All Forum Posts by: Russell M.

Take it to the logical conclusion.  If the refi loan will be $55/mo more, as @Mike Hanneman said, and you are saving $250/mo, do the math. If your timeline to hit 78% LTV is 2 years if you don't refi, you save $6000 at $250/mo X 24 if you do. If it takes 4 years, you save $12000 at $250/mo X 48 if you do

If your loan closing costs will be less than $6,000, you should probably go for it.  That would give you a 2 year payback with then 28 years of savings.

I know you are in CA, but I would be leery about banking on appreciation to get you to your LTV. Besides, what if it took longer? I would base the decision on the time to pay back the closing costs and fees and not worry as much about appreciation.

I concur with both @James Wise and @David Light.  I have 3 properties and maintain them, along with a small business and my personal finances using an open-source accounting software called Gnucash.  It has the flexibility to structure your accounts for each group combined or separately to as great a detail as necessary.  The benefit I see over Excel are the reporting functions that are already built in to Gnucash.

I have structured my real estate accounts to match what is necessary for tax reporting purposes.  There is a copy for each property.  Adding a new property is as simple as copying the directory structure.  I have them listed as a fork under my business entries, so that it is possible to run reports showing the total of all businesses or the real estate and small business separately.

Another benefit to Gnucash is that it has small business functionality included, with the ability to generate invoices and checks, etc.  I chose this software over Quickbooks because it was a step higher on the functionality scale than Quicken, but also maintains strong adherence to accounting principles.  

The most important take-away from this should be that whichever accounting package, or Excel you choose, take the time to determine your account structure and set up when you start.  Putting some time into planning will make your life loads easier down the line as your small business and real estate situation gets hopefully more complex, and profitable.

A couple comments, having gone through a short sale in the last 6 months.

1.  The bank will not begin any negotiations until you have an offer on the table that you submit to them.  They will then evaluate it to their criteria.

2.  The price you list it for in order to obtain an offer, and the price the bank is requiring, may be significantly different.  The key here is to speak to the bank and find out what their appraised value is.  They will require approx. 90% of this value in an approved offer.  This can drop slowly based on time on the market and comps.  Knowing it is critical as without it, you may end up with a bunch of rejected offers simply because the price was not quite right.  It also allows you to be more solid on the listing price and when discussing with potential buyers.  As a buyer, this is something you should ask the seller about.  If they don't know what the appraised value is, suggest they find out, or you could be wasting a lot of your time.

3.  The mortgage company I was working with was Ocwen.  They stated in their short sale documentation that closing costs had to be limited to no more than 10% of the sale price.  So, when putting an offer in, plan accordingly.  This probably varies from company to company.

4.  Once you have submitted an offer, or have an offer in hand if you are the seller, getting the completed documentation compiled and sent in as 1 packet is critical.  At least with Ocwen, any document sent individually was generally lost.  If you are notified that something is missing from the short sale packet, obtain the correct documentation, merge it in and resubmit the full packet.

I suppose as a buyer, the complete packet issue is more out of your control, but if there seems to be a long delay and you are interested in the property, it is worth mentioning.  

Finally, as @Phil Z.  mentioned, your purchase criteria should not change whether it is a short sale or not.  If you are interested in a property, but it is quite a bit outside your range, and you find that the asking price is close to the Bank's appraised value, then don't waste any more time.  Just walk away.  The banks are not generally interested in negotiating, unless it is for more money.  Also, don't expect the process to be quick.  Ocwen, at least, moves at their own pace, which is extremely slowly.  It almost seemed they were trying to wear us as the sellers, down until we let it go to foreclosure, as they would likely make more money that way.  Be patient, or go find a motivated seller.

Hope this helps!

After much delay, I finally put together the tax spreadsheet and chart of accounts. I uploaded them to the fileplace.

Here is the link:  

https://www.biggerpockets.com/files/1130/download

Feel free to ask if you have questions or want clarification about how it is set up.

Glad to hear there is an end in sight!

Since you are already in the thick of it, I would spend a little more time to get organized now.  It may literally save you thousands of dollars in the future.

The first step is to get some sort of financial program.  You could use Excel, but it doesn't have the database and reporting capabilities that actual financial packages have.  Whether you use Quicken, or Quickbooks, or a free package like Gnucash, which are equally capable, pick one.  Take the time to learn how to use it and get it set up with appropriate accounts for your properties.

My account set up has income and expense categories for each property I own.  The expenses are broken down based on the expense entries from the IRS Schedule E, assuming you are in the United States.  If not, I would suggest structuring based on your local tax laws related to real estate investing.

Keep track of everything.  Set up file folders for management and expenses for each property that you can use to archive your information year by year.  This will allow you to be able to pull past information easily without having to search through a stack of papers, or a cardboard box.

If you do most business electronically, then set up the same sort of directory structure to keep track of records.  Scan Receipts, or print electronic receipts to a pdf when you make a relevant purchase.  Keep track of payment confirmations for mortgages, utilities, etc.

In your financial program, set up standard Balance Sheet and Net Worth reports for each property and for all properties together.  This will allow you to run them on a monthly basis to track how each one is doing.  Also set up reports to track expenses throughout the year.  This will let you see anomalies in your expenses, if something is higher one month, it can trigger you to investigate for a problem.

Also set up transaction reports so that it is easy to create lists of expenses and income per property at the end of the year when preparing to do your taxes, or send to your accountant.

As I said at the beginning, starting now and getting organized will save you a lot of time and possibly money in the future.  The more detail you can capture, the better you will be able to keep track of your situation for each of your transactions.

If you are interested, I'd be more than happy to share my chart of accounts, as well as a specific property spreadsheet I use at tax time for my Schedule E.

Purchased a property sight unseen.  I trusted the recommendation of someone I thought I could trust, even though my instincts were screaming.  It is a situation I'm still trying to work through.

Were I to do it again, I would have insisted that I see the property first.  That would have been enough to make me walk away.  Trust your instincts.  If something feels off, just stop.  There will be another opportunity or another deal down the road that will let you sleep at night.

I think what @Paul Ferraro meant by "reading what you wrote" is to look at the list of problems that you have already discovered.  You know that they are not going to drop the price of the property enough to account for those repairs, so you will already be running a loss.  When you take that into account, along with the fact that you will then do renovations, and those always have some unknowns, it is looking less and less certain.  Add that to your concern that you will run out of funds.

Based on your last paragraph where you ask whether you may be jumping in the deep end, your instincts are already firing red flags.  You should probably listen to them.

Thank you both for the input, it is much appreciated!

 This would be a 2 step process.

1.  Upon purchase, you would determine the Improvement percentage of the $78K.  This would be listed as the initial depreciation amount starting at the close of sale, for Improvements.  This would start one term of 27.5 years.

2.  Once your improvements were completed, it would be the cost of the improvements, not the difference in appraised value that would be the 2nd depreciated amount.  All improvements that add significant value to the property also fall under the 27.5 year depreciation schedule.  The start date for this component would be upon completion of the rehab.  You depreciate the cost because the increase in value may not be as much as the cost of the rehab.

Now, it is possible, depending on how long the rehab takes, that the start dates would be effectively the same.  I can't remember if the schedule is broken down by month or by quarter.  Regardless, there still need to be two separate depreciation entries.