All Forum Posts by: Tyler Speelman

@Dave Skow yes, the lender was initially sent the contract with initial offer and the accepted counteroffer. The counteroffer was on the first page, but maybe overlooked.

Thanks for your advice and feedback.

Hey BP,

I received an appraisal back below purchase price and realized appraiser used initial offer and not the accepted counter offer on the appraisal report. Now there is an appraisal gap of 10k. I spoke to lender and he plans to speak to appraiser. Realtor (dual agent) said to ask the lender to speak to appraiser. What would you do?

Thanks in advance,

Tyler

@Kayla Santangelo

I use google voice. It is nice to be able to customize the voicemail for business. It can forward all texts and transcribed voicemails to your work email. I believe you can transfer the number to someone else in the future if you wanted to sell business.

https://evergreensmallbusiness...

The above link breaks down some scenarios for tax breaks with a STR - the key takeaway was you can use depreciation against rental income to create paper loss to offset active income as long as you have material participation and guests rent the property for 7 days or less at a time.

Below you'll find further details from the article link above.

"Exception #3: The Short-term Rental

The short-term rental exception (see 1.469-1T(e)(3)(ii)) says if your average rental period equals seven days or less, tax law doesn’t limit your losses.

Example: You buy a Montana log cabin late in the year, get it furnished, and then sign up for a couple of the short-term rental websites. During November and December, you rent the property for a week three different times. Your rental activity averages 7 days and therefore isn’t limited by the passive loss limitation rules.

If you do your depreciation in a way that puts a $63,000 deduction on your tax return? Bingo. You may shelter $63,000 of income without needing to worry about having passive income or middle-class income or qualifying as a “real estate professional.”

Just to play with the numbers so you see how powerful this is, you could use the vacation rental tax shelter to put a big deduction on your tax return every year.

Recycling the example presented earlier, if you purchased a vacation rental every year, you would drop a $63,000 deduction onto your tax return every year.

And by the way? If you wanted to really jack your depreciation deductions? Sure, you can scale. Ten vacation rentals might produce a $630,000 deduction. A hundred vacation rentals? Well, you do the math…

Achieving Material Participation

One other important wrinkle you need to know about.

You can also lose your ability to deduct losses–even losses on short-term rentals–when you lack material participation in the activity. Accordingly, you need to materially participate in the short-term vacation rental activity.

You can achieve material participation in a variety of ways. But typically, you have three practical options:

• You or your spouse spend more than 500 hours a year.
• You or your spouse spend more than 100 hours a year and no one else spends more hours.
• You or your spouse is the only person who substantially participates in the activity.

Let me provide examples so you see how this works.

Example 1: You do all the marketing, housekeeping and landscape maintenance. All totaled, this activity only adds up to 40 or 50 hours a year. However, because no one else does more work than you do, your participation counts as “material” even though the total hours over the year are modest.

Example 2: Your spouse spends about a 120 hours over the course of the year renting or trying to rent a vacation home. You guys use two housekeepers: Mary and Margaret. Mary spends about 80 hours over the course of the year. Margaret spends about 100 hours. Nevertheless, your participation counts as “material” because your spouse spends more than 100 hours a year and no one else (neither Mary nor Margaret for example) spends more hours.

Example 3: Same facts as example two except Margaret retires and Mary picks up all of the housekeeping. This means your spouse spends 120 hours a year while Mary spends 180 hours a year. In this case, your participation does not count as “material.” With Mary spending 180 hours a year, you or your spouse would need to spend more than 180 hours a year.

Example 4: Your property is rented nonstop through the year. As a result, your housekeeper, reliable Mary, spends about 1000 hours a year cleaning and washing. The heavy rental use also requires you to hire another worker who does repairs and landscape maintenance—work that he also spends about 1000 hours a year doing. In this case, you need to spend more than 500 hours a year in order to participate on a material basis."

Hey BP,

Purchasing a 2nd home with 2nd home mortgage, but using the home as a STR.

1. Can I use depreciation of the home to offset rental income gains?

2.How do I take advantage of tax deductions if purchased as a 2nd home? (Neither my wife or myself qualify to be a real estate professional).

Thanks in advance!

Hey BP,

Can you combine funds from self-directed IRA, and LLC to invest in a syndication as a limited partner?

Thanks in advance!

@Kimberly Sile You're welcome!

@Joshua Janus

Thanks! Yes, currently looking for value add (light rehab), 10-20 unit multifamily preferably built after 1978 with at least $100 cash flow per door, in an area with growing population, diverse industry, crime rate < 2x national average and decent schools.

@Mary Beth Blackwell

You're welcome!

For the underwriting process I tried to look at the forest and not the trees. Generally speaking there is a huge demand for housing in my area, the cost to build is pretty steep, inventory is low and inflation is out of control. Further, the current rents were pretty low compared to a less desirable rental property that I had a few miles away (2nd story 2 bedroom 100+ year house with no garage that rents for $650) so I knew I could easily increase rents because the subject property was much nicer. Lastly, the property was essentially turnkey (fully occupied, good roof, newer HVAC, no deferred maintenance). This knowledge and knowing a similar property nearby sold for 200k approximately 10 years ago helped give me confidence to be aggressive to close the deal.

For offer 1 the cash offer - my plan was to close well below market value and then do a cash out refinance. 

For offer 2 conventional financing - https://www.biggerpockets.com/...

*Delmar Mortgage does 30 year fixed interest rates for rental properties. 

*The loan and interest rate would be in personal name, but after closing I would do a quit claim deed and transfer to LLC.

*The numbers worked (+cash flow) with current monthly rent. The potential monthly rent ($700/unit) was used in the link. 

*ACV insurance quote was used. 

For offer 4 - I ran my numbers similar to offer 2, but with the terms offered from a local bank (3.875%, 5 year ARM, 20 year term) because the seller-financed down payment scares away a lot of traditional lenders who work with Fannie and Freddie. Updating the interest rate and loan term in the biggerpockets calculator resulted in projected $404/month cash flow which clears the interest only payment to the seller for the seller financed interest only payment. I planned to refinance after seller is paid off in 2 years and will lock in long-term debt. I have a couple options to pay the seller off and transfer debt with little to no money out of pocket, these options include a HELOC, business line of credit, cash out refinance other rental(s), cash out refinance the subject property or some combination of these options. I like transferring debt to a line of credit that you can move money into and out of easily because you can park your idle reserves there to keep money always working for you (like a master sweep account) instead of sitting in a checking account. I don't have a crystal ball for future interest rate, but thinking long-term I always liked what David Green says - real estate tends to be forgiving overtime.

*There was negative cash flow (-63/month) with current rents, but I was willing to have potential negative cash flow for a few months until rent was raised because there was no money out of pocket. 

For offer 3 - I ran the numbers similar to offer 2, but with the new seller financed interest rate this resulted in a $429 monthly cash flow. At the end of 2 years I would do a cash out refinance and pay the seller off or transfer debt to some other options mentioned in offer 4 above.

*The numbers worked (+cash flow) with current gross monthly rent.

Hope this helps!

Hello, 

I wanted to give back to the bigger pockets community and share the step-by-step process I followed to purchase an off-market, no-money-down deal. 

Step 1: Locating off-market properties. 

On my commute to work and while driving to other rental properties I looked for other multifamily properties, preferably properties that had some deferred maintenance and also had more than 2 units. After these properties were spotted I wrote down their address. 

Step 2: Finding the owner. 

Next, I looked up the address on the county auditor's website to figure out who the owner was. If it was owned by an LLC I then looked up the owner of the business by searching the business name at this website: https://businesssearch.ohiosos...

Step 3: Contact the owner. 

I then attempted to look up the owner's phone number by googling their name and phone number. If I couldn't find their phone number I would send a letter to the address found in step 2. 

The direct mail off-market letter example can be found here:  https://docs.google.com/docume...

Another example of an off-market letter can be found here: https://docs.google.com/docume...

*I reached a few owners on the phone and mailed approximately 35 letters to off-market MF property owners and one of them emailed us back a few weeks later stating that they may be interested in selling. 

Step 4: Analyzing the deal

The triplex had a gross monthly rent of $1,555. The residents were responsible for utilities. My father had a similar triplex approximately 15 miles away that he sold approximately 10 years ago for 200k. I also had a rental property a few miles away not in near as nice shape that rented for $650 for a 2 bedroom/1bath unit and had a ton of interest (>120 people interested). Based on that knowledge, I ran my numbers in the biggerpockets calculator with potential rents at $700/unit and a purchase price of 200K (I came up with this number based off a sales price from a similar property that my dad owned mentioned above and figured this was a pretty strong offer based on the seller's purchase price from a family member for 129,046 in 2014). I also had a rental property a few miles away in not near as good as shape (over a 100 years old) that appraised for 190K in 04/2021.

Step 5: Talking and meeting with the seller.

I spoke with the seller and learned that they really did not have to sell, but were ready to move on and use the proceeds to potentially build another house or building. The seller mentioned that he was worried about capital gains tax and wanted to sell before the end of the year (2021) due to concerns of capital gains taxes increasing. I mentioned paying the seller off slowly over time (contract for deed) or having the seller finance the down payment. The seller said he would be open to offers that would help him out with capital gains taxes, but mentioned that he would want all of his money by the end of 2023. I met with the seller and checked out the well-kept triplex (2 bed, 1 bath per unit) with attached garages built-in 1981. This property was fully occupied and essentially turn-key, the seller used to live in one of the units so the whole building was very well taken care of. He mentioned that he had others that had contacted him about the property even though it was off-market and that he would be showing the triplex to 3 other people.

Step 6: Making offers.

*Offer 1: $170,000 cash, no contingencies, can close in 2 weeks.

*Offer 2: $180,000 contingent upon conventional financing, no inspection contingency, must close before the end of the year.

*Offer 3: $190,000 seller-financed, 20% down payment ($38,000) due in 2 weeks, remaining balance ($152,000) amortized over 30 years at 5.5%, $863.04 monthly payment, balance due on 11/19/23, no prepayment penalty. No inspection contingency. *Seller keeps the deed in their name until the full balance is paid (contract for deed) allowing the seller to continue to use depreciation on the asset. Contract for deed with the terms above to be drawn up by an attorney prior to closing.

*Offer 4: $200,000; $150,000 contingent upon conventional financing and $50,000 seller-financed must close before the end of the year. Seller receives 8% per annum interest-only monthly payments ($333.33) on principal balance ($50,000) for 2 years, principal balance ($50,000) due on 11/19/2023. No inspection contingency. Promissory note for $50,000 paid to seller from buyer with terms above to be drawn up by attorney prior to closing. 

* All offers are without a realtor involved.

*All offers are good for one week.

The seller accepted offer 4! I gave multiple offers based off of Brandon Turner's advice to figure out the seller's true motivation. 

Step 7: Creating the purchase and sale agreement.

After they accepted the offer I then drafted a purchase and sales agreement which can be found here: https://docs.google.com/docume...

Step 8: Financing

The appraisal came back at 225K! I used a local bank that was able to finance 148k at 3.875% 5 year ARM, 20-year term. We plan to refinance the property into a long-term fixed mortgage after we pay off the seller. The bank agreed to wrap the closing costs into the loan. The bank required the seller's attorney to prep the deed prior to closing.

Step 9: Promissory note

I sent the purchase and sales agreement to a local attorney who then drafted up a promissory note with the terms included in the accepted offer. The promissory note was then signed, notarized and given to the seller at closing. 

Step 10: Closing

I got Covid shortly before closing, but still closed. We signed the closing documents outside of the bank on the hood of my Kia Sorento. Fortunately, it was a decent day for late December in Ohio. The cool thing was I did not have to bring any money to closing. There was no money out of pocket and I got 25K of instant equity. 

Hope this was helpful. Definitely no expert and still learning, but hopefully some of you find this useful and can pull something from this to use as a tool for a future deal and help propel you towards your goals.