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Hi All,
If all goes well, I'll be closing on my first rental property in under a week and it's right by a state school. I know I'll probably be renting mostly to students and one of the main things of concern for me still is the lease. I know how important it is if I ever have problem with my tenants later, so I want to make sure I don't forget anything important. I got a basic lease from my local landlord association, I've borrowed a couple of books on leases from my local library and included clauses that looked good, but I've yet to find anything specifically for students.

Does anyone here have anything they use or can point me to a good resource?

MyPetSlug

Thanks All Cash.

Well, I need to replace because, while there's only one leak that we know us, the roof is old. We've been told by a couple of roofers that it's at the end of it's life and they could attempt a patch, but the shingles are so brittle that one patch might lead to another which leads to another and so on. Now, they might all just be trying to sell us on a new roof, but I really don't know anything about rooves, so I'm not in a position to dispute them.

As for doing it myself. I actually wouldn't mind, but A) I've never done it before and wouldn't feel comfortable unless I had someone showing me how. B) How long is it going to take doing it the first time when you're also working a full time job? C) That's time I could be spending painting or doing one of the many other things we need to do to get the property up and running.

Anyway, thanks for the reply. At least I'm glad I have the right answer now.

MyPetSlug

Maybe it's bad form to reply to my own message, but for anyone that's interested that didn't know the answer, I did some more research and found out this is actually a really complicated question.

The general consensus of most of the landlording tax books I've looked at says that patching a roof or replacing a section of the roof can be deducted in the same year as a repair. However, replacing the entire roof is considered an improvement since your are "substantially prolonging the useful life of the house", and must be depreciated over 27.5 years. Now, this doesn't entirely make sense logically to me, but at least it's an answer.

To complicate this though, the tax courts have ruled that in some instances replacing the roof can be considered a repair if the roof still had plenty of useful life left, you were only making the replacement to restore the property to working condition (not, say, to increase it's value), and replacement was the most economical way (like fix a bunch of leaks) of doing that.

However, to be conservative, I think I'm going to have to depreciate.

Hi Guys,
So, I'll be closing on my first rental property in about 3 weeks and I just found out this past weekend that the property needs a new roof. I mean, I knew the roof was old, but I thought I'd be able to get away with not replacing it for at least 12 months. Then, this past weekend we actually discovered a small hole in the roof through which water was slowly dripping. So, the roof will need to be replaced immediately. I'm pissed at my inspector not finding this, but that's besides the point. Right now, I'm trying to explore my options for replacing it if I can't back out of the sale (without losing my deposit anyway).

So, my question is, how do the federal taxes work when doing a major repair like this? Can I deduct the whole amount or I do I have to depreciate it? If I have to depreciate, how do I determine my basis? I tried putting this into my tax cut program, but it still wasn't clear.

I know I'll have to talk to a CPA for my specific tax situation, but I'm talking in general.

Thanks,
MyPetSlug

Hi Charles,
No I don't have a pet slug, but you have to admit, they would make great pets. They make no noise, take up little space, eat next to nothing, and it's not like they can run away.

You said: "I have heard of many people going this route in purchasing a home. The perks of the deal are that the end buyer usually does not have good enough credit to actually purchase a house so instead a lease option is better suited for their current financial abilities. I don't understand how they afford the non-refundable option monies but that's besides the point."

MyPetSlug: So, for a person with bad credit, how is the lease option better suited for them? They essentially take the lease option with the deposit on faith that they'll be able to fix whatever credit problems they have in the future enough to buy the house at a price above where the market is now. At the same time, they are essentially renting at an above market rent because they're paying a premium for the option to buy. Doesn't trying to fix one's credit at the same time you're paying a large rent seem counter productive to you? Even if not, if the market goes down, the option price suddenly doesn't look so hot and they're out 5K.

Add to that the fact that it make infinitely more sense for a person with credit problems to rent cheaply somewhere for a while, while they fix their credit problems with no risk of losing 5K and no risk of the market going down.

You said: "on another note; all the people that I know that do these type of deals do purchase the home below fair market value and therefore start out with equity. part of this equity is then transferred to the end buyer which will setup a lease option. What do you mean "they are going to be renting at an amount that covers 95% of the mortgage". I usually see deals like this:

purchase price=85K (assumed the current mortage)
ARV=100K
sell price=95K "

MyPetSlug: How do these people you know purchase the home below market? In every lease option I've heard explained, including HuntMan1, the option price is always above market because the seller had no equity to play with and you want to make money when the leaser exercises their option.

What I mean by "they are going to be renting at an amount that covers 95% of the mortgage" is that because you're assuming the mortgage "Subject to" and the seller has no, or very little, equity (the example HuntMan1 gave was 5%), you have to set the rent as at least the mortgage payment that you're now making, which is 95% LTV on the house. In my area, and I would guess most, renting a single family house for essentially the same price it would cost to get a 95% mortgage on it would be a very high rent.

So, my point was that because of that you're looking for a very specific person, someone who can afford to borrow 100% of the purchase price of the house, but for some reason has bad credit and, as I was arguing in my other paragraph, is also bad at math.

Also, in the example you gave, the person has 15% equity, so they could afford to hire a real estate agent.

As for you cash-flow example, I mean, I understand that part. I know how it's good for the investor. It's great for him. I'm just arguing that is seems terrible for the buyer.

MyPetSlug

I'm sorry, I know I'm a novice in real estate investing. I'll just be closing on my first rental property in about a month, but the scenario laid out by HuntMan1, just doesn't make much sense to me. I mean, this technique must work for some people and I've heard a lot of gurus promote it, but I just still don't "get it".

Here's what I mean: So, you go out and find some poor guy who's in big trouble with his mortgage on a house in good rental condition with no equity. You find this guy and promise to solve all his problems, you draw up the contract, and take over the mortgage "Subject to".

Now, who is going to want to lease this property? First off, it's got to be a person who can afford a huge rent (because obviously they are going to be renting at an amount that covers 95% of the motage +) but for some reason doesn't have good credit or can't afford a huge down payment at the moment. Then, they are going to agree on an option price that's above market *and* doesn't mind putting down a 5K non-refundable deposit to take the gamble that he's going to be able to fix any problems that wouldn't allow him to buy that house outright in the first place. I mean, does that sound like a good deal to anyone? Would anyone here take that deal??? I certainly wouldn't.

Again, why wouldn't the potential buyer rent somewhere *cheaply* (or at least cheap-er than an entire single family house) for a year or two until they fix their credit problems or save up the down payment. Then they could buy the same house at market value and if real estate prices are going down, so much the better. They actually pay less than they might have. And if prices go up, so what? They would end up paying about what you're giving them in the lease, since it was above market at the time to begin with.

I mean, am I missing something? Oh right, the buyer's motivated too. Actually it sounds more like they're just not too bright with their money.

This whole thing seems more like just pure "salesmanship". Convincing someone to take a bad deal by making it sound great. What am I missing?

MyPetSlug