All Forum Posts by: Joe Splitrock

 100% agree. I bought my first home in 1999 and we locked into 7 7/8th interest rate. We were super excited because we locked in under 8% at a time when rates were moving up. Up until ten years ago, the 30 year mortgage was never below 5%. It was only after the housing crash and the Feds efforts to stimulate real estate that we landed in these ridiculously low rates. So rates today are actually good if you view them in a 20 year perspective and excellent if you view them in a 50 year perspective. Instead people are comparing today to rates during a housing crash and during a global pandemic. That is not a realistic comparison for "good", but it does show what will happen our economy goes bad. You can predict interest rate stimulation from the Fed. 

I am surprised you are able to close on a personal residence without being employed. I am assuming you have investment income? If not then how are you getting your current mortgage?

@Daniel Murray every receipt should have an explanation of the purpose of the expense unless totally obvious. I agree with @Markus Shobe that questions should be consolidated to once a month or even week, but not every day. A good bookkeeper should be able to figure out some of this out, but you need to explain expenses too. Imagine in your day job if you submitted an expense report for reimbursement without any explanation of expenses. Someone would have questions. No different here.

Our process is that every receipt gets logged in a spreadsheet with explanation and property the expense goes against. Another option is write the purpose of the expense on the back of the receipt when you receive it. You need a system to document purpose and your bookkeeper can categorize and log it from there.

Good question. When converting a personal home to rental, the basis will be purchase price plus (documented) improvements. I don't think you would ever want to use FMV, even if values dropped in your market, because it just means lower basis. Higher basis is good because it means more depreciation and less gain when you sell.

As far as how to handle carpet and appliances, I would just depreciate those on their 5 year schedule or bonus depreciate if available at the time. (Bonus depreciation is phasing out after 2022 tax year.) Technically you are supposed to add to basis, but then you would be spending money on a cost segregation study to separate out. That is lots of extra work when you can just put the property "in service" a couple weeks early and the expense is valid. I would not recommend this for a full rehab, but for carpets and appliances, no issue. I advertise properties that are waiting on carpet or appliances all the time. They are "in service" because someone could move in with old carpet and old appliances. If you are missing walls, missing a bathroom, etc. that is not reasonable to say "in service". 

Also be aware that bonus depreciation is accelerating depreciation. That means when you sell prior to regular depreciation schedule, there is more depreciation to recapture and be taxed on. There are strategies to delay using like kind exchange, but that still transfers basis. You are basically rolling a tax snowball down hill and it keeps getting bigger and bigger. I am just saying this so you are not surprised in the future.

FHA is a program to help people achieve home ownership. That means owner occupants. It is not a program for investors. You mention business and partner, which is an investing business and not the intent of FHA. Do the deal yourself or consider other routes of financing.

Did you accept free help from your friends dad for the rehab work or did you pay him? Free help means you owe him one, unless you are a selfish. If you paid for his help, then you owe him nothing. 

In general it is a bad idea to rent to friends and family. Things go wrong and then you are stuck. If they stop paying or trash your place, you have the choice of going after them legally, but you lose your best friend. No matter what your friend says now, when the sh1t hits the fan, he will expect you to put up with his parents crap and hold it against you if you don't. Just say, sorry I have a firm policy on not renting to friends or family. I value personal relationships too much.

Buy now without paying points to pay down rate and refinance in the future. Anyone who purchased in the 70's, 80's just refinanced when rates came down. I purchased in 2018 for 4.8% and refinanced into 2.89% last year. Again, don't pay down the rate with extra points. Paying points is rarely a good idea, because it is a sunk cost. Rates will come down in the future, because it is how the Fed manipulates the economy. When (not if) we enter a recession and housing slows down, they will stimulate with lower rates. That may be a year from now or three from now, who knows. Just make sure the investment today covers the payment. Between rent appreciation and future refinancing, you will come out fine in the long run. 

The reason you don't want to wait for rates to come down is because prices will be higher and you will lose any benefit of waiting. 

My tenants just put a sheet up at the stairwell to block heat from going upstairs or they put a space heater in a drafty room. It sounds like your damper solution was overkill. For $3000 that is the cost to do substantial rerouting of air ducts and installing a damper system.

As far as repairs, that is the responsibility of a landlord. Just make sure you are differentiating repairs from improvements. Repairs fix broken things, but don't make them operate better than new. Improvements make something new again or better than new or they add completely new capabilities. 

Repairs are usually not a choice and that is why you need reserves to cover these expenses. I am sure you heard the term reserves and know that you need a cash buffer Did you underestimate rehab costs or just not plan properly for reserves?

I would charge on the higher end of fair market, but within the going rates for the area. That way you are running your businesses clean and separate. If you choose to sell the building, it has a history of solid rents. If you choose to sell the business, it has a history of paying market rents, so if someone tried to move it elsewhere, the numbers would be about the same. This is also good if you seek financing for your business or property. You want the numbers to be reasonable and supported by comparables. Tax treatment is fairly neutral here. Even if you shifted a few dollars, it isn't going to be enough to make a significant difference.

@Margaret Essien 

1. Should have questioned this every year. Nothing can be done now.

2. Should have been better communication by the property manager, but it sounds like they handled the eviction. Given COVID restrictions, this seems like a reasonable time period.

3. This is unfortunate but in an eviction situation it is common. You could pursue tenant for damages in court, but that is likely a waste of time.

4. Assuming the property manager asked for the $900 in writing specifically for junk removal, this could be considered fraudulent use of funds. You could sue the PM in small claims court for the $700. 

5. See response 4.

6. It seems they breached the contract, but you are really better off without them at this point. Hire a new PM and move on.

There is not a lot that can be done here. Possibly recovering that $700 is the best case. I would first focus efforts on finding a new PM and getting the unit rerented. Only after a new PM is in place, would I spend any effort going after the old one.