All Forum Posts by: Dave Holland

Yeah I get that, but the issue is that it is my bank telling me the replacement cost policy is what is needed.

I'm getting conventional financing on a 4 unit property with a purchase price of $130k. The appraisal came back with a rebuild cost of $428k and my bank says my insurance must be for at least 80% of this cost. I was planning on insuring for less than this, around $150k, and obviously the insurance is now going to cost quite a bit more than I was anticipating. My banker said this is the industry standard to use 80% of the appraised rebuild cost. Is this right? Does anyone else who is wiser than me in regards to insurance have any tips to share?

Hi @Kevin Siedlecki

As a CPA I tell people all the time when they don't need a professional to prepare their taxes.  For example those with W-2 wages, own a home, and maybe have some investments.  There is no reason a person in that situation shouldn't just use TurboTax or a similar tax prep software.  Some go for it on their own and some still just want to assurance of a professional to be sure it is done right.

When you get into real estate or other self-employment, that is when I generally think it is necessary to use a professional.

I do see your point, though. If you just read off numbers at the end of the year and have to pay $1k for your return to get done,  it doesn't seem worth it.  That doesn't sound like a great client / accountant relationship.

The value in working with a CPA should be their knowledge, not just processing the return.  You should be able to ask questions throughout the year, and the CPA should help strategize for maximum tax efficiency, in addition to taking care of all of your filings accurately. Your CPA should feel like a part of your team. I would probably try to find a different person to work with if I was in your shoes rather than trying to do it all yourself.

Just to answer your question more directly, I've seen a lot of non-accountants try to use the TurboTax for business software and almost never right. 

@Eddie L.

Yeah I think what you are experiencing is common. Just like attorneys, for example, if you don't use someone who specializes in what services you need you won't be getting the highest quality service. 

If you want to use a local accountant, someone who you can meet face to face, maybe ask around at a local REIA group meeting. Or if you know other investors in the area ask who they use.

If you are comfortable with  scanning/emailing, phone and/or Skype meetings then there are quite a few (myself included) CPAs on BP that deal exclusively with real estate investors and are good options. Just like any other contractor you might use I think you should just talk to a few and see who you feel the most comfortable working with. 

Hope that helps

@Mark S.

Right, 1/27.5 is roughly 3.64% so that's the annual write off of what is depreciable. Also, realize that only the building is depreciated so say you buy a property for $100k that is $75k building and $25k land then you only get to depreciate the $75k. This lowers that percentage if you are using the total purchase price as your factor. Maybe this was part of the confusion. 

Also commercial property is depreciated over 39 years which is just over 2.5% so maybe that could be another source of confusion. 

Benjamin Allen Yes as far as how W-2 income is taxed compared to rental income you are correct that you don't pay Social Security and Medicare. For 2016 the rate is 7.65% for W-2 employees, it should be noted if you were self-employed it would be double that or 15.3% since the employer actually splits this tax with you. So the simple answer is you can earn 7.65% less and still have the same take home income if you only had rental income as opposed to W-2 wages. It's not really that simple though because as others have mentioned there is depreciation and other "on paper" expenses you have for tax purposes that don't impact your actual cash flow. You do also have to accurately forecast your expenses and capital expenditures because that too will impact your total rental income. If a toilet needs to be replaced at your employer it's not like your wages would be impacted, but if you have to replace a toilet at your rental it goes against your bottom line. So if your goal is to replace your W-2 income you will want to really get to know what average maintenance is and also reserve for capital expenditures, vacancy, etc. because these things will happen.

@Doug Underwood

Everyone's preferences are different so it might just be whatever level of risk you are comfortable with and what sort of investing you do. 

Just think that if you are in say a 35% tax bracket then you'll essentially be taxed 45% on the money you take out. So $100k out of you IRA nets you $55k.

For me, I do buy and hold investing so I'd rather just save up for a down payment and not mess around with the IRA withdrawal. It would take too long to recoup that tax and penalty.

Others might believe they can flip a house and replace their lost IRA funds in a deal or two.

@Wendy Lin

You'll be able to qualify as a real estate professional based upon what you said, but I want to clarify a larger point.

You can deduct expenses regardless of whether you qualify as a RE professional or not. You can also deduct expenses whether you are a sole proprietor in your own name (or DBA), or if you have an LLC or an S-Corp. So if you aren't already deducting expenses you need to speak with a CPA and get your record keeping in order.

The main benefit of the RE professional designation is not being phased out of passive net losses from real estate investments.

@Nathan Christensen

For taxes I would check out Amanda Han's book published by BiggerPockets or the blog posts by Brandon Hall. 

For loans I would also check out the beginners guide that BiggerPockets created. 

Also don't worry about asking specific questions here on the forum there are a lot of people willing to help out. 

I'm located not too far from you if you ever wanted to chat with more questions just shoot me a PM. 

@Michael Bertsch

Yes I agree with @Jenny Bayless the ARV figure you get won't have any impact on the depreciable basis. It is going to be your purchase price plus the cost of your rehab.