All Forum Posts by: Joe Splitrock

There are different schools of thought on investing and risk versus return is the general trade off. In my opinion, the best way to maximize return when buying real estate is using leverage (loans). You can basically buy 4-5 times as much real estate, versus paying all cash. This will have a dramatic effect on your COC (cash on cash) return in the short term. Leverage will also allow you to scale your portfolio and net worth much faster.

@Bryan Noth basically Elon Musk has the Midas touch and he is all-in for Texas. He has even been wearing cowboy hats at media events. Great for Austin, but realistically Austin has been on a great trajectory for 20+ years.

LLC has no effect on taxes, it is only for liability protection. Right now you are renting this as a single proprietor, which is a type of business where you personally own. You will want to meet with a tax professional to discuss expense tracking. First year can be especially difficult, because you are setting up depreciation and doing a partial years expenses for taxes and insurance.

These type of properties are heavy on management fees. Even if you are not using them to rent a unit, there is HOA type fees that are very heavy. On the plus side, you don't have to deal with things like pool or yard maintenance. Still pretty heavy fees and during the housing crash, one of the worst asset classes was condos in Florida. That is because major recession causes a significant decrease in discretionary spending. Simply put, people don't take vacations when they lose their job or fear loosing their jobs. Florida is getting pretty saturated, so just be cautious.

The challenge here is percentage of personal use will limit the percentage of expenses you can claim. If she is sharing the house with two roommates and she is not paying rent, then only 2/3 of the property is a rental property. You don't get to claim deductions for housing your child at college. So your depreciation, mortgage interest, utilities, etc. are all only 2/3 a business expense.

I plan to buy a house for my daughter to live in during college, but expect her to pay rent from her college fund. In that case she would have a lease. Yes it adds additional taxable income, but it is very likely offset by being able to expense 100% of the property.

 Not sure if you noticed when you posted your response, but the original post was from 2018. She was concerned about the impending depression four years ago. This just underscores how people have spent years worrying about something that never happened and is unlikely to happen. Fear can cause people to make bad investment decisions. I would argue, "how much money did she lose over the last four years as she was afraid of losing money?" 

@Syman Scarpellino I don't have all your financial details, but assuming you are over $200K income, you will not be able to take passive loss against your W2 income. You would need to be a real estate professional or be married to a real estate professional. Getting your RE license and opening a management company doesn't make you a real estate professional. You would need to work 750 hours per year in a real estate profession and over half your working hours. It is impossible to qualify as a real estate professional when working a full time W2 that is non real estate professional. If you are working 40 hours a week, that is 2000 hours a year, so your real estate professional side hustle would need to be 2001 hours. Not humanly possible or at all believable by the IRS. It is even difficult to hit the 750 hour threshold, unless you are managing a sizeable portfolio.

If you were married and your wife didn't have her nursing job, she could potentially meet the 750 hour threshold. That is still working 15 hours a week managing rental properties. I am not sure the size of your portfolio, but IRS knows if you have a few houses, it doesn't take that kind of time. She would need to keep time logs to document her hours spent. Since she is just your fiancé, this isn't an option.

Since you are not married, she will have no effect on your taxes. If you are hiring her to manage your properties, you would generally pay her a management fee. That could help with your taxes, but not $60-70K per year. My guess is she (and you) can't justify purchasing a vehicle for 100% use in the rental. How many miles a year are you currently claiming for rental use on your personal vehicles? She will need to keep travel logs to show what percentage is business versus personal. 

There is a false narrative out here that real estate owners never pay taxes. That can be the case early on when depreciation and interest are heavy, but as your portfolio ages, it gets harder to claim losses. Even if you did expense a vehicle, that would have a short term effect on your taxes. It may help for a couple years and when you go to sell the vehicle, you would recapture that loss and owe taxes. That is not the case if you just claim mileage, which is why mileage can be better in many cases. Just be aware that depreciation and accelerated depreciation are tax deferrals and not tax avoidance. 

The term financial advisor is a broad term and not all financial advisors sell insurance. Although, yes man financial advisors are primarily selling insurance, mixed in with some mutual funds. The insurance policies are their main source of income.

Also be aware that there are fiduciary and non fiduciary financial planners. If they are a fiduciary, they are required to act in your best interests, even if it contradicts their best interests. 

Fee structures vary, but basically there are three types:

1. Fee only (advisory fee)

2. Commissions

3. Combination of fees and commissions for fee based

The fee only structure offers the most transparency. You know up front how much every transaction costs and how your advisor gets paid. This can be one issue with insurance is the heavy sales commissions and fees that are not transparently disclosed. Try asking a financial planner on Bigger Pockets to disclose their commission and they just say things like "everyone deserves to make a living". 

My parents have a financial planner that charges a percentage of assets under management. He is not compensated for transactions, so he has no motivation to buy and sell investments or sell insurance. His only goal is growing their assets. 

I personally fired my financial planner after the 2008 crash. Not because I blamed him, but because I realized he was doing nothing besides collecting commissions. I switched to low fee index funds, a couple individual stocks and self manage real estate. 

The dirty little secret of the financial industry is that fees destroy returns. Heck, I would even argue this is true of real estate when hiring a property manager. If you are paying 3-5% on management fees and the market returns 7-8% on average, you can see how much the fees erode your investment. Same for property management, if you are paying 10% off the top, and hoping to get 15-20% return.

Studies show that it is rare for financial planners to beat the market with active management. Why pay someone to perform worse than the market?

@Cara Fazio most everything you described should be charged to the tenant. Make an itemized list and make sure you have receipts and photos. Ideally you should have before and after photos. Take photos of the back side of the carpet, the pad and the floor. This will show the urine stains. They only lived there 1.5 years, so I would give little consideration due to short age of tenancy.

The only thing I am not sure you can charge them for is the garbage disposal. My guess is the garbage disposal was a really cheap model which is why it started leaking after two years. Check the warranty on it. Unless you have proof that they broke it (which is hard to do) then you can't charge them for replacement. Buy a higher quality disposal with 5+ year warranty and stainless steel parts so it doesn't rust out. 

Don't worry about how much is or is not left of the deposit. Just total up all the damages and subtract it from the deposit. Whatever is left they get back or they get a bill. 

That mentality of "it is build to code" or "I used licensed professionals so it is fine" is really incorrect thinking. I always get permits, always build to code and always use licensed professionals. It is still very common to get things flagged in inspections. The entire reason people avoid permits is to take shortcuts and avoid having issues show up during inspection. 

Licensed and experienced professionals make mistakes or they are not familiar with code changes. If the work was done by a DIY home owner, the likelihood of mistakes is ten fold. 

Adding a kitchen in a basement is most likely an effort to add a secondary living space. That could even get into zoning. Even beyond zoning, there can be fire code requirements for egress or venting requirements for the stove.

There are all sorts of things that need to be inspected. Pipe sizing, wire sizing, GFCI protection, panel board wiring, egress. Even the water heater being in a closet could be an issue. Do you have proper venting for fresh air supply? Did you maintain appropriate distance from the water heater?

As far as being "screwed", do you plan to sell the property? Buyers will want to see permits and know the work was inspected.

Do you plan to rent out the space? Do you expect your insurance company to cover you for damage or liability if there is a fire in the basement kitchen? Have you talked with your insurance provider and disclosed your non permitted work? This would be my biggest concern. 

I would contact the city, explain a hypothetical situation of a home owner that didn't realize they needed permits. See if they will work with you. I would deal with this issue. People who blow off permits are just a ticking time bomb for it to catch up to them.