenue Code you (as a single individual) can exclude $250,000 of capital gains from your taxes if you have owned and resided in the house as your personal residence for 2 out of the 5 years prior to the date of sale.  There are additional rules relating to this, but that is the gist of it.  California conforms to this, so you also would be able to exclude the gain from your California income taxes.

I don't know your age so this may not apply, but under Prop 60 if you are 55 or older there is a 1-time chance to transfer your property-tax base from your old primary residence to your new one.  There are a number of rules relating to that, so if you meet the age requirement you should talk to someone about this.

Hi @Josh Dehmlow,

As has been previously mentioned, you do not necessarily need someone based in Missouri because your tax planning will largely revolve around federal tax laws.  However, as a California resident you will also want to do some tax planning around California tax laws.  Our tax rates are high, and (particularly with the new tax law) there is a lot of non-conformity with federal tax rules  Therefore, even if you do not go with a California CPA you will probably want to go with someone who is very familiar with California tax laws.

Hi @Griffin Campbell,

My advice is to live frugally.  I didn't spend like crazy in college (who can afford to), but I look back now and think that I could have saved a lot of money if I had slightly better habits in college.

Until you graduate from college, I would try to figure out how you can live for free.  That could mean taking a college job that pays for housing (RA, etc.), living with your parents, or (if you have the savings for it) house hacking (i.e. buying a house and taking on enough roommates to pay for the mortgage, property taxes, etc.).

Next, I would figure out how you can make some money while still in school.  Your classes are obviously your priority, but if you can get even a part-time minimum wage job to help build up your savings that will help you a ton.

Podcasts I would recommend are the BiggerPockets Podcast and the BiggerPockets Money Podcast.

There are a number of books I would recommend, but I would start with: 1) How To Win Friends and Influence People; 2) The E-Myth; 3) Give and Take; and 4) Start With Why.  There are plenty of investing and real estate specific books, but I would recommend starting with these books because they are more about the approach you take to things.

Hi @Lee Divers,

You can do a cash-out refi on commercial properties.  They are fairly common once you have built up enough equity.

One tax issue that you may want to be aware of (if the commercial property is in an entity like an LLC) is the debt-financed distribution rules. Basically, in cases where you take on debt in order to make a distribution to the owners of a business, the portion of the debt related to the distribution may not be deductible. First, with proper planning you are able to limit how much of the debt is deemed to be related to the distribution. Second, whether that portion of the interest is deductible or not depends upon what the distribution is used for (interest racing rules).

There isn't a problem with taking the property out of the LLC.

Technically, transferring the property from your name to the LLC triggers the due on sale clause. I would be up front with the bank about it though, and ask if transferring to a single-member LLC triggers it.

Normally just because the clause is triggered doesn't mean that it is enforced.  If you are making all of the payments, that is typically all the bank cares about.  However, that is not a guarantee that if interest rates go way up the banks won't change this policy and enforce it so that they can try to force you to refinance to a higher interest rate loan.  Seems unlikely, but it is a possibility.

You are also at risk every time title changes to the property that your property value will be reassessed.  However, most states have an exemption for when the beneficial ownership has not changed.

Hi @Ashley Stasio,

When analyzing a rental property, you also want to factor in other costs such as routine maintenance/repairs, insurance, and  cap-ex (major repairs; cap-ex stands for capital expenditures).  You also want to think of vacancy as a cost; you have to pay all of your expenses regardless of whether you have rental income, so you either have to reduce your potential rental income to account for vacancy or take the more common approach of thinking of it as an expense.  To be conservative, I would assume 1 month of vacancy per year, but once you have a tenant in place it should be slightly less than that (if you have a 12 month lease).

Once all that is factored in, if you only have to come out of pocket $1,500 or less per month for the mortgage (what you are paying for rent now), you are in great shape since you also have someone else paying down your mortgage and helping you build equity.

Hi @Matthew K.,

I am curious about your real estate investing plans.  Are you planning on continuing to invest in multi-family residences with family?

I don't know about making it all streamlined, but some advice I heard a while back from someone who focused on short-term rentals was not to be too reliant on any one service (like Airbnb).  That guy used several different sites simultaneously so that he could play with different prices and advertising strategies to see what worked best.  Might be worth exploring.