All Forum Posts by: Mariah Jeffery

My CPA is myself, and I'd like to keep it that way if at all possible.

I hear cost segregation is very expense, as in the $10K range. Since some of my properties are in the $60K range, it probably doesn't make sense. I do like the idea of backing out the building costs from the purchase price and assigning whatever is left to the land.

I bought several properties this year and I'm trying to figure out how to get the highest depreciation deduction possible. I do my taxes myself and plan to continue to do so.

The value of the land, according to the tax assessor, is generally a very high percent of the property's value. Here is an example of a property that I've bought:

Duplex:
Purchase price - $59.5K
Tax assessment - $63K ($26K for land, $37K for building)
Appraisal - $67K total value

The best I can come up with is to take the $26K for land and divide this by the $67K appraised value, to get 38.8% of the value allocated to land. This will allow me to depreciate 61.2% of the $59.5K purchase price, or $36.4K. I'll allocate a few thousand to appliances, which can be depreciated more quickly, and the rest to the building itself. Is there any way I can justify depreciating any more than 61.2% of the purchase price?

I have another property that I purchased for $72.6K, and did not have an appraisal. The tax assessment is $77K with $26K going towards land. This property has two nice houses on it and I'm sure the market value is upwards of $100K. For this one, can I use some comps to determine the total value and still use the $26K as the value of the land?

I'd really appreciate some creative ideas on how to increase my depreciation deductions. Thanks!

~MJ

Ah, yes. The $11.5K includes my $300/month utility estimate and the PM fee. Still, $5,700/month seems a little bit high.

I've been evaluating a 4-unit foreclosure property. I estimated the rents to be around $600/unit x 4 = $2400/month. Using the 20% figure for Maintenance/repairs/capital improvements/legal/misc, I get $11,503 per year for these expenses. This seems insanely high for these expenses, especially given that I'll be gutting everything and installing new appliances and installing a new roof.

I don't have escrow on this property. Do they still check up on changes I make to my insurance policies?

I recently formed an LLC and want to transfer my properties to my LLC via quitclaim deed. I have two mortgage companies. One said no problem, the other said I will trigger the due on sale clause if I do that. Do you think they would really call the note due? How would they find out? I recently changed the autodraft of the mortgage payment to come from an account in the name of my LLC. I'm waiting to see if this arousing suspicion. I'm basically thinking that in 2-3 months if I haven't heard anything, I'll go ahead and file the quitclaim and just hope they don't notice. I would hate to give up my 4.75% rate, though! (I bought this one as OO and later moved out).

By the way, the property is in my name and my husband's, and the LLC is owned by my husband and me 50%/50%.

I'm financing them all with 20-25% down. The prices range from $60K-$94K so far. The $94K is for a 4-unit. They average around $30K-$35K per unit.

My father in law is my property manager. He does an excellent job for the most part, but I do worry about him being organized enough to handle this many units. I have the tenants mail a check to me and half of them get their rent paid by the county, so he's only in charge of collecting if someone's check doesn't show up. If he starts to feel overwhelmed, I'll hire an outside property manager.

Cash reserves are ok now, but after the 21 units I will have to take a serious pause and build them back up before buying more.

I bought my first duplex in March '07. It's in South Dakota and managed by my father in law. The first one worked out well, so I kept looking for deals, but couldn't find anything that met my cashflow criteria. Finally, this year I found a motivated seller. He is '87 and wants out NOW before he dies. He has 65 properties and will sell be any of them at about 25% below market value. They already have tenants in them and are in good but not great condition. I have bought one per month for the last 3 months (a 3-unit and two 2-units). I just made him an offer on a 4-unit and he said he would accept it if I buy another 2-unit from him at the same time, also at well below market. The 4-unit meets the 2% rule and the 2-unit is at about 1.5%, but is an incredible house in a very nice area, which will attract great tenants. I also met another motivated seller this week and made an offer on two duplexes, which I am waiting to hear back on. Additionally, I found a potentially fantastic deal on an REO fourplex that I want to make an offer on, which would also meet the 2% rule. I'm finding the kind of deals that I only dreamed I would find, but if they all work out, I'll be at 21 units in a few months. This is a big jump from two units! Two units is a hobby and 21 units is a regular small business. Am I setting myself up for failure by growing so fast?

Originally posted by MikeOH:

That is a great question. I was just wondering that myself. I don't use square footage or anything like that, but I break things down more than the 50% rule, as follows:

-Maintenance and repairs: 20%
-Vacancy, advertising, turnover: 10%
-Property Management: 6%
-Use actual taxes from country records, estimate insurance costs.

What do you use for all the expenses you didn't include? Utilities (even if only during vacancies? Legal fees? Evictions? Lawsuits? Damage done by tenants in excess of the security deposit? Advertising? Capital expenses? etc, etc, etc?

You're at 36% without any of these additional expenses (or even taxes)! 20% is too high for maintenance - where did you get that number?

Mike - I was including advertising in the 10% vacancy/turnover expense and the other expenses you mentioned are rolled up under the 20% maintenance bucket. I guess it would be more appropriate to label it Maintenance/repairs/capital improvements/legal/misc. This 20% came from a book a read on RE investing. I can't remember the name of it now. For utilities I have to pay (water/sewer/garbage), I use the previous 12-month average for the property. I guess I have left out the ones I have to pay during vacancies, but they're usually not much.

Do I really need to have a factor for lawsuits? I have a $1M umbrella insurance policy.

Taxes and insurance tend to run around 15-17% of rents in my area, so I guess I'm at 51%-53% even with a low PM fee. I may be being too conservative.