All Forum Posts by: Jonathan Small

@Michael Smythe This is exactly what happens. The question is more around how a tax professional captures the information in the return.  Thanks for the feedback.

I am thankful and looking for feedback from our professional tax preparers. 

My wife and I don't qualify for real estate professional status.  We make over 150k a yr.  We have 5 rentals in seperate LLCs that have created losses on our return. The rentals are not in the same state we live in. We self manage 2.  We have separate property managers for the other 3.  I want to understand the 25k special allowance. I have received 3 different but similar explanations from tax professionals. They may be saying the same, but when I hear the explanation I lose what understanding I thought I had.

1.  Are we limited to 25k in losses?  Line 11 on my return has more than 25k in losses.

2.  We don't qualify for real estate professional status. If we did, how does this impact this topic if at all?

3. Feel free to answer any other questions I should be ask but not smart enough to realize it 😀

Scenario:  I have 3 properties managed by on property manager.  I receive one 1099 for all properties at the end of the year.  I am using a CPA to do my taxes.  How should the tax return capture each property separately as well as the 1099.

1099 Total (example):  36,000k total

property 1: 10k total rent

property 2:  20k total rent

property3: 6k total rent

This is what we are doing and just curios as pros and cons:  We report a schedule E for each property.  property 1 total rent is 10k, property 2 total rent is 20k, property 3 total rent is 36k

property 3 then has a schedule statement that shows 36k total minus 30k.  
She stated she did this so that we report the full 36k 1099.  If we didn't have a line item for the 36k then IRS would flag our return because we have a 36k 1099 that is not being reported.

side note:  I have about 25 properties managed by 4 property managers. In short I am replicating the process 4 times because I each one of my 1099s are tied to multiple properties.

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I have asked 3 accounting professionals and received slightly different answers. 

I am looking for feedback from other accounting or CPA professionals.  Thank you much

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $85,000
Cash invested: $52,000
Sale price: $220,000

This was one of my 1st profitable long distance flips. I used my cash to purchase and renovate the deal.

What made you interested in investing in this type of deal?

This was a late model home on a slab. Great area that appreciated well. Close to a military base.

How did you find this deal and how did you negotiate it?

My property manager told me about this deal. One of their owners wanted to sell.

How did you finance this deal?

I financed this deal with my cash so I could close quickly. I used a local bank for renovation budget.

How did you add value to the deal?

We updated the property with LVP, new HVAC, metal roof, updated kitchen, new appliances, new electrical and plumbing fixtures.

What was the outcome?

We sold the property. I wanted to keep it but the rent to purchase/renovation numbers didn't work out. I was all in at 140k and the rent would of been 1300. A cashout refinance based on value and debt coverage would of resulted in more cash than I wanted to leave in the deal.

Lessons learned? Challenges?

Explore additional options that would of allowed me to get my cash out and keep the property. Ex: I could of offered my partner the deal where I would of got my cash out and retained some ownership. Retaining 10-20% of the deal would of been better than 0% which I got after the sale.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I used my real estate agent as my project manager. He got a commission when we bought and sold. He also got a project management fee for managing the renovations.

Investment Info:

Single-family residence buy & hold investment in Valdosta.

Purchase price: $75,000
Cash invested: $31,000

I found this property using a local realtor that specializes in foreclosures. However the property have been extremely neglected. It had one of the worst insect and roach infestations we have ever seen. I financed the property using a local bank. The bank gave me favorable terms since I have a number of properties with them. I was able to use equity from another property as part of the down payment and renovation cost. I used my property manager to management renovations.

What made you interested in investing in this type of deal?

This was a late model single-family house in a good quiet neighborhood. I like the property because it was in a great area and next to a city park. It was built on a slab and only 15 years old.

How did you find this deal and how did you negotiate it?

I used a realtor that focuses on foreclosures. I first met this realtor when I bought five homes he owned personally.

How did you finance this deal?

I financed this still using a local bank. The local bank gave me the purchase price and renovations. The down payment and renovations was collateralized by another properties equity

How did you add value to the deal?

We did a complete renovation on this property that included floors, appliances, roof, hvac, water heater, countertops, and fixtures

What was the outcome?

I'm keeping this property as a long-term rental. I do not intend on selling this one since this property has a good bit of equity and is low maintenance

Lessons learned? Challenges?

Purchase price and Renovations total about 110,000. After repair value was about 150k. I was able to do a 85% Cash out refinance with the local bank. The property rents for $1250. I was able to move an existing tenant from an older less expensive property into this one and increase rent. My plan is to keep this property since I don't have any of my money in the property and it cash flows. I will keep short-term 3 to 5 year financing on this property using the local bank. This will allow me to us

Investment Info:

Single-family residence buy & hold investment in Valdosta.

Purchase price: $75,000
Cash invested: $31,000

I found this property using a local realtor that specializes in foreclosures. The property owner was involved in a reverse mortgage and had not paid a note in over a year. It took 10 months for the bank to foreclose on the property. I like the property because it was in a great area and next to a city park. It was built on a slab and only 15 years old. However the property have been extremely neglected. It had one of the worst insect and roach infestations we have ever seen. I financed the property using a local bank. The bank gave me favorable terms since I have a number of properties with them. I was able to use equity from another property as part of the down payment and renovation cost. Renovations consisted of lvp flooring , inside outside paint, new appliances, kitchen and bathroom cabinets, new stone countertops , updated electrical and plumbing fixtures, new hvac, and new water heater. I used my property manager to management renovations. Purchase price and Renovations total about 110,000. After repair value was about 150k. I was able to do a 85% Cash out refinance with the local bank. The property rents for $1250. I was able to move an existing tenant from an older less expensive property into this one and increase rent. My plan is to keep this property since I don't have any of my money in the property and it cash flows. I will keep short-term 3 to 5 year financing on this property using the local bank. This will allow me to use the equity in this property on other deals. One thing I learned on this property is the power of using Equity from other deals to cross collateralize and buy additional properties. I have long-term financing on most of my properties. However I will use a few of them like this and keep 3-5yr local community bamk financing so I have access to the equity without causing a taxable event.

What made you interested in investing in this type of deal?

This was a late model single-family house in a good quiet neighborhood.

How did you find this deal and how did you negotiate it?

I used a realtor that focuses on foreclosures. I first met this realtor when I bought five homes he owned personally.

How did you finance this deal?

I financed this still using a local bank. The local bank gave me the purchase price and renovations. The down payment and renovations was collateralized by another properties equity

How did you add value to the deal?

We did a complete renovation on this property that included floors, appliances, roof, hvac, water heater, countertops, and fixtures

What was the outcome?

I'm keeping this property as a long-term rental. I do not intend on selling this one since this property has a good bit of equity and is low maintenance

I would create an LLC. You will need to update your insurance policy. I have home owners insurance for each of my properties. I also have an umbrella policy as supplemental coverage.

I have a 2M umbrella insurance policy for about $400 a year.  Worse case is that I am over insured and wasted $400 a year.  Best case I have additional insurance and protection. I think it is a good idea.  

Wholesalers > do you love them or hate them? Or do you just deal and put up with them?

I buy 5-9  properties from wholesalers each year. They do a lot of work to bring you a great deal.  For this, I love them. They are making calls, sending letters,  and grinding to find a deal.  I appreciate their place in the marketplace.

What's I hate about wholesalers: (95% seem to have these characteristics) > they over promise and under deliever. They call me from multiple numbers and then someone else they are working with calls from another number. I usually end up talking to 1-3 people in the same company. They seem to be very unorganized. Their contracts are always shady. Most have not seen the inside of the property. They usually talk with an arrogance and over state their experience. Their ARV is NEVER correct.  Their rehab number is NEVER correct.  They want you to close on 14 days yet are usually the ones to hold up the deal close.  They don't seem to treat the homeowner very well.

Wholesalers make me appreciate and love realtors.

What has been your experience with wholesalers?Any suggestions on how to deal with them so it is a win win deal for everyone

How to be a good mentor without being frustrated?

Mentoring can be incredibly rewarding, but it's a responsibility. I enjoy doing it because I have seen how real estate has changed my life.

I want to set clear expectations at the beginning of the relationship. I have many quality friends so really only looking for a professional relationship. I realize people are at different points of their real estate journey. I like to see people grow and I enjoy celebrating others investment wins and trials.

My problem is that I feel a lot of people waste my time.  I dont want to meet for coffee because my schedule does not allow for it.  I dont want to answer questions that can be easily searched on Google. I need to quickly find out how motivated the other party is to accomplish their goals.  It seems I am often more interested in their success than they are in their own accomplishments. 

When I think about my journey it took time. I didn't always follow through on what I knew I should be doing.  Sometimes I just needed someone to encourage me or correct me.

Question:  what have you done or not done that helps to develop a good mentor/ mentee relationship?