All Forum Posts by: Wes Butler

Having looked at credit reports for many years of my finance career (for underwriting collateralized loans -- not for real estate or property management), I can tell you that I have seen low scores right now, then be in the low 700's only a year later. There is a lot that goes into a score, and a low score is not always about delinquencies. If there are delinquencies, then you should be sure that the age of his credit lines that are delinquent match up to his story. I would also ask for tax returns going as far back as I can get. This will show you his cash flow history, but if he is like many small business owners, he may be showing a loss or limited profit (landscaping is probably a cash business). This can be mitigated by looking at his bank statements and match them up to his tax returns. 

Finally, my thought is that since this is a house hack, this means his rent is probably on the low side compared to renting a complete apartment, so I would expect him to eagerly pay on time to stay in the unit and keep his expenses low. As Josh Dorkin is quick to point out, this is a business, if the tenant is late on the rent, then file for eviction as soon as you are allowed by law. Making this clear to the tenant will train them to be responsible with paying the rent. 

With all that being said, I am not a landlord, so verify this advice before relying upon it.

Wes

 Why do you ask? Do you intend to listen to me if I have more experience than you, and ignore me if I have less?

My argument is not with your premise, but your conclusion. Whatever you are doing is clearly working (based on the info you provided). Obviously you have a successful strategy, but as the OP of this thread, you proposed that the land under the home is what appreciates in value. As evidence to support your argument, you point to the IRS depreciation guidelines.

So your argument looks like this:

premise #1 -- a certain real property appreciated in value

premise #2 -- the IRS only allows buildings to depreciate

conclusion -- The land is what appreciated and the building depreciated

my response to you is that the IRS allows you to recover your cost of the building -- this has nothing to do with its market value.

in other words, both your premises are true, but they do not combine to make your conclusion valid.

if i make the following argument:

premise #1 -- I wear glasses

premise #2 -- black belts go with black shoes

conclusion -- I am wearing black shoes

both my premises are true, but the conclusion does not follow from them.

I think you are confusing market depreciation with accounting depreciation -- these are not the same concept.

Here is my question to you:

when an appraiser appraises a home, how do they determine the land value? I don't know the answer to this, but I am willing to bet it is a percentage of the market value of the real property, which means that BOTH the land AND the building experience a rise (or fall) in its market value. The appraiser isn't going to apply ALL the rise in market value to the land.

 Yes. I disagree with this. Market value is a product of supply and demand. Take the US Dollar, for instance. Its value rises and falls relative to other currencies. (an investor who only buys and sells in US markets has very little exposure to foreign exchange, so the fluctuation of the US Dollar may go unnoticed to you.)

Back to my point... the value of the US Dollar rises and falls, but the paper it is printed on wears out and must eventually be taken out of circulation and replaced by another bill. Did the value change because the bill gets ripped up or left in a jeans pocket and put through the washer? No... Does the dollar bill that is de-circulated depreciate? No... How about the bill that replaced the old one? Has it appreciated? No.

What makes a US dollar drop in value? the same market forces of supply and demand. Yes, buildings wear out, but my argument is that its value is not a function of it wearing out. Instead, its value is a function of supply and demand. If the market dictates that new buildings are demanded more than older ones, then investors tear down old buildings and replace them with new ones. It was demand that set its market value -- not how old the building is. I would be willing to conjecture that there are markets where old buildings bring a premium price over new ones.

Wes

 Sure it does. I just did a poor job of explaining it. Stock market investors who prefer growth stocks generally choose stocks whose p/e ratio is high. This is similar to flipping or buying a property that you anticipate will appreciate in value. Stock investors who prefer a value strategy prefer stocks whose p/e ratio is low (generally). This is similar to a strategy of buying properties to keep as rentals. This provides cash flow to the landlord. In similar manner value stocks who pay dividends provide cash flow.

I wasn't offering some profound advice, since I'm a novice when it comes to real estate. But I'm no novice to stock investing. I just found the analogy to be interesting. Stock investors know the price of the stock has very little to do with its value. You have to dig deeper and look at its financial ratios (of course, there are many stock investing strategies. I just mentioned two of them). I also noticed that California is a smaller market, when population is used as a guide, compared to the midwest region. Not that this really matters. I just thought that was interesting.

 Depreciation for tax purposes is the systematic assignment of the cost of an asset over its useful life. It has nothing to do with its market value. (Just because a website uses the word "value" when referring to depreciation doesn't make it true. Read my first sentence to a CPA and ask them if it is correct.) 

Depreciation, as an accounting concept, is required in order to adhere to the matching principle, which states that revenues and expenses must be matched to the period in which they occur. At the end of an asset's useful life, it is sold or scrapped. If sold, the amount received is known as salvage value, and may be more or less than "cost minus depreciation".

While I agree that buildings wear out over time and must be maintained and repaired, refurbished, etc., I think you are muddying the waters by making this analogy. I think there is nothing inherent in land that causes it to appreciate in value, anymore than there is anything inherent in buildings that cause them to depreciate. Consider inner city decay, for example. The land doesn't appreciate in an inner city while the buildings on the land crumble. Instead, both the land and the buildings decline in value.

Prices go up for one or both of the following reasons: reduced supply, increased demand, or both. Prices go down when the opposite is true. Land is the ultimate scarce resource. A fixed supply of land (who builds land?) and houses mixed with an increased demand for it, is what drives home prices AND land to increase in value. You can't cram 39 million people onto the west coast and expect prices to stay flat.

Wes

oh, and apple pays dividends whereas amazon does not (cash flow anyone?)

hmm... as of the closing bell today, Apple stock cost $160 and amazon cost $958. which one should I buy? Is amazon a better buy because it cost more? ... Is it "worth" more?

If I dig a little deeper I may notice that Apple earns $8.79 for every share whereas Amazon earns $3.96 per share....

Digging even deeper, I wonder if market cap matters? Apple's $815B to Amazon's paltry $474B...

I wonder if I can extrapolate to the Cali housing market and the Midwest housing market?

California has a population of 39 million, and the midwest as a region has a population of 67 million... hmm...

 the post-dating part is unnecessary. you could leave the date part blank and your bank would cash it. you could write "when hell freezes over" in the date part... no difference. checks are read by machine and posted to your account. when a human has to read it, then the date is overlooked.

i for one would not hand someone a half signed check, either. toooooo easy to forge.

why not use escrow? an earlier post suggested this...

 sorry friend, also not true. i once had a check clear my bank that was a year old. it caused my account to overdraw. there was nothing i could do about it. i should have kept better records, or stopped payment or contact the recipient to inquire at the very least. i was very young and dumb at the time. furthermore, i move large sums of money all day long (not my own -- i wish!) in my job and I recently found out that the bank we use only honors "stop payments" for 6 months! not really germane to your post, but interesting nonetheless.

 neither myself nor the person I quoted said "stop payment". I am referring to a "post dated check" and so was the person I quoted. I hope this clears it up, but if not, please google "post dated check", "bounced check", "check kiting", "check fraud". certainly NOT b.s. If google doesn't provide enough proof, then I encourage you to contact your local bank and ask them if it is illegal to write a check on an account that does not have enough funds to cover it. and if THAT doesn't clear it up, then contact your local prosecutor and ask the same question.

I see you're a cpa, so I am sure you know this. perhaps you simply mis-read my post.