All Forum Posts by: Jon Martin
Jon Martin has started 36 posts and replied 1075 times.
Post: Short Term Rental Tax Loophole for Physicians
- Posts 1,086
- Votes 957
Quote from @Lisa Marie:
So, along that line, I would like to know how many people on this thread have actually done cost segs on their properties and how much W2 income tax you saved from that.
I paid $600 for a cost seg that will take $60K (80%*75K) off of my taxable income for 2023. I won't say what my W2 income is but I will say I expect to save over a quarter of that of that amount between fed and state taxes. So yeah, absolutely worth it. I can also say that the money I save by self managing, even when broken down per hour, is not far off from my "hourly wage" based on my salary. I look at it as a side hustle where I pay myself.
Like @Ryan Moyer said I can utilize that cash now to invest in more properties and kick the can down the road, potentially past my time on earth. That cash is worth much more to me now in the scaling stage.
As for your "better off in the stock market" comment, your analysis is flawed because it is based on an equal cash vs cash assumption. Most people do not have that kind of cash to put into the market, but maybe we can scrounge up 15-20% of that for a down payment. That's the power of leverage in real estate, where I can pull the returns of a $1M investment with 20% of the cash. I can't do that at Charles Schwab.
Regarding what you said about not investing solely for the purpose of utilizing cost seg and bonus depreciation, sure, I would agree that your decision to invest in an STR should go beyond that and should work in its absence. In a related example, I was looking to get in to a property before year end to lower my tax bill further. Then I realized that if I don't have enough cash to invest in a property for 2024 tax year, then I am better off waiting until then because another cost seg will lower my tax burden within a reduced tax bracket for 2023. Whereas in 2024, that bonus depreciation, even at 60%, will be worth more if that's the only property I buy between now and the end of 2024. So yes, there is nuance and people should take a close look at their situation to see if it makes sense, but at the very least the first seg I mentioned is an absolute no brainer for me.
Post: Boost your profits while reducing your property count
- Posts 1,086
- Votes 957
Quote from @Collin Hays:
Ok
Yeah. LOL
In all seriousness I like the idea of scaling up to a manageable number using leverage, maybe 8-10 units. Sell off a couple where the return on equity is low and roll that into paying down the biggest revenue earners.
Post: Lending on Short Term Rentals. What I discovered and confirmed.
- Posts 1,086
- Votes 957
Quote from @Michael Baum:
It does seem that way, but all the lenders were pretty adamant that they lend on the value of the property not the revenue.
On a related note, with conversations I've had recently, I know that there are Fannie Mae backed investor loans that can take LTR rates into account without dinging your DTI. If your all in PITI is at or below the monthly loan amount you are good and don't need to show the income to cover it. Therefore you are basically getting the benefits of a DSCR but with a reduced interest rate.
That said, they do not care what your expected STR revenue is going to be, which seems to be the basic jist of this post.
Great stuff @Michael Baum and thanks for the post and legwork
Post: Who owns Condotels
- Posts 1,086
- Votes 957
Quote from @Bobby Paquette:
I considered it in Myrtle Beach, called around to some units and decided against it. The management takes such a large bite of your top line revenue (40-50%) that by the time you pay your mortgage, $850/month HOA and other bills there often isn't much left. Some will allow you to self manage and bring in your own cleaners, but if you do that then your guests might not be allowed to get towels from the front desk, use the pool etc because you are no longer paying their fees. Requires a lot more DD than a standard SFH purchase.
Post: Short Term Rental Tax Loophole for Physicians
- Posts 1,086
- Votes 957
Quote from @Lisa Marie:
Bonus depreciation may sound good -- "oh, I can offset it against my W2 income and not have to pay tax", but in reality, it is just another way for the tax professionals to get more business by charging you for doing the cost seg as well as preparing an ever-increasingly complicated tax return. If you are a corporation or a real estate developer, it may be different, but for the vast majority of the mom and pop investors, it has no value.
First of all, I always find it laughable that any high income professional, doctor or lawyer or corporate executive, would want to trade their most valuable resource (time) for something they already have plenty (money). Second of all, any depreciation, regular or bonus, is a delayed tax. You still have to pay it eventually, possibly at a higher rate. If you are close to retirement age, and think your W2 income will decrease significantly in a couple of years, then cost seg and bonus depreciation can be useful. But I don't think that's the case for most people.
I am just a housewife, but my husband is an engineer and has an MBA. We have a STR beach house and he looked into the bonus depreciation scheme. He even went so far as creating an Excel file (as an engineer would do), and concluded that (1) if you are not already a real estate investor, you are actually better off by taking the money and investing in the stock market; (2) if you already own a STR, cost seg has a small benefit, but the benefit decreases the longer you own the property, also there is the cost of the cost seg itself. To be clear, he is not saying that you should not invest in real estate or STR. He is saying that if you want to invest in STR, do it because you think it's a good way to make money or because you want to diversify your assets, but don't do it just for the cost seg tax savings.
The key point to remember is that yes you can get the bonus depreciation right away, and depending on your W2 income amount, you can skip paying tax for the first 3 or 4 years. But then what? Once the bonus depreciation is over, your tax goes back up. Another key point: how much is your time worth? If you make $200k a year, that's $100/hr your employer is paying you. To use this "tax loophole", you need to spend at least 100 hrs AND more than anybody else. 100 hrs is 8 hrs a month -- if you have 3 or 4 rentals per month, your cleaner will spend more than that. I think realistically, 150 hrs or even 200 hrs is more likely, especially for a new STR owner.
Here is the Excel table my husband did, with some very simplistic assumptions. Assuming you have $1.2M cash, which can be invested in the stock market and reasonably get a 7% return. Or you can buy a $1.2M STR with the building valued at $1M, which is your max bonus depreciation amount. Assuming your W2 income is $250k, and you get a gross income of $100k from your STR. Roughly it translates to about $50k Net after deducting all expenses.
Conclusion: you save some money in the first 3 years, but at a cost of spending a lot of time to manage the STR, not to mention any start-up time to buy and furnish and launch the STR. But over a span of 10 years, you actually make less money.
Again, I want to emphasize, I am not saying it's a bad idea to invest in an STR. I am saying it's a bad idea to invest in an STR purely for the benefit of cost seg to lower your tax bill.
| Option 1: invest money | Option 2: STR with Cost Seg | |||||||||||
| Investment income on $1.2 M | W2 income | 25% tax on Income | Money in the bank | Value of my time | Net Income on $1.2M STR | $1M Bonus Depreciation | W2 income | 25% tax on income | Money in the bank | Value of my time ($100*200 hrs) | REAL NET PROFIT | |
| Year 1 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | -$300,000 | $250,000 | $0 | $300,000 | ($20,000) | $280,000 |
| Year 2 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | -$300,000 | $250,000 | $0 | $300,000 | ($20,000) | $280,000 |
| Year 3 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | -$300,000 | $250,000 | $0 | $300,000 | ($20,000) | $280,000 |
| Year 4 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | -$100,000 | $250,000 | $50,000 | $250,000 | ($20,000) | $230,000 |
| Year 5 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| Year 6 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| Year 7 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| Year 8 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| Year 9 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| Year 10 | $90,000 | $250,000 | $85,000 | $255,000 | 0 | $50,000 | $0 | $250,000 | $75,000 | $225,000 | $225,000 | |
| TOTAL | $2,550,000 | $2,420,000 |
While I can appreciate the cost/time/benefit analysis, and think that this should be done by everyone for all things in life, as a whole I don't agree with any of this. You can get a cost seg for a SFR for ~$600, so you dont need to spend thousands. I'm not worried about recapture because I buy in appreciating markets that also cash flow as an STR. Plus, I already self manage because I am basically paying myself thousands of dollars per year for doing so. Therefore the W2 offset is quite significant for something I would be doing anyway.
Post: When is the best time to renovate, fix or improve your airbnb?
- Posts 1,086
- Votes 957
Quote from @Alex Scattareggia:
Quote from @Alberto Nikodimov:
Best time to improve your Airbnb is during low season. I recommend going through your reviews, see what guests recommend you to improve in order to make their stays better. Take advantage of the low season to keep your bookings up with good reviews in high season!
Also, low season can be good to list your new airbnb. So you can focus on getting 5 start reviews, build the property profile and be ready for high season!
What have we as a community done to receive such deep and penetrating insights as these?
In all seriousness, what are the purposes of posts like these. I browse other forums here on BP and they are not riddled with self promoting or pointless posts as frequently as the STR ones. Would be nice if 10-20% of the threads weren't people giving the most obvious and intuitive advice that any person with a brain could deduce on their own. Save it for instagram!
Thank you. By far the most Captain Obvious post I’ve read here, and possibly on the internets as a whole
Post: Is this a new trend?
- Posts 1,086
- Votes 957
Quote from @Eliott Elias:
Short term rental landlords are doing whatever they can to squeeze out the last few pennies they can before they all go under.
Lolz. The majority will not go under.
Post: Is this a new trend?
- Posts 1,086
- Votes 957
For sure @Rodney Sums . It wasn’t “free”unless you were expensing it.
What’s even dumber is Expedia/hotels/Vrbo selling this as a cross platform win for customers, except the points can’t be cashed with lots of VRBO hosts.
Post: Is the next portfolio step for vacation rental investors boutique hotels?
- Posts 1,086
- Votes 957
Quote from @Michael Baum:
I think it would be fun but I no longer have the ability to be as involved as running a small hotel.
We came close to buying a 24 room BnB in New Hampshire a long time ago. Had a restaurant and a small bar. Very cool place but decided to stay put rather than roll the dice.
No longer in the cards for us.
Depending on the layout it could be much less work than a traditional hotel/motel and managed in a similar way as an STR, just at a bigger scale. I've stayed in boutique hotels that were minimally staffed with keyless entry. Then you could lease the restaurant out to a local restauranteur.
That said I would still want to sub out the management.
Post: Is this a new trend?
- Posts 1,086
- Votes 957
I noticed this with VRBO about a month back. Actually took 2-3 clicks to get to the final out the door price, and it was well over double the nightly rate all in.
On a related note, Hotels dot com also gutted their "stay 10 nights, 1 night free" program, which was basically a 10% rebate/dividend. It was incredible if you traveled for work and had control over how you booked. Hot a few dozen free hotel nights for personal use over the years. Now you only get 2%. They spun is a win for the consumer, but when I tried to cash in the points it didn't even work on at least half of the places I tried to book . . . WTF?
Dumbest part is that I was looking forward to cancelling my hotels account, but not I can't because I have a VRBO owner account tied to the same email, so I would basically be deleting my VRBO listing in the process. Absurd.