All Forum Posts by: J Scott Hamilton

If she owns the properties free and clear, why not look into a Home Equity Line Of Credit (HELOC). You might have a luck with a credit union if the loan to value ratio is too sweet to pass up.

Depreciation only applies to the buildings you do not use as a personal residence, aka the income properties.  It only applies to the building, not the land.  Usually you can figure the land/building value split by looking at the county tax assessment and using the assessment value to determine the ratio.

You don't have a choice about taking depreciation on business property. If you "don't take it", you'll still be hit with taxes at the time of sale as if you did take it. Keep in mind that depreciation is sort of bogus on real estate, because it assumes the building turns to rubble in about 28 years. We all know that buildings usually sell for as much or more than what we paid for it. So depreciation usually gets recaptured on sale, and makes the tax bill higher.  This is offset by the tax deduction you got from depreciation while you were carrying the property.

If you want to roll over the gains and depreciation recapture in a property you held long term the vehicle for that is a 1031 exchange (like kind exchange). You will need to buy up, and your future property will have less depreciation benefit. 1031 exchanges are tricky, and if you make any mistakes with them then part or all of the exchange will be taxable.  Consult a professional with 1031 experience if you want to take that path.

Scott

There is a way to do solar that makes sense for a landlord.  Get solar installed financed with a Power Purchase Agreement (PPA), which is basically a long term lease.  Whatever electricity is consumed over the amount produced by solar is billed by your electric provider, assuming you are grid tied.  Then include the PPA as a component of the lease payment into the rent and you in turn pay it so that you are assured it gets paid.

I would also structure it so that your tenants will be effectively paying off the PPA in 7 - 10 years. Then once the solar is paid off, that "excess" part of the rent will be yours as free cash flow.

I would recommend you putting in as much as you can, and your friend cover the rest. You can each have different amounts in your respective capital accounts and that is perfectly okay.  Then you might want to split the cash flow profit and tax benefits in proportion to how much each of you contributed.

Then when it comes time to sell the property, maybe split the net income either 50/50 or again in proportion to how much each contributed on the down payment.  That can also be spelled out in the partnership agreement.  Then in terms of the duties, make it explicit in the partnership agreement who does what, and specify who does anything that needs to get done that wasn't thought about and documented.

When it comes time to cash out, the amounts each of you have in your respective capital accounts is how much you get back (if the bookkeeping was done correctly).

In the context of currency and real estate, there is a lot of confusion between the terms appreciation, inflation, and devaluation. I experienced all three while living in Argentina in the late 1970s when the country was going through hyperinflation.  I'll explain all three in context of the US Dollar (USD) and local real estate.

Inflation is a measure of the decrease of a currency's purchasing power for local goods and services.  Devaluation is the lowering of an exchange rate of one currency for another currency (or multiple currencies). Appreciation is the increase in a property's price that results from inflation and possibly a rise in the underlying value of the property (what stock investors call "alpha"). These three things are all very different but can also all affect real estate prices.

If the USD devaluates, it causes no immediate effect on housing prices. Each market has to decide if RE prices has to rise in the case when expatriated dollars return to the United States to start buying up property. I have seen a statistic somewhere that SFRs generally only rise in price to track average inflation, they don't rise to much from intrinsic value appreciation.  But if you are in an improving neighborhood, you may see price appreciation that has nothing to do with inflation. The same can happen with price depreciation in bad neighborhoods, inflation notwithstanding.

But to answer the underlying question of what happens if the USD loses reserve currency status? We saw this happen to Britain when the Pound Sterling was replaced by the US Dollar.  The economy went into a stall, and the pound lost more than half its value against the USD (so, true devaluation). But that didn't mean because Britain got "cheap" that housing prices necessarily got better. The United States is in an even worse situation. We are approaching 20 trillion in expatriated dollars in the form of treasuries. That which is held in foreign currency reserves won't find a home in real estate.  But the private petro dollars may start seeking that as a home. More than likely you'll see it go into high ticket items like big buildings in New York city and comparable investments. Donald Trump might make a killing, but the rest of us won't.  Instead if the USD dramatically devaluates, you'll probably see that Americans will find life far more expensive for their goods and services, and there won't be enough purchasing power to support high housing valuations. We may be in a very odd situation where some properties rise dramatically, while other properties deflate because few people can afford to be buyers. It will be interesting to see the results.

Scott

[sorry, the reply poster cut me off...]

...the game and how your profits will accumulate.  Make sure your tax preparer understands how you do the splits so that each K-1 gets reported properly if it is not an even 50/50.

Hope this helps,

Scott

[I am offering this perspective for its educational value, not as a legal or professional opinion. Standard disclaimers apply.]

From a legal entity perspective, I would say you could structure this with a well drafted partnership agreement. Actual partnerships are passe, but you could do an LLC that is structured as a partnership and files a partnership tax return at the end of the year. Since this is a pass through structure, the tax items will be reported on individual K-1 statements in proportion to how you divide it up.

In terms of the cash investment, each of you will have a "capital account" inside the partnership structure.  This represents how much skin you have in 

I've just been looking at many South Side Flats properties as a newbie REI but good with numbers. The problem I'm finding is the retail prices are relatively high but the rents are relatively low. The inflation is most acute about a one block radius from East Carson, but gets a lot better as you move up into South Side Slopes.

You won't find any 2% properties anywhere, and you will struggle to break 1%.  The few properties I was selecting for a Owner/Occupier that had decent value were running about 0.8% and a cash flow of barely break even.

You'll also notice a huge difference in price between rehabbed properties and ones whose vintage 1900 age is immediately apparent.  Those that have been fixed up real nice appear that somebody bought a junker, but then think they can get about 200K for the property when the comps might be only 160K. 

So you're probably going to find it a very tough market for good cash flow deals. But good luck!

Scott

If you have seen a clip of Mayor John Fetterman from the Pittsburgh region, you know where I live now. I moved here to start or rehab businesses with the goal of 20 firms in 20 years, until 2031. The story will develop as a rags to riches one, much like Andrew Carnegie in the late 19th century, as I am starting with nothing but ambition. With that will come a lot of real estate investing, and here in the Rust Belt the opportunities for older buildings are still rich and varied.

I'm working with a Oil & Gas land man who is also taking a new direction in his life. We are both passionate about sustainability in real estate and with our consumer goods. Once he relocates from Dallas to Pittsburgh like I did four years ago we plan to make a big splash in this region. So his specialty is property title, mineral lights, and multi-plot tie up, and my specialty is tax law and business analysis.

A lot of my deal focus to start will be older mixed using buildings in commercial areas, namely small ground floor retail locations with 2-12 apartment units above.

Scott