All Forum Posts by: Michael Zagorsky

Hey everyone.  Wanted to post an update.  A member of the BP team reached out to me and I we had a great 15 minute chat.  Hats off to the BP team for their commitment to the community.  

I wanted to put a pin on my original post.  I think my initial feedback comes back to this question:  What is the argument for investing in real estate right now?  For the last decade, there was a strong case. The old school rules of thumbs worked and the content of the BP podcast was a masterclass in how to do it.  Today, not so much.  So what is the case today to take action vs. waiting and/or investing in a non-RE asset class.  

In the words of investor Jack Bogle, 'Don't do something; just stand there'. 

Or to parrot Boglehead investing advice:  If you won the game, stop playing. 

If the response is 'the rules have changed' well let's deep dive this--After all investing history has not treated investors well that make this proclamation in the past. 

From an economic view:

1. SFR is a hot market. Are there deals? Of course! but for a majority of investors that are not full time, it seems too competitive a space to say the odds are in your favor if you play. Buy the Toilet Paper you need and wait, the market will catch up. No need to stock pile.

2. Commercial: Seems like a nice idea, if you can find niches. That said, you are tying up your capital in a long term low CAP rate asset and if interest rates raise, you end up losing money.

So here was my specific feedback to the BP team:

1.  What are the rules right now?  What is the case to take action vs. wait?  (After all, there were people investing in Detroit in the 1980's--action is not always progress, it can be regressive to ones goals).  

2. As an investor, how do I perform due diligence before investing in other people's deals? (private lending, syndications, REIT's, etc.) I think this is a bigger deal as SFR investors cash out and may want to place their capital with others. Not going to lie, investing in something that either I don't personally own, have colleterial against, or is a publicly traded company with audited financials scares the crap out of me.

3.  International perspective.   What does the rest of the world look like?  

Just some feedback on the PB Podcast.

Things are really weird right now. Costs of rehabs and new construction are jumping. Risks of inflation are high. CAP rate sucks. There is a backlog of Covid evictions in some states. The old rules of thumb are all saying don't invest right now for most deals. 1031's might go away. I'm debating if I should cash out my property and sit with cash on the sidelines but worried sitting with cash is a mistake too.

All that to say, I want to hear what smart people are seeing, thinking, and doing right now in this market. Instead I'm this I'm hearing more about goal setting and vague advice to take action.  I need to make some tactile decisions where higher costs = higher downside risk. 

Not saying goal setting is not important, but one of my goals is to make good decisions about my investments and I'm not getting that from the BP podcast anymore.  I'm not sure if that is because the smart money is just sitting on the sidelines, or they are not wanting to talk about what they are doing, or that's not what the BP producers want to talk about.  

All that to say, I've learned so much about investing from the BP Podcast and listened to every episode, but I'm skipping it a lot now because I'm not getting the education I once did from it.  

So this is a musing of mine I wanted to throw out there from a BP/FIRE perspective.  

What are everyone's thoughts about buying properties specifically with the end goal of having a paid off, freshly rehabbed property as a retirement home? Clearly, this is likely not a try of property that is a usual Class B/C affair of normal BRRRR investing.

Buy:  Buy a discounted property with good 'bones'

Rehab:  Do the things to make it a good rental.  Either long term or short term.

Refinance:  Put it on a good 30/15 yr note.

Rehab Again:  Closer to your target date, do the higher end rehabs that you would want in your future home, using rental cash flow to pay for the work.

Retire:  Make it your primary residence

Payoff:  Hopefully by now you can pay down the remaining balance and you have your paid off retirement home.  

What about Solo-401k (Employer and Employee) contributions?  

Does anyone know the math of much losses are allowed for Schedule E if your AGI is between 100 and 150k? I have about 11k in losses and want to do the figuring of much much to contribute to a IRA/Solo-401k with regard to how that impacts how much in losses I get to recognize.

As some background, my wife and I are temporarily staying in our income property (paid off) for the next couple of years as we fix it up and travel almost full time. Our goal is to buy our long term permanent home when we find it, < 3 years from now. Our total guess is our new home would be $300-$400k range.

We have about $200k in cash.

The opportunity has come up to buy another rental property for about ~$90k.

So at a high level what are everyone's thoughts on whether it is better from a numbers perspective to have a paid off rental house vs. a (almost) paid off primary residence? Assume we don't itemize so we can't deduct mortgage interest. I know we can deduct mortgage interest from our Schedule E but getting a mortgage for rental properties seems to be at a higher interest rate.  

In terms of overall strategy, we are not looking to build a big portfolio of rental homes.  Longer term goal would be 3-5 paid for properties acquired over the next five or six years.  We do not want to go crazy with leverage.  

From the instructions for Schedule E, was confused about this line:

Do not count as personal use:
• Any day you spent working substantially full time repairing and maintaining the unit, even if family members
used it for recreational purposes on that
day, or
• Any days you used the unit as your
main home before or after renting it or
offering it for rent, if you rented or tried
to rent it for at least 12 consecutive
months (or for a period of less than 12
consecutive months at the end of which
you sold or exchanged it).

So, does that mean that if I am converting a long term rental to personal use in Q4 of this year, does that mean that for intents and purposes I get to treat it like it was a rental all year for expenses and CapEx and I should leave the personal use days box blank?

We had a tenant leave our rental property in May of this year. We received about $5,000 in gross rent. The tenant trashed the property and we had to spend about $8,000 on repairs. Including new paint ($4,400) and Carpet ($2,200). These costs were incurred in preparation for us attempting to sell the home. The roof also sustained damage that we filed an insurance claim for, so we have a $1,000 deductible on that.

We attempted to sell the rental home and were unable to get a satisfactory price and cancelled the sale. We currently have the home empty while we wait to decide what to do next and if comps improve. We are thinking about using it as a 2nd home for the next couple of years as it is close to family we would like to visit making our first visit to in Q4. After a couple of years we will either rent it again or sell it. We do not plan on making this home our principal residence.

The home was originally a personal residence that we converted to a rental 8 years ago.

I was wondering how we should handle the expenses we incurred. We would want to make sure that all the expenses were either deductible or added to the cost basis of the property so we minimize capital gains when we do sell it.

So here are my questions:

1. If we are converting a rental home to a personal residence, is this the same a personal use of a rental home---would we have to prorate all expenses include repairing tenant damage?
2. Is tenant damage to capital assets (e.g., paint, carpet) different and can be fully expensed?
3. How does the personal conversion work as far as if we will be reporting a huge loss for the property?
4. How to we handle capital additions to the home for the period it is used for personal use? E.g., can a new deck or fence be add once we use it add to the cost basis once we convert it back to a rental?

Does anyone have recommendations on where I could talk to a CPA online related to a single specific tax question? I normally just use Turbotax, but I am converting a rental home the tenant trashed to a second personal residence and want to talk through how we should handle the expenses associated with it as the repair expenses exceed the rent collected for the year.  

I looked online but did not really find any sort of advice-by-the-question services out there. Just looking for a flat-rate service for a 15 minute question.

Yeap, I did some more digging and that's what it is.  Oh well, going to pass on this deal.