All Forum Posts by: Erik Kubec

Hello BP folks,

Here is a real scenario for one of my properties with regard to how to use the Safe Harbor for Small Taxpayers, Routine Maintenance, and/or De Minimis options.

Property LCT has an original basis (just the building) of $70,000

Here is the work performed on the property during 2016:

1) The following done as part of a make-ready/turn over.  None of these seemed to improve the property, but rather to get it back to regular condition.  These seem to be types of expense that will regularly occur

• Paint interior walls, repair interior doors, drywall, tile
• Clean, clean, clean
• Repair plumbing, dishwasher from tenant damage
• Replace smoke alarms, blinds
• Replace weather seal

2) These items below are to fix damage the tenant did.  These aren't likely to be repeated regularly, but they were damage, so repairing them gets the property back to the condition when the tenant moved in, but does not seem to improve it

• Repair electrical lighting in garage from tenant damage
• Repair exterior door to garage from tenant damage

3) Finally , I made an improvement to the property that did increase the thermal efficiency:

• Insulation of crawl space

Given the low basis and high cost of all the above, the SHST budget of 2% of 70,000 is blown, so I can't use that one

Can I do all of these things:

• For 3) (insulation) I paid a contractor $2400, which included materials.  Can I use the $2500 deminis for this?
• For 1) use Routine Maintenance Safe Harbor
• For 2) can I use two additional, separately invoiced de minimis ($800 for the door, $100 for the electric fixture?)

@Matt M. Not class A, so maybe B?  This unit won't ever compete with what they are building in RINO and Union Station.  The townhome is near 80th and Washington, a smidge under 800 sq feet.  2 parking spots, no garage.  The rent does seem a bit on the low side.  Zillow thinks $1150 / month.  My PM has raised rent once from $850.  Might be due for another bump, but the tenant has been so ideal.  

I could borrow $50k against it to finance another SFR (held in my name, not in the 401k).

@Travis Sperr  it is a good problem to have.  I have 3 SFRs now also bought around the same time.  These have come close to 'doubling' in price, while the rents have increased much greater (some 40-50%) than the townhome.  Doesn't make sense to sell the SFRs.  I am going to crunch the numbers on what you suggest  (buy 2 properties in 401k with non-recourse loan.  I need to do some deep research on non-recourse loans and also on how gains from debt owed by the 401k affect all things tax related.  I agree that if I 'wait for properties to come down in price', I could be waiting for 4 years or forever.  I started predicting a housing crash in 2001--it wasn't until 7 years later that it burst, and another 4 years after that that we bought our first investment property.  Kind of like the joke about the economist who predicted 8 of the last 2 recessions.  

Hey folks,

In 2012, I bought a 2 bed 1 bath townhome in the Denver metro area for $35,000 through a self directed IRA that initially had about $50k. Had the property appraised last month for about $120k. It rents out for $950 / month. Been incredibly lucky with the tenant--a genuine germaphobe/neat freak who has required zero maintenance in 4.5 years, and always pays on time. Folks that know the Colorado market can probably see the market conditions that led to over 300% appreciation in under 5 years:

• Difficulty in getting financing for condos during the aftermath of housing bubble bursting, thus, this depressed demand.  At the same time, there was a lot of inventory.  Hence, the low acquisition price.
• Construction defects law:  Hardly any condos have been built for some years now because of the problems with foundations and shifting soils meant builders were liable for bad engineering.  Thus, no new supply of condos as the general RE market has come back.

So here I am today.  The total value of the Solo 401k (i converted the solo ira to a solo 401k a couple of years ago) is now close to $170k ($120k in RE and $50k in cash).  The 'best case' cash flow on it is about 550 / month, after all fees.  Note, this means zero maintenance and vacancy.  Which has been the reality for the past 4 years, but you know what they say--this is not a guarantee of future returns.  

With the boom in apartment construction that is happening now, it seems that both price and rent appreciation have a limited upside:

• With all of the apartment supply coming on line, how much more upside is there maximum rent?   Probably more downside, or at least limited upside.
• With all of the potential for these apartments to be converted to condos and sold--after the 6 year statute of limitations on construction defects--how much more upside is there to appreciation (considering there is already +300% 'on paper')?  Probably more downside in the future from a supply perspective
• Some year perhaps the Colorado State legislature will figure out a way to deal with the construction defects problem.  More downside to the supply story

Here are my options:

1. Do nothing--continue to collect the rent.  This is a retirement account, so my timeline is 20 years (I am 47 now).  It will grow, but there is a lot of dead equity. 
2.  Sell the townhome now or soon and either
   1. Move the cash into something else non-RE, position myself for price-time arbitrage in RE:  since there are no cap gains taxes in a solo 401k, this means I could sell, not pay taxes, and wait for a shift in the RE market to buy again.  
   2. Explore non-recourse lending. Use the $170k + a non recourse loan to acquire enough capital to buy a SFR. Goal would be to double free cash flow
   3. Use the $170k and then add in via 401k contributions enough to acquire a SFR, goal would be to double free cash flow.

Thoughts?

I manage one myself, and a PM the other 3.  I have done some maintenance myself, and have also had the PM manage it.  The experience the PM has is valuable.  I have had some tough tenant experience--good ones too--but its the tough ones that test the financial and emotional models of one's business plans.  Having a good PM is like having good insurance.

i have tried to cultivate both 'poles' of spending/not spending money.  When I did some rehab after turnover in a property, I looked for the most frugal ways: refit and patch doors vs buying new ones.  When I buy shoes for my kids I scour the internet and stores for the best combo of quality and price, and then buy multiple pairs.  When I bought some new soccer shoes for myself--soccer being a huge life long passion of mine--I tries on 10 pair without looking at the price tag.  When I found the pair I wanted, there was no price tag.  I just gave the clerk the shoes and my card and asked 'how much did I just spend?'

I used an SDIRA to buy a condo cash 100%. I pay a property manager to run it. I use equity trust company in addition. I converted it to a solo 401k, and can borrow $50k from it. It made sense at the time--condos were selling for $35k. There is a degree of complexity to it. That seems to be the down side. The mistake I made was not converting it to a Roth IRA immediately at low market value rate.

Hey folks, we have a property with some old, cheap vinyl siding with an inch maybe of insulation.  the small house exterior  is ugly, but serviceable.  the inside is new and clean.  the neighborhood has houses in worse and better shape externally than this one.  Here are my options as I see it.

1.  do nothing
2. Power wash vinyl
3. 2+ paint trim
4. 3 + paint vinyl with vinyl paint
5. Rip vinyl siding off, add rigid foam board + new vinyl
6. Rip vinyl siding off, add foam board and Hardie plank

I would be doing the work myself.  house is single story 800 sq ft.

How much value is there in improving the curb / online viewing appeal?

What would you do?  Its rented now, almost paid off.  The idea of doing it well appeals to me.  Tenants aren't likely to trash the siding, so the increase in curb appeal should last for years.

spend money on preventative maintenance/rehab.  Replace plumbing valves and hoses, washer hook ups, pull and clear drain traps. Check subflooring under toilet. Led lighting.  Also make sure thermostat and appliances are easy to use.  New interior paint is good.  One of my properties I put in new tile and paint.  A real germ a phone loved it. After 3 years, it looks the same as the day he moved in.  If it looks super clean you have a chance to attract someone for whom that is important.  Likely, they will want to keep it that way.  Go cheap on blinds--i seem to replace those all of the time.  Also, remove storm doors--just another thing that will break and adds no value.  If fridge has a water line, disconnect it all the way to the copper.  

If he pays on time and is not trashing the place, you could do a lot worse.  I have had 4 properties for 3 years and found there are three 'break in' periods:. One for the property the first time it is rented.  There will be maintenance issues that won't be discovered until a tenant lives in it.  This can cycle over the seasons as well.  Furnace issues come up in winter, drainage during the wet season, etc.  Second, is a new tenant.  Power goes out, and the stove locks itself.  Or the tenant doesnt know how to work the thermostat. Third is new landlord break in period.  How do you react emotionally to these things?  

I would recommend considering a good property manager.  It's like insurance.  Mine has been in business for 30 years and every month it becomes clear how valuable her experience is.  I now manage one property myself, and three she manages.  

Hey folks,

Any thoughts on the efficacy of this strategy?:

We own several SFD rental properties held in our names.  We file jointly a 1040.

I have a single member LLC taxed as a sole prop. This LLC holds another property. This LLC has a solo 401k.

The contribution to 1040 gross income (after depreciation et al) via LLC-as-a-sole-prop to our 1040 will be about $4000. Our tax rate on the margin for that is 33%, so $1320 to the IRS.

Let's say that I as the member/employee of the LLC did 100 hours of work on the 3 properties (not the one held by the LLC!!!) at $40 / hr = $4000. So that $4000 becomes an expense item of the properties, thus no $$$ from the properties to be taxed.

Then, through the LLC solo 401k, I choose to defer %100 of the $4000 into that solo 401k.

I believe that I just lowered my tax bill for TY 2015 by $1320.

Anyone see any problems with this?

-Erik