All Forum Posts by: Ty Coutts

Hello Nicholas, there are a few drawbacks: 

-Complexity and Scrutiny: This approach could attract scrutiny from the IRS, as it's not a typical way to manage rental properties. Ensuring that you meet all criteria for substantial services and properly reporting on Schedule C can be complex.

-Self-Employment Tax: While you anticipate the net gain to be zero after expenses and depreciation, any net income would be subject to self-employment tax, which can be significant.

-Recharacterization Risk: The IRS may recharacterize the activity if they do not agree with your classification of the services provided, potentially leading to penalties and back taxes.

-Administrative Burden: Managing substantial services may require more administrative work and potentially higher costs in terms of time and resources.

Some investors do use creative strategies to maximize tax benefits, but this particular approach of converting long-term rentals into an active business reported on Schedule C while providing substantial services is less common. Most investors either qualify as Real Estate Professionals or use short-term rentals to achieve similar goals. It’s advisable to consult with a tax professional who has experience with real estate investments to ensure that this strategy aligns with IRS regulations and your financial goals. I hope this helped!

This general log gives an overview of your activities, but it might not be detailed enough for IRS purposes.

Example 2: Detailed Log

Monday, 7/1/24

7 AM - 7:30 AM: Monitored security cameras

1:30 PM - 2:15 PM: Responded to tenant question regarding parking

3:00 PM - 3:30 PM: Monitored security cameras

4 PM - 4:15 PM: Checked mail and delivered to tenants, as necessary

7 PM - 7:30 PM: Monitored security cameras

10:30 PM - 11 PM: Monitored security cameras

7 AM - 11 PM: Remained on standby all day for tenant needs/emergencies

This detailed log breaks down your activities into specific time slots, which can provide a more precise account of how your time was spent.

Best Practices for Record-Keeping

Be Specific: Break down your activities into smaller time intervals, as shown in the detailed log example.

Use a Logbook or App: Consider using a time-tracking app or a dedicated logbook to keep daily records.

Document Standby Time: Clearly note the hours you are on standby for emergencies, but also separate it from active tasks.

Include All Activities: Document everything from advertising to maintenance and tenant interactions.

Consulting with a Tax Professional

Given the complexity of qualifying for REPS, it's always a good idea to consult with a tax professional. They can provide specific advice tailored to your situation and ensure you're meeting all IRS requirements.

Additional Resources

If you're looking to expand your real estate portfolio or need financing options, let me know. I'd be happy to discuss mortgage solutions that can help you grow your business and achieve your investment goals.

Feel free to reach out if you have any more questions or need further assistance.

Best regards,

Ty

Hello Francis,

Skip tracing services charge fees because they aggregate data from multiple sources, often including private databases, public records, and proprietary data, to provide accurate and up-to-date contact information, including phone numbers associated with a property. These services invest in technology, data acquisition, and maintenance to ensure the quality and reliability of their information, which is why they charge for access. I hope this helps!

Hello Ethan,

Turning your old home into a 5-bed, 2-bath Airbnb while having a conventional loan is generally permissible, but there are important considerations. First, you should inform your lender, as converting the property into a short-term rental can affect the terms of your mortgage and may require a change to an investment property loan. Additionally, you must notify your insurance company to adjust your policy to cover short-term rentals, ensuring you have appropriate coverage for liability and property damage specific to Airbnb operations. Failure to inform your lender and insurance could lead to complications, including potential policy voiding or loan default. Properly addressing these aspects will help you avoid any legal or financial issues. Please let me know if this doesn't make sense or you have any other questions. Good luck!

Hello Lucas, 

Your question about financing a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy is important for understanding how much cash you'll need upfront and how to leverage financing effectively. Let's break it down with your example and explore the financing options.

Max Leverage (Using a Lender for 90% Purchase and 100% Rehab):

Purchase Loan: 90% of $80,000 = $72,000

Rehab Loan: 100% of $25,000 = $25,000

Total Loan Amount: $97,000

Your Cash Investment:

Down Payment: 10% of $80,000 = $8,000
Closing Costs and Fees: Estimate around 3-5% of the purchase price = $2,400 - $4,000
Holding Costs: Property taxes, insurance, utilities, and interest during rehab (estimate $1,000 - $3,000)
Contingency Fund: 10-15% of rehab costs = $2,500 - $3,750
Total Cash Needed: $8,000 (down payment) + $2,400 - $4,000 (closing costs) + $1,000 - $3,000 (holding costs) + $2,500 - $3,750 (contingency) = $13,900 - $18,750

Moderate Leverage (Using a Lender for 90% Purchase and 0% Rehab):

Purchase Loan: 90% of $80,000 = $72,000

Your Cash Investment:

Down Payment: 10% of $80,000 = $8,000
Rehab Costs: $25,000
Closing Costs and Fees: Estimate around 3-5% of the purchase price = $2,400 - $4,000
Holding Costs: Property taxes, insurance, utilities, and interest during rehab (estimate $1,000 - $3,000)
Contingency Fund: 10-15% of rehab costs = $2,500 - $3,750

Higher Equity (Using a Lender for Less than 90% Purchase):

If you decide to put more equity into the deal by using less leverage, you will need more cash upfront, but your loan amount and, subsequently, your interest payments will be lower.

Pandu Chimata, you're off to a great start! I'll throw in a few more things to consider:

Property Assessment:

Structural Engineer Evaluation: Before proceeding, hire a structural engineer to assess the extent of the damage. This evaluation will determine if the property's foundation and structural integrity are sound.

Insurance Assessment: Check if the property has insurance coverage for fire damage. The insurance company may cover some or all of the restoration costs.

Scope of Work and Budget:

Detailed Inspection: Get a comprehensive inspection to identify all areas of damage, including hidden issues like electrical, plumbing, and HVAC systems.

Cost Estimation: Obtain detailed cost estimates for the restoration or rebuilding process from licensed contractors experienced in fire-damaged properties.

Environmental Hazards:

Asbestos and Lead Testing: Older properties may contain asbestos or lead, which can become hazardous after a fire. Ensure the property is tested and, if necessary, remediated by professionals.

Permits and Code Compliance:

Building Codes: Ensure that the restoration or rebuild complies with current building codes and regulations. This might involve updating certain aspects of the property to meet modern standards.

Permit Acquisition: Obtain all necessary permits from the city, which may include demolition permits, building permits, electrical permits, and plumbing permits.

Restoration Process:

Debris Removal: Clear out all debris and damaged materials from the property. This step must be done carefully to avoid further damage.

Structural Repairs: Address any structural damage first, including the roof, walls, and foundation.

Systems Repair: Repair or replace electrical, plumbing, and HVAC systems as needed.

Interior Restoration: Once the structural and system repairs are complete, focus on restoring the interior, including insulation, drywall, flooring, and fixtures.

Safety and Health Concerns:

Air Quality: Ensure proper ventilation and air quality during and after the restoration process to remove smoke odors and contaminants.

Mold Remediation: Check for and address any mold growth, which can be a common issue in fire-damaged properties due to water used in firefighting.

Final Inspections:

City Inspections: Coordinate with the city for final inspections to ensure that the property is safe and habitable.

Fire Department Clearance: Obtain clearance from the Fire Department confirming that the property is safe to occupy.

I hope this helps, best of luck!

-Ty

Hello Mara Hayes

For your situation, hiring a fee-only financial planner who charges by the hour would be a practical choice. For example, Garrett Planning Network advisors offer financial planning on an hourly basis. You can search their directory to find a planner who meets your needs.

- Search for "fee-only financial planner hourly rate" in Tennessee.
- Review their websites and credentials.
- Schedule a consultation to ensure they can assist with real estate investment decisions.

By taking these steps, you should be able to find a financial advisor who can help you navigate the purchase of your new primary residence in Tennessee without the high minimum fees. Good luck!

When applying for a joint mortgage in California, lenders will typically assess both of your financial qualifications individually and consider the property's use as both a primary and secondary residence. This may slightly affect the types of financing options available, but if both applicants are well-qualified financially, you should still be able to secure competitive financing terms. Be prepared to discuss with lenders how the property will be used and ensure your financial profiles demonstrate strong ability to manage the mortgage jointly.

Hope this helps. Feel free to reach out to me directly if you have any other questions, want to discuss further, or if you would like flexible financing options!

Hey Devonne,

200k in equity is AWESOME! There are so many options for RE investing. Here are a few:

Invest in Rental Properties:

Buy Rental Property Outright: Use a portion or all of your equity as a down payment to purchase one or more rental properties. This allows you to generate passive income through rental payments.

Financing Additional Properties: Use your equity to secure financing (like a home equity loan or line of credit) to purchase additional rental properties. This strategy leverages your equity to expand your real estate portfolio while potentially benefiting from appreciation and rental income.

House Hacking:

Use your equity to purchase a multi-unit property (like a duplex or triplex) where you can live in one unit and rent out the others. This allows you to generate rental income that can help offset your mortgage payments and other expenses.

Real Estate Investment Trusts (REITs):

Consider investing a portion of your equity in REITs, which are companies that own, operate, or finance income-producing real estate. REITs offer a way to diversify your real estate investments without directly owning physical properties.

Real Estate Crowdfunding:

Invest in real estate crowdfunding platforms that pool funds from multiple investors to finance real estate projects. This allows you to diversify across different properties or projects with lower capital requirements compared to direct ownership.

Flipping Properties:

Use your equity as capital to purchase properties that need renovation or improvement. After renovating, you can sell them for a profit. This strategy requires knowledge of local markets, renovation costs, and the ability to manage or oversee renovations.

I am a loan officer and I could advise you on how to tap into that equity and put that money to work. Feel free to reach out directly if you like or if you have any other questions. 

Going the Airbnb rout can be riskier as you have to secure bookings to secure that cash flow. In lower vacation/rental cycles of the year your margins could get compressed. Consider going the route of long term rentals in a different market if this worries you. However, if you believe there will be significant demand, by all means it is a good investment. Just make sure you do thorough research and financial planning. I am NOT a financial advisor so make sure you do your due diligence! However, I may be able to answer any other questions you have so feel free to reach out any time. Also, I am a loan officer if you need to talk financing. Hope this helped!