All Forum Posts by: Masashi Borges-Silva

*Update*

I asked the agent, and initially, they said that the seller would pay 2.5% of the purchase price, and I (the buyer) would be responsible for 0.5% of the purchase price.

I asked them to clarify the difference between commission and compensation, and also I pointed out 2% paid by the seller and 3% paid by the buyer, and they confirmed that it was a "mistake."  They are now offering 2.5% of the purchase price instead of a 3% fee, and they cannot change the cost for the seller... (it smells fishy here.  Why can they change the rate for me but not for the seller... Also, who is paying for the seller's agent...?  I can only assume that my situation would be a discount, but for them, it would be a fee increase).

Anyways, to give more context to this discussion, below is the deal I am dealing with.

The property is in Kingston, NY, and it is a 2-unit multifamily with three beds/one bath (downstairs) and two beds/one bath (upstairs).  The asking price is 300k, and all of my analysis and a photo are here.  

Initially, the owner wanted to live in the house rent-free for two years in the 3bedroom unit, plus keep the current tenant.  This was already giving me a bad feeling about this deal.

We negotiated a seller's financing with a 0% interest rate for two years in exchange for free rent and a 3% interest rate after the two years.  Then, balloon payment at the end of the 10th year.  Also, with this, I am asking lowered price for the property plus some down payments.  (details are here)

Then, the owner asked me if he could divide the property into a subsection and build a house for him to live in.  They are emotionally attached to the property and don't want to let it go.  

Then, we came up with another option for him to take a chunk of money on closing day in terms of a higher down payment and keep the interest rate at 3%.

Now, I am waiting for their response and looking for lawyers who can provide me with a template for a lease agreement (This will be my first rental property).

I will keep you updated next week on the progress.

I need your help for me to understand my first "offer and agent agreement".

The background: I am the buyer, and this agreement is between my real estate agent and me (client).  I am buying a house from a seller with the seller's financing.  One of the options that the seller is demanding is for them to stay in the property for two years for free in exchange for 0% interest rate, and they plan to move within after the two years. 

I am compiling an offer for the house, and the agent is asking me to sign a document that has language that I am not fully understanding.

In my understanding, the agent's commission is paid by the seller, but in "Client's Obligations" it seems I am responsible for 3% of the purchase price of the property or 50% of the aggregate rental of the lease and all options as exercised.  I am not sure how "50% of the aggregate rental of the lease" would mean for me financially.  I am assuming this is the language used for a rental property, so 3% applies for this instance, but I thought the seller pays for the commission.  Are commissions and compensation are treated separately that the agent receives 5% total from the seller and the buyer?

Below mentions of "the Seller shall pay the broker's commission of 2% to my agent."

Then also, below mention of "50% of the aggregate rental of the lease and all options as exercised"

Just like the title says, do I need to find my own appraisal after renovation in New York state?

I am not familiar who is running the business. That is, is this a city governmnet’s scope of work or do I contact a private company’s scope? Or is it usually provided by the lender when evaluating VAR?

I am trying to buy a single family primary for short term rental given the market situation, and I want to analyze if long term rental make sense financially if I switch it to a long term rental in New York State. 

Thank you in advanced and happy Halloween!

As the title says, does an attorney need to be licensed in the same state as in the state where I am buying a property?

For example, I am buying a property in New York state, and I must hire an attorney who practices in New York state.   My understanding is that the attorney can only practice in the state where they are licensed, and my understanding is that an attorney wouldn't have a license in New York and California due to physical constraints.  Maybe, an attorney can benefit from having two licenses in states if s/he lives close to a state border line (i.e. NY and NJ or OR and WA).  But I don't know if it is common for an attorney to practice in multiple states.

The background of this question is, I am buying a property in NY, and I am contacting attorneys who have experience with buying a property using an option (lock in the purchase price now, and purchase the property in Jan. 2023 when my contractors are available to do the work).  My real estate agent referred me to two attorneys who live in the town I am investing in, and I am contacting them to ask them if they have experience with option buying.  If they are unable to help me with this option, then I need to keep searching for one who has such experience.

With the Federal trying to stop the inflation, homeowners might be worried about selling their houses due to a decrease in the number of home buyers in the winter market and decreasing property values in the next few months.  I am ready to purchase a property, but I am unable to find contractors who can do the work until Jan. next year, so I want to offer an option to homeowners to buy at a predetermined value, and exercise my right to purchase at the price in Jan. 2023 to avoid for property to sit two months and not produce income or delay producing income.

Cheers, and thank you for reading this far.

Background

“How do I even start with market research for Airbnb?”

This is the question that I was pondering for days, weeks, and years!! This is just a story in my experience and n=1. With that being said, I want to share my thought process and the progress I have been making. If you are still interested in how I went about the research and where I am at in terms of becoming a real estate investor, please read on.

First of all, for those who don’t know who I am, I would like to give you my current situation regarding the real estate investing journey.

Current situation

I am currently working as a full-time engineer, and in fact, I am typing this in a hotel room before attending a shock and vibration test for one of the suppliers in Long Island, NY (sorry this is not relevant information for real estate). I have been reading and studying about real estate investing, and I was “wishing” that things will change and let things happen in my life. Overcoming the first step is the hardest step toward my goals, and a change is uncomfortable. I don’t really want to do anything after spending miserable hours sitting in a cubicle (I am sure I am not the only one thinking that way), and I had to shift my mindset. The feeling of discomfiting is a good sign that I am making progress! (well, also I had to take care of my mental health before, but that is a topic for another thread somewhere else…)

Anyways, I am finding a way to achieve financial independence, and I started looking at different real estate investing types (BRRRR, house hacking, short-term rental, long-term rental, commercial buildings, residential buildings, and so on). I also began to look for investment strategies that can be used in New York City, and soon enough, as you might already guess that it didn't make sense (at least for me at the time and in the market). I don't have enough liquid!! What do I do now?? Well, I need to create more liquid!! So, I looked at all the expenses in my life and determined the biggest expense. Tax!! I realize that 24% of my salary is subtracted for Federal tax, and even more for the state, and city tax! Wow!! Wait a minute… How do I find a way to reduce them? Do I even have control over it?? Then, my question transformed into, "how do I reduce these expenses!?"

Save more money by reducing the tax obligations

Long story short, I did a little more digging, and I found that I can use short-term rentals such as Airbnb to generate passive income, and I can reduce my w2 income tax which is non-passive income. (passive income can be income from rent received, capital gain from selling stocks, and non-passive income is W2 income from your salary or wages)

How do I find a market that will generate passive income for you

Believe me, this is not my idea. I just read lots of books and a lot of them indicate that there are steps to take to find out where is a good market to invest for YOUR unique situation. There are tons of data available, and I just needed to sort the noise (junky) data that doesn’t help me reach financial independence.

Step 1, find out where is the population growth in counties or cities in the states. Ok, easier said than done. How do I start with this?? Grab a laptop and let’s do some research together. When I decided to research for my situation, I used https://worldpopulationreview.com/ and https://www.opendatanetwork.com/ This was a good starting point. This will give you a general idea of the area with positive population growth. Then, I stumbled upon Airdna.com and Mashvisor. Those websites were very helpful for me in determining the market that I wanted to invest in.

An example to find the right market for you

I ultimately used Airdna to do my research. There is a monthly fee associated with using the website, but I am planning to use this expense as a business expense write-off (remember, you have to invest money in order to profit). Once I had an access to the data by counties in NY, I just randomly picked on the map to see the score ratings. Since the website gives you a score rating out of 100, it was easier for me to decide where is a good place to invest. Then, I just googled a list of counties in NY state, and I created this list.

What is your ideal market for you?

This is really you have to decide what works for you. For example, how often do you want to see the properties? Do I want to drive for less than 2 hours to get there, or do I need to take an airplane to get there? Do I want to go there and come back in a day, or is your schedule more flexible so that you can stay there for a few days?

I was also having trouble to guestimate how much of a house can I afford. I would suggest aiming for a house for less than $200,000 and seeing what type of properties you find in the area. Oftentimes, at this price range, you might need to do a renovation. As I am a full-time engineer, I don’t have time to do the job, so I started to call around contractors found in Angi. I also started to call around to look for a home inspector, landscaper, real estate attorney, and general contractor. I was so afraid of rejection, but it was all in my head. So far, I have been lucky enough to find people who are excited to work with me!

The real estate business is a people business. There is no way I can accomplish what I want to do all by myself. If you are reading this far, the chances are that you are looking to invest in real estate, but haven’t had a big awaking call to push you outside of your comfort zone. I challenge you to try out my method and see where it leads you! Even in the worst-case scenario, you will survive. Don’t take anything personally. This is a business, and you will become financial independence and live the life you always wanted!

This is the same event posted in MeetUp.com

This is an event to network with people who are interested and/or doing real estate investing. In this event, you will be able to network with other real estate investors and learn about real estate investing and strategies.

The host is still a beginner in real estate investing but has been educating himself about financial freedom retire early (FIRE) in real estate investing.

The issue he faced was: How do I even start? Where is a good place to look? Where can I learn more about real estate investing? The host can point in some direction to start (BiggerPocket.com or books to read).

In the events, the following is expected:
-Networking
-Playing games (Rich Dad Cashflow Board Game)
-Have an open mind to share and learn from each other

-Discussion points:
Long distance vs local investments,
Short-term rental (STR) vs long term rental (LTR),
how to reduce your w2 income tax using STR
Residential vs Commercial Property and how the praise is determined (properties sold neighborhood vs NOI (Net Operating Income)/Cap rate

Education x Action = Result

$5 is used to cover the cost of the board game.

Thank you all for your input.

After digging more into this topic, I learned that short-term rental income can be used to offset my W2 income, so I am starting to investigate the area to invest in the upper State of New York.

@David M.

First of all, thank you for your response, and I really appreciate your taking the time to write me a reply. That means a lot to me.

Having said that, I have follow-up questions.

What do you suggest that seems to work for other real estate investors who started out in a similar situation as mine?

I don’t qualify as a real estate professional as I don’t work 750 hrs in real estate, and I don’t plan to work 2001 hrs in real estate in parallel with my w2 job as an engineer either.

I also don’t have any rental income simply because I don’t own any rental property, and I am exploring the idea of purchasing a turn-key property from a company similar to RentToRetirement.com. In the process, I want to use my 401k and savings for down payments for one property (ideally a small multifamily unit). for this to work for me, I need to be actively participating.

For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions.

This means that I have to work with property management teams to hand over some of the “decisions” for my rental property.

I am working full-time with a W2 income, and I want to know how I can maximize tax incentives while I am transitioning to being a real estate professional which is defined as the following:

Qualifications.

You qualified as a real estate professional for the year if you met both of the following requirements.

• More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
• You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Real property trades or businesses.

A real property trade or business is a trade or business that does any of the following with real property.

• Develops or redevelops it.
• Constructs or reconstructs it.
• Acquires it.
• Converts it.
• Rents or leases it.
• Operates or manages it.
• Brokers it.

Basically, I need a CPA who can work with me and understand my situation fully. My goal is to plan and take action to maximize the benefit of tax incentives in such a way that I can reinvest with tax-saving money and ultimately build my wealth.

I have questions such as:

1. What type of retirement account would be best for my situation? I am planning to borrow $50k from my 401k into my second non-personal checking account specifically made for real estate investments. Also, how can I use Roth 401k towards the first rental property without tax burden or penalties?
2. How can “start-up costs” help me save in taxes? Can I write off the fee paid for CPA? some “investor-friendly CPAs” charge between $2000 to $3000 annually, and I can’t justify the cost as I don’t have any rental income “yet.”

Background

I am not a Professional Real Estate (yet) as I am working as a full-time engineer, and I don’t meet 750 hours of services during the tax year in real property trades or businesses in which I participated. I don’t own a property (yet), but I am trying to figure out ways to reduce W2 income taxes. I am also not a professional CPA or in a position to provide such advises, and below are what I read and how I understand it. Please seek professional services appropriately.

Question

What are examples of “loss from rental real estate activities” mentioned in Special $25,000 allowance found in Publication 925 (2021), Passive Activity and At-Risk Rules?

The definition of the Special $25,000 allowance I found is here, and an example used in the document is as follows:

Example. Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and isn’t subject to the modified adjusted gross income phaseout rule. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).

Ok, this is where I might need more help for me to understand the allowance.

Can rental property depreciation be applied as loss from rental real estate activities?

In this example above, I am assuming that $11,000 will be deducted from $70,000. The adjusted gross income would be $59,000, and the tax saving would be $2420 (assuming there are no other deductions applied).

Let me describe how I calculated the tax saving. By using the 2021 bracket and both gross incomes ($70k and $59k) would fall under the same 12% bracket (between $19,900 and $81050), the total tax I calculated for each is $8602 for $59k income and $11,022 for $70k income, and finally, the difference of the two scenarios is $2420.

One of the many “losses from rental real estate activity” I can think of is the depreciation of the property. For example, if I bought a property at $100,000, can I claim that $3,636 (depreciation over 27.5 years is calculated as $100,000 divided by 27.5 years = $3,636/year) is considered as a part of rental real estate loss? Similarly, if I bought a property at $700,000, and the depreciation over 27.5 years is calculated to be $25,455 ($700,000/27.5 years = $25,455/year), then this depreciation would reach the maximum allowance that any other “loss from rental estate activities” are no longer applicable.

Examples of other posts related to my questions

Is the $25,000 special allowance only for Married individuals? In this thread, the author is asking if the special allowance for single individuals would be $12,500

*Interpretation of 8582 Special Allowance for Rental RE Activities:* In this thread, the author is asking about the difference between “nonpassive” and active (W2) income and special cases in which up to $25,000 of passive losses can be used to deduct from a W2 income.

*$25,000 Offset Question???* In this thread, the author is asking about is $25,000 is offset from your earned income.

After thought

I am in search of a CPA/financial advisor to discuss tax planning and tax saving strategies. Do you have any recommendations?

This is an event to network with people who are interested and/or doing real estate investing. In this event, you will be able to network with other real estate investors and learn about real estate investing.

The host is still a beginner in real estate investing but has been educating himself about financial freedom retire early (FIRE) in real estate investing. The issue he faced was: How do I even start? Where is a good place to look? Where can I learn more about real estate investing? The host can point in some direction to start (BiggerPocket.com or books to read).

In the events, the following is expected:
-Networking
-Playing games (Rich Dad Cashflow Board Game and Klask)
-Have an open mind to share and learn from each other

Education x Action = Result

$5 is used to cover the cost of the board game.

Please RSVP to Meetup Event for accurate headcounts.