All Forum Posts by: Luke Megna

Hello there,

I don't think this is a unique question at all but is one I have been pondering.  I am looking for ways to buy bigger to gain the economies of scale that will come with it.  One idea I have been contemplating is putting together an investment partnership and pitching it to friends and family.  I am working on modeling that out and I realized I am not sure what the standard format is.  

Here is what I am thinking.  I will find the deal, manage the investment, pay costs associate with the deal prior to closing (with the expectation of reimbursement from the partnership upon closing), handle accounting, etc.  For this I would expect a 50% ownership interest.  I will also have decision making authority.

Passive investors would receive a preferred 8% return on their investment annually plus a proportion of the other 50% based on their proportion of investment relative to the total capital collected.  For example, if we raise $200k and one investor puts in $50k, they would receive 12.5% ownership (=50k/200k x 50%).

I would expect to make distributions based on ownership % annually for cash generated in excess of a baseline bank account which would be the only time I would be getting any current cash out of this type of structure.  

I am not sure if a 50/50 split would be enticing enough to investors and I don't want to bring a concept to friend and family that might feel like I am trying to slight them.  I would also likely want to buy in as a limited partner in addition to being the managing partner.  Would that present a different set of problems?

For a little reference, I am an investor that owns a few properties already so I have some experience.  This would be a much larger leap though.  I am sure there are a lot of holes in this plan.  Please shoot them for me.

A couple points from a first read of the details though it is far too early to tell:

1) Extending the time period requirement for tax free gains on personal residence will hurt,

2) There is some discussion of making edits to like-kind exchanges though it is not clear how that will work,

3) The $500k mortgage deduction piece and property tax caps are individual tax provisions.  You should still be able to deduct interest and property taxes as a business expense on rental properties.

4) There are provisions allowing for accelerated depreciation and limitations on interest expense for businesses though it is not clear how those will be treated within the real estate space.

Generally speaking, most of what you see as generic news coverage is going to discuss the impact on individual tax returns.  What we all care about is the impact on business-side activity and that is going to require a lot of time in the details to really discern.  This is also definitely going to change once a CBO score is put together and the Senate get's its hands on it.  

Another point, these changes are generally set to take place beginning in 2018.  That being said, there will probably be clever tax planning moves that can be made prior to the end of 2017 once more information is available.  Stay tuned and you can probably save a few bucks in taxes.

Bradford,

You can not double up on the miles deduction. You can split the miles between each of the LLC's.

If it were allowable to deduct the miles for each LLC, people would likely set up many different LLC's and find ways to exploit a single deduction many times over.

I hope that answers your question.

Luke

Bryant,

I want to reiterate the point above - you will owe 25% Federal tax on the depreciation recapture.  Assuming you are selling these properties at a gain and you have owned them for 8 years that is going to be approximately 7% of the original purchase price of the properties in tax (8 years depreciation / 27.5 year useful life x 25%).  So if you bought the property for $100k and you have been depreciating it each year you will owe $7k in depreciation recapture taxes.

Also, at about $70k of income you are very close to the capital gains threshold for married filing jointly.  A gain will likely push you into a position where you gains will be taxable at 15%.

All of this will ultimately be subject to the specifics of your financial situation in the year of sale.  I would reach out to your CPA and ask them to run a tax projection for you to evaluate the consequences of sale.  It should cost a few hundred dollars but could help you save thousands by timing the sale appropriately.

Luke

Hello all,

Though there are many versions of QB that are suitable, if you are truly just getting started there may be cheaper options.  I am a CPA and also own a single investment property and I use Wave Accounting software.  It is FREE and because I have a smaller scale operation it can handle everything I need. It links directly to my properties bank account making the whole process seamless.  I know there are other free options available for small scale operations. 

QB Online is going to cost about $30 a month.  If your operation is large enough than I would definitely recommend some version of QB.  But if not, maybe consider something free.

Luke

Brittany,

I would agree with everything James said above with a slight tweak.  Once you are into a more ordinary year, likely year 2, you will pay taxes on profits (revenues less expenses and depreciation) at your marginal tax rate.  

As an example, if you are single and have taxable income between $40k - $90k your marginal tax rate is 25%.  That means every additional dollar of profit from the rental property will be taxed at 25% (see this link to tax brackets that you can use to identify your specific circumstances: http://taxfoundation.org/article/2016-tax-brackets)

The difference between marginal tax rate and average tax rate is small in some cases but can be large in others.  It is definitely worth considering.

Luke

Thanks everyone.  I spoke with her this evening and she and the boyfriend agreed to move out at the end of the month.  It happened in a little bit of a roundabout way so that she suggested it instead of me which I think was helpful.

Ultimately, it will depend on whether she moves out as she has said she would and whether they treat the property respectfully on the way out.  I will be ready for eviction proceedings should the next steps not go smoothly.

Thanks for everyone's responses.  It is very helpful to get some additional perspectives.

Thanks Gail.  I guess I am trying to avoid an eviction proceeding if I can.  Perhaps the threat of eviction will accomplish that but I am a bit afraid she will call my bluff and then we are in a standoff.  I am not sure I have any other options though.

Or alternatively, can I ask for an additional security deposit to include him on the lease and include an addendum that any fees from the HOA need to be paid out of pocket as opposed to being deducted from their security deposit?

Thanks again,

Luke

Hello there,

I am new to the forums though I have been an avid listener of the podcast for a while now. I purchased a condo as a buy and hold six months ago. My first tenant's boyfriend appeared almost immediately after she moved in and I have received a couple of complaints from the HOA about him being rude and breaking association rules. Recently, she asked if he could officially move in. Simultaneously, I received additional complaints from the HOA about rules he has broken as a guest that he claims are not violations because he "lives there."

I do not want him to move into the unit because obviously he is a problem in the community.  But because he has likely been unofficially living there all along, I don't see how I can ask him to leave without creating problems with my tenant and risking damage to my property.

Any suggestions for handling this situation?  Is there an amicable way to just ask the tenant and her boyfriend to move along or is that far too naive.

Thanks,

Luke