All Forum Posts by: Max Smetiouk

If you are using the HELOC proceeds to acquire land for a property that will be business use in some manner (a rental), then that interest expense from the HELOC would be deductible against that business project. I'll stay out of the weeds of dealing with potentially capitalizing that interest expense to the land while something is actually constructed.

If the HELOC is being used to acquire land for a property that will be personal use, you are out of luck. Mortgage interest is (potentially) deductible as an itemized deduction on Schedule A only if it is secured by that given property. So if the HELOC is in no way secured by this second property, it isn't deductible mortgage interest. If you took out a separate loan secured by the second property, and that will be used as a second residence, then it is potentially deductible - subject to all of the other limitations of personal mortgage interest like the $750k balance cap.

After a brief search, the IRS says-

For tax years 2018 through 2025, if home equity loans or lines of credit
secured by your main home or second home are used to buy, build, or
substantially improve the residence, interest you pay on the borrowed
funds is classified as home acquisition debt and may be deductible,
subject to certain dollar limitations. However, interest on the same
debt used to pay personal living expenses, such as credit card debts, is
not deductible.

But, wait there's more... The IRS also says “you can choose to treat any debt secured by your qualified home as not secured by the home.”

So... this leads to interest tracing rules which are not complicated but it begs more questions-

What's the land for? Are you building a house or putting in a mobile home park?

I'm so sorry to hear you've had such a rough go of it Fran. To be honest, I had a rough go of it as well when I was buying rental properties.
Eventually I got rid of all my rentals and switched to passive real estate investing. I own a fractional interest in over 2,500 units today, and I don't have to hassle with tenants or lenders or inspectors or insurance or contractors or property managers. I just wire in the money and sit back to enjoy the cash flow, appreciation, and tax benefits.
If you love the idea of a real estate side hustle and being a landlord, then I would never discourage you. But if you just want the investment benefits of real estate, consider joining an investment club that goes in on real estate syndications together. That's how I invest every month, with relatively small amounts.

@John Malone are you a tax attorney? Do you have any experience with construction of a STVR as it relates to claiming material participation while acting as co project manager?

Log cabins are tough to finance on the exit 

Max,

That's a loaded question...First will you be using financing or getting a construction loan. You have to consider will it be a primary, Vacation home or investment. Each carry a different option in terms of Max LTV, Rate, and overall cost. The location is also super important to know if it's in an amenity area, Rural area, suburbs. When you build from the ground up in todays market you are paying top dollar for materials, builder costs, land lots, rates, etc.

Log cabins can be tough because most appraisers will only use other log cabins on an appraisal to support value. So if there are a lot of home sales but limited log cabin sold comparable sales it may hurt your value. If you have inventory in your area that require renovations, distressed homes, outdated and you can pick it up for a good deal. That may offer a better option to gain equity faster on the ARV.

I would also take a look at the total time spent into a new log cabin build, overall costs and compare to recent sales of exact log homes. Does the profit margin make enough sense to put all of that time and money versus buying an outdated home and doing some renovations in a shorter period of time.

@Divya Santhanam

I'd be cautious.  I think a lot of CA / HCOL area investors go into Ohio / the Midwest with unrealistic expectations.  Is Columbus a great market to invest in?  Yes.  Are you going to buy solid properties in good neighborhoods with conventional financing, and then 'cash flow' in month 1 or year 1, or even in the first few years?  No.  

https://www.biggerpockets.com/forums/48/topics/1159104-overl...

It will take a creative strategy or a combination of creative strategies to actually cash flow.

Same thing here in Pittsburgh.  Is Pittsburgh a great market to invest in?  Yes.  Can you buy a reasonably priced property in a solid neighborhood that will make a great rental?  Yes.  Will you 'cash flow' on that property for the first few years?  No.  And can you absolutely lose your shirt if you buy on the wrong street in the wrong neighborhood even if the numbers look great on paper and that property has nice countertops?  Yes.

Hope this helps.