All Forum Posts by: Josh Hanson

Hello sorry for such a noob tax question but I just wanted some general guidance on how taxes would work in my case. I am fairly new to real estate and this is the first property I am considering flipping. This year on paper I purchased a Short Sale property and have been rehabing it and my father and I have been both contributing about 50/50% on expenses and labor. Most of the work we have done on our own. The initial intent was to keep this home as a long-term rental and possibly refinance when rates go down but now we are considering flipping it. It works out perfectly because the neighbor's house which is very similar is being flipped by an experienced flipper so I will have a very good comp to compare against very soon. Collectively we have invested over $40k and by the time we are finished will probably be close to $50k. I purchased the home for $181k + about $50k reno and the house will likely be valued at around $330-350k when it's finished. 

My question is from a tax perspective what is the best approach to write off these improvements because some of the cost is funneling through my father and some through me. Will this get cloudy because I do not have an LLC for this property? Is there any way for me to write off a fair labor rate for all of the work my father has put into the property even though he doesn't own a home improvement business? My understanding is that I cannot write off my labor since I own the property but many hours have been put into this project so I am seeking the best advice to lighten my tax burden and hopefully my father's. Any guidance would be greatly appreciated!

Thank you,

Josh

I have a duplex with one meter and I use a Sense (https://sense.com/) device to monitor the total KWH that the upstairs unit is using I then take the electric bill and split the bill up based on the amount of power drawn by the upstairs unit vs the total usage. A separate meter is a better way to go but this way has been working for me and it's $300 vs thousands to achieve the same result and the tenants have been good with it.

@Kai Ponte your so close to paying off your loan so very good work. Paying off my personal mortgage is definitely very attractive. The thought of having no mortgage payment  is very exciting. (Aside from insurance and property tax of course.)

@Dean C. That idea is actually very good and I like it. The big thing is convincing the wife to house hack. Going from having an entire house to ourselves to sharing a property with someone else is hard to convince her. I am working on getting her to see the light. We actually are going to try our hand at AirBNB to kind of house hack at our current property. Just waiting on the new furniture I ordered. Everything is so slow with Covid-19.....

@Theresa Harris thank you for your perspective on that! I agree probably most wise to use the money to invest in deals now rather than tie it up into my mortgage just to take out another loan.

@Chris John Will do! Will post with updates as I move along my real estate journey!

@Dean C. Are you saying sell my current house then take any profit into a 1031 exchange to purchase a BRRRR deal that I could later house hack and live in?

Thank you everyone for the replies! A lot of very good points! It seems like most people believe I should not throw the money into my current mortgage and I am definitely starting to agree. I agree that 3% is nothing and I should easily be able to purchase properties that outperform 3%. Also I failed to think about inflation. Over 15 years 70k interest will mean less when you factor in inflation and appreciation in properties and such. Speaking of appreciation I have lived in my home for 4 years and we purchased the property for 220k and the value already increased to 250k after our last appraisal when we refinanced a few months ago.

The big thing in my scenario is that me injecting 40k into my principle will do two things. 

1. 1. Advance me way along the Amortization Schedule saving me interest and decreasing the length on my loan pulling 5 years off. 
2. 2. Here is the big one IMO and mainly works because I want to BRRR instead of buy conventionally. It still gives me access to a large amount of funds through the HELOC. (I would have 90k equity.) I am guessing I could get a HELOC with a limit of 50k+ and still continue to save cash like I have. So I should be able to access the cash when I find great below market value properties and then eventually refinance the BRRRR project to remove the balance off the HELOC. My HELOC would have a 0 balance and I would be ready to find the next BRRRR deal to start over.

Additionally, from my understanding when using a HELOC there are strategies to minimize the interest you pay because it's based on simple interest. In other words I can deposit all of my income into my HELOC account while I hold a balance to keep the Average Daily Balance as low as possible over the course of a month. I would then at the end of the month use my HELOC credit to pay my bills. The whole purpose of this would be to keep the balance as low as possible to save money on interest until I eventually pay the HELOC off with the refinance of the BRRRR deal.

Hope all the makes sense! 

Here are a screenshots of exactly what would happen using a Loan Amortization Schedule spreadsheet.

Example 1: No extra funds added

Example 2: 40k funds added to principle.

Why 100k? The target for 100k is because of the BRRRR strategy. It might be slightly higher than I actually need but I want the ability to be able to make cash offers on properties below market value and also have enough funds to rehab the property without relying on hard money loans.

If my strategy was not to BRRRR. I could get started now there are plenty of homes that go for $120k or less and I have already been pre-approved for using a conventional loan.

Hello everyone! My name is Josh I am 28 years old and live in the Cleveland, Ohio area and currently have been working hard towards saving to finance my first BRRRR deal. My goal has been to save up 100k cash in order to be well positioned on the first deal and currently have 40k saved up however, upon researching I came across and interesting strategy utilizing a HELOC to quickly pay off your mortgage. Which bring me to my question. Should I focus on building equity on my current home mortgage or continue to save cash to be ready for my first deal? With more equity I could access a HELOC to finance BRRRR deals in theory and also drastically shorten my loan length + interest paid on my personal home which sounds appealing.

My thought is currently my primary residence is a liability so the quicker I can pay it off the better. I have a 20 year mortgage with a 3.125% interest rate and still owe $200k. My home very recently appraised at $250k as I just refinanced. Currently over the course of my 20 year loan I will pay ~$70k in interest however if I where to inject 40k into my mortgage principle today I would shorten my loan from a 20 year loan to a 15 year loan and also decrease my interest owed from $70k to $40k (assuming I did not inject any additional money into my principle over the rest of the loan) This move alone would create 90k in equity and make me eligible for a reasonably sized HELOC to finance BRRRR deals and of course I would continue to inject additional income into my principle to continue to build equity in my home.

What are your thoughts? Do I keep saving up cash like I have been doing to grow my 40k into 100k over the next 2 to 3 years or build equity on my current home and slash away interest which would quickly make me eligible for a reasonably size HELOC?