All Forum Posts by: Pete Harper

Quote from @Sean O'Keefe:

@Pete Harper there's also option 3 to consider (that you didn't mention). Sell property, don't do 1031 exchange, and get cost seg on the new property. 

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

Just so I understand your option.  Basically option 1: $175k capital gains with $43.75k long term capital gains tax.

Perform a cost segregation study on new $250k property and somehow "find" $175k in new deductions to off-set $175k income.  Is that even possible to write off 70% of the value in the first year?  Please explain?

I have a property that I want to sell and do a 1031 exchange into another property of lesser value.  I want to confirm my understanding of the 1031 exchange rules are correct.

Exchange property: Cost basis is $205k; Sale price $380k, Loan $164k leaving $216k equity

Without doing 1031 exchange I would have to pay capital gains on $175k with $ 43.75k in long term capital gains tax.

Now if I were to do a 1031 exchange on new property: Sale price $250k The difference is $130k with $32.5k long term capital gains tax.  The 1031 exchange is $11.25k favorable.

Ideally I can find a second property to utilize the $130k doing a 1 for 2 exchange with the total purchase price over $380k.

Thanks, Pete

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Fairfield.

Purchase price: $85,761
Cash invested: $22,000

1970's Duplex in small rural town in Central Texas. I found the deal by sending out "Yellow Letters" to all the multifamily owners in town. I was contacted by the guardian for a gentleman that just moved into assisted living. Over six months waiting for the court to approve the sale. Our plan is to hold this as a long term rental. Update: The right side renovations are complete. Unit is now rented at $950/ month. The left side decided to stay as-is at $700. $1650 total Solid 2% deal.

What made you interested in investing in this type of deal?

Long term buy and hold for cash flow. Solid 2% deal

How did you find this deal and how did you negotiate it?

Negotiated deal with owners guardian. Took 6 months to close the deal with court approvals. Used inspection report to negotiate half cost of new roof prior to closing.

How did you finance this deal?

Conventional 30yr financing

How did you add value to the deal?

Renovated the right side increasing rent from $500 to $950.

What was the outcome?

Long term hold with great cash flow.

Lessons learned? Challenges?

Patience.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Represented myself on negotiations. This was an off-market deal

Quote from @Justin Brin:

Quote from @Pete Harper:

I would make a suggestion on your target market strategy.  Look at secondary markets in the path of progress from major metro areas.  We are doing well outside Austin, Dallas and Houston. 

 You are suggesting not to focus on main metro areas but secondary areas?

 Correct.  Don't invest in Austin but along the I35 corridor going North.  Similarly along the I45 corridor from Houston.  Hwy 75 North of Dallas is another good area.  

Quote from @Justin Brin:

Quote from @Ali Nichols:

@Justin Brin great lead in for discussion, thanks for putting that together. Generally speaking, we have the same approach - avoid areas that are heavy in renter friendly regulation (i.e. CA). Then TX is tough right now because of property taxes. And then, Florida is difficult with insurance right now until that stabilizes. 

Then, when we look at Atlanta and Charlotte we see a good amount of supply because of the footprint of large institutiional buyers (i.e. invitation homes).

That leaves the midwest (OH, IN, MO), TN, and the one off markets like Tucson and Albuquerque. Personally, we have had success in small multi-family across OK, TN, MO, KY, IN, OH. 

Did taxes went up in Texas?

Regarding Atlanta and Charlotte institutional buyers are buying up the market?

From all these stats "OK, TN, MO, KY, IN, OH" which one is your favorite? 

Property taxes in Texas have always been high.  With no state income taxes they government needs to get their money somehow.  Unlike CA there is no Prop-13 cap on appraisals.  Appraisals keep going up every year unchecked.  We own 8 properties in Texas, every one went up in 2023.  Same in 2022. Low prices might look attractive but your total property tax burden is about 2X California.  Make sure you account for this in your underwriting.  

I would make a suggestion on your target market strategy.  Look at secondary markets in the path of progress from major metro areas.  We are doing well outside Austin, Dallas and Houston. 

Quote from @Raymond Schmitt:

Here's an update on Waco plant....not looking good https://wacotrib.com/news/local/business/development/s2a-wac...

 I was going to say, nothing but a field of weeds at the Waco location.  I believe the Paterson CA facility is just a circus tent.  Nothing is real, all their home photos are CGI renderings. 

Quote from @Joshua Bautista:

How do you guys analyze a property? Based on what metrics?

BP has excellent calculators available for free in the tools section of the website.  I believe you get 5 free free uses.  I "borrowed" the formula's and created my own spreadsheet to quickly analyze deals.  Save both your good and bad deals and you will quickly get a feel for your target market.  

Quote from @Hannah C Christie:

1. Why? Because every resource recommends doing so from a liability stand point and I do not want my name out there as the property owner. I am staying local to where the rental is, work in healthcare where I can be found reliably and with little security. 
2. Tax benefits? I don’t plan on selling anytime soon which is why I’m going through this trouble. My interest rate is 2.875% which I do not want to give up and the house hasn’t changed too much in value to make selling lucrative. Additionally, I still like the house so if things don’t work out with my living situation (cohabiting with partner) I have some place to go back to. 
3. I’m ok spending more if there’s some benefit to it- like privacy and being able to sleep at night. 

I have a business banking account and a PO Box for the LLC, a property management company picked out for once the transfer is approved (so I can sign the agreement as the LLC and the LLC actually has the right sign) and a CPA that has helped me file and form the LLC. I took the advice to put the house in an LLC (or at least try to) from a prominent real estate maven in my area (she has about 40 properties).

Hannah, I've been in a similar situation where I wanted to transfer title to my LLC. As you can see this is a hot topic with strong opinions on both sides.

Transferring title will give you a small degree of anonymity. It will likely dissuade a disgruntled tenant or stalker who will try and look you up.  They will see the LLC name and address instead of your own.  A PO Box for business is a good idea. As others have pointed out a good lawyer can easily get around this and find your personal information. If you are looking for total anonymity there are other legal instruments like Wyoming LLC or Trusts but I believe that is beyond the scope  of what your are asking.  If you are looking for legal protection then a good umbrella policy is your best first defense. An umbrella policy inside an LLC is even better. The umbrella policy provides access to very good legal defense lawyers who's job is defending you.  You should sleep better.

You said you have lived in the home two years.  That qualifies you for a $250k capital gains tax break, $500k if filing jointly.  Even if you sell after renting for a year you still qualify.  Check with your CPA but this is a huge benefit if you decide to sell the property.

Nuts and bolts of transferring.  I've done this before.  You are taking the right approach speaking with the bank first.  Done right this will not trigger due on sale clause.  For FannieMae loan I was not able to transfer the loan itself into the LLC.  My name remained on the loan.  I was however able to transfer the property title to the LLC.  If you look on the county records you only see the LLC name and address.  If you dig further you will see warranty deed transfer from me to LLC.  Your average Joe stalker would see this as property being sold.  A smart lawyer could dig further and find the loan lien.  On top of the regular home insurance policy I carry a sizable umbrella policy.  BTW warranty deed preserves the title policy chain, don't do Quit Claim Deed.  No issues with title when we later sold.

1% is a useful screen criterial for evaluating cash flow properties.  It is a quick and easy way to sort through a bunch of prospective properties.  If you see a $400k property that rents for $2000/month move on.  It isn't going to cash flow.  Don't bother running the in depth numbers because it just isn't going to cash flow positive.  If however it is close to 1% then it is worth taking a closer look.  June year we closed on a 10 unit complex that was 0.9% that is cash flowing nicely.

Don't believe the nay-sayers that 1% deals no longer exist. I closed on a 2%+ deal in April. Our overall portfolio average is 1.6%. In todays market you are going to look a little harder. Off-Markers deals not on the MLS. Or tertiary markets outside the major markets in the path of progress.

lol "another seriously battered and abused landlord"  Says the guy with footprints all up and down his back from his tenant walking all over him. lol

You obviously know more than everyone on the forum.  Best of luck.