All Forum Posts by: James Palassis

I am not able to deduct depreciation on my rentals due to my AGI being too high. But I am considering selling one of the rentals (owned since 2019). Will I be able to "capture" that depreciation to decrease my capital gains from the sale? 

Thank you @Jeff S. We used a closing attorney, and the mortgage/note was recorded. So we will go the loan modification route you mentioned. I have emailed the attorney we used. Thank you for your advice!

I am the lender on a 3 year loan with a balloon at the end, we are 14 months into it. My borrower came to me today to see if I would accept a $50,000 principal only payment, representing about 50% of the total loan amount. I am good with the paydown, but normally I would keep the payment amount the same and just adjust how much is going to principal and interest each month. My issue is, he wants the payment to be reduced roughly 50% to reflect the lower principal amount. 

I have worked with this borrower many times, never been a day late on payments. But I want to make sure I'm protected. Is the move here to get a new promissory note through a real estate attorney? Could I draft my own note and have each party notarize the new terms of the loan?

Any help or suggestions are greatly appreciated!

My wife and I are about 3 years out from retirement. Both kids will be out of the house and we are looking to downsize. We have identified one of our rental properties to be our primary residence when we do this. We have several renovations planned (build 2-car garage, install solar, new kitchen and bathrooms). I'm looking to optimize our tax exposure. Would it be advantageous to perform these renovations while the unit is still a rental? Or does it even make a difference on whether renovations occur when it's a rental or when it is our primary residence?

We are anticipating the expense of these renovations to be in the neighborhood of $100-$125K. 

Thank you @Kevin Romines for the insight! This is money accumulated, so I see your point about just raising the fixed rate to account for possible loss of opportunity costs from not getting points. I decided to go with a 3 year term @12.5% to give my predictable return without trying it up for 5 years. Thanks again for your response. 

Just curious, if I were to make a loan adjustable in the future, would WSJ Prime be a good benchmark to tie it to? Or would you use another metric?

I have been lending for a few years now, with terms anywhere between 6 and 12 months. I've been approached by someone I've lent to in the past asking for a 5 year term. Great history with this borrower, always pays, no issues. My issue is locking into a rate for that amount of time with the unpredictability in the mortgage space right now. I don't want to put a loan out at 12% if there is a chance my premium to risk factor might disappear in the future. 

Examples: 

When traditional rates were avg 3.5, I was getting 10%.

Now traditional rates are approaching 6% and I'm getting 12%.

So I don't want to lock in at 12% and watch my spread erode. As a workaround, I thought about tying my rate to the WSJ prime rate. Was thinking interest only variable rate at prime + 500 bps (5%) with a floor rate of 8%. Prime is currently at 4.75, so the loan would start at 9.75%. Whatever prime is on the 1st of the month dictates that month's interest, and rate cannot go below 8%. 

Looking for feedback on this loan structure. Has anyone lent money at a variable rate for a longer-term loan? Is correlating the rate to the WSJ prime rate a good route to go? Thank you for any feedback. 

 Thank you @Jeff S.. I have some good relationships that are interested in keeping the money "local." I just didn't want to 1. take advantage of anyone and 2. get taken advantage of. I appreciate the thorough response!

Private Lenders: I did some lending a couple years ago, usually getting a couple points and 10% interest. That was when inflation was 2% and conventional rates were 3-4%. Now planning to do some more lending (to local folks I have worked with in the past). 

Question: with inflation approaching 9% and mortgages approaching 6%, what are you private lenders getting for your money these days? Are we still in the 10% range?

I currently do the lawn care for 6 of my long term rentals. Would there be any tax advantages for me to create an LLC for lawn care and paying said LLC a fair market wage for lawn care?

I was thinking 6 lawns, $50/lawn, 2X per month = $600/mo. 

Or would that just be a wash after writing off the lawn care from the profit of the rentals, but adding profit in the same amount to a different entity?

Another thought, my 17 year old son has always helped. Now he has his own vehicle can can do all of the lawn care by himself. He has a significantly lower AGI than my wife and I, would it benefit us for him to charge me for lawn care?

I'm not looking to evade paying my taxes, just looking for strategies to optimize my spending and profit within the eyes of the IRS.

They are just two different forms of protection. The LLC protects your personal assets because a lawsuit would only go after the assets held within the LLC. But if you're purchasing a property and taking title directly into the LLC, you'll most likely have to use a commercial loan. These have higher rates and shorter terms (the longest I could find was a 15 year fixed at a local lender).

The umbrella policy is used if you are taking title in your personal name. You don't have the asset protection that an LLC gives you, so you protect yourself with the use of the umbrella policy. Unless your net worth is extremely high, I wouldn't think you would need an umbrella policy if your properties are held in an LLC.

 
Those that are buying personally and transferring to the LLC are getting the best of both worlds... conventional financing and LLC asset protection. But it comes with the risk (however small) that the lender can say "no, you told us the deed would be in your name" and exercise the due on sale clause.

As you have probably found out, people have VERY strong opinions on both sides. It's totally a personal decision based on the goals you have for your real estate investing. Study both sides of it and do what works for you personally. There are pros and cons for each strategy.