All Forum Posts by: Yong Jin Lee

Thank you all for your comments and guidance. Throughout the day, I realized how abstract/naive my question was. I appreciate all of your patience and kindness with my post. I need to do more homework by myself.

0 Votes

Fairfax, Virginia

Hello everyone,

I've been closely examining a property listed on Redfin and am curious about the estimated rehab costs for a project of this nature. The property clearly needs new flooring and some repairs to the deck, among other updates. As someone who is still learning the ropes in real estate investment, I'm not entirely sure what an experienced investor would estimate for these rehab costs, especially with the intention of selling the property, not renting it.

Could anyone provide me with some ballpark figures for a rehab like this? I'm also interested in understanding how you arrive at these estimates. Additionally, if there are any resources or reading materials that you could recommend to help me learn more about this process, I would greatly appreciate it. Thank you for your help!

0 Votes

Fairfax, Virginia

Quote from @Account Closed:

If you have a w2, the best strategy to look deeper into is the short-term rental loophole.

In the realm of real estate investments, the short-term rental loophole offers a unique opportunity, subject, however, to certain rules and regulations. According to passive activity loss rules, every business is obligated to adhere to specific criteria, especially when it comes to short-term rentals. One crucial stipulation is that the property must be rented for 7 days or less on average. While this may exempt it from being classified as a rental activity, active participation remains a requirement, necessitating compliance with three tests: spending 500 hours on the property, dedicating at least 100 hours (and more than any other participant), and performing all the necessary work needed.

Additionally, long-term viability and consideration of depreciation recapture are important concerns. Excess business losses are capped for single individuals at $250,000 and for married individuals at $500,000, with any surplus being suspended and carried forward. Notably, short-term rentals are categorized as non-residential properties. If over 50% of guests stay on a transient basis, the property is subject to depreciation over 39 years. Bonus depreciation and Section 179 allowances for improvements can be utilized, with the latter, however, capped at zero to prevent negative losses. Determining whether the venture falls under a service or rental business hinges on the provision of substantial services; for instance, if a bed and breakfast service is offered, it must be reported on Schedule C, triggering a 15.3% self-employment tax.

Moreover, personal use plays a crucial role in the classification of the property. If used for 15 days or more or 10% of the rental days at fair market value, it becomes a residence, subject to specific regulations. The REPS-9 election prohibits grouping short-term and long-term rentals, emphasizing the need for careful strategic planning. Notably, personal visits for maintenance purposes do not contribute to personal use calculations. The involvement of onsite management, often seen as a potential red flag, can lead to the property failing crucial qualification tests. Understanding these rules is essential for investors seeking to capitalize on the short-term rental loophole while maintaining compliance with tax regulations.

Hello Zachary,
Thank you so much for answering my question. Your answer is very enlightening and detailed. We might not have enough time to manage the short-term rental. I was looking into building a long-term rental property portfolio, which makes me think about my strategy going forward. Thanks again. I hope you have a fabulous day.

Best Regards,
Yong-Jin

1 Vote

Fairfax, Virginia

Hello!

My wife and I are both W2 employees. We are carefully looking into starting rental property investing. However, one of our objectives is to reduce the tax burden we face on our W2 income. However, a local real estate investor in a similar situation once told me he couldn't get the tax deduction because he didn't qualify as a real estate professional on one of my posts in the forum.

I thought it would be best to ask others to see if they were in the same situation and got to reduce the tax burden on their W2 income and grow the investments simultaneously. If there is anyone on W2 income with a relatively high tax bracket, could you please tell me if you successfully reduced your taxes with your rental property investments?

Thanks for looking into my post and question.

1 Vote

Fairfax, Virginia

Quote from @Huiya Xiao:

@Yong Jin Lee - My wife and I both work full-time and don't qualify for real estate professional. So we can't deduct real estate losses on our regular income.

Understood! Thanks for your response! I guess that would be the same for both of us as my wife and I are working full-time as well.

0 Votes

Fairfax, Virginia

Quote from @Julien Jeannot:

@Yong Jin Lee

Sounds like the Seattle market strategy to capitalize on the equity build. YOY rent increases & fixed debt will eventually cash flow.

When calculating a return, don't forgot to take your initial cash to acquire the property divide it by the equity build and divide that again by the holding period. Pretty sure no other investment comes close to matching it, then for kicks, play out the tax advantages.

@Julien Jeannot thank you so much for your suggestion! I followed what you suggested and got about 68%

0 Votes

Fairfax, Virginia

Quote from @Chris Seveney:

Wayt I would look at this, could you invest the $250k equity into something else and get a better return? Right now its paying the interest and principal on the mortgage of $2k which is $24k a year which is almost 10%. If you do not need that money, then go for it, but remember you lose homestead tax exemption later on if you are not living in it 2/5 years.

Thanks, Chris, for your response! Yes, I thought about that... Then, my wife and I earned enough money today and wanted to invest for the longer term.

It is also under the assumption that it might be hard to find a rate like this anytime soon, but I could be wrong.

0 Votes

Fairfax, Virginia

Quote from @Huiya Xiao:

Yongjin, we were in your situation a few years ago. We rented out our primary residence then (also a townhouse) and purchased a SFH.

Real estate is quite expensive in Fairfax county. With RTP around 0.5%, the rental property barely cashflows. On the other hand, the properties here appreciate well. We could use some more appreciation vs. cashflow debate. In retrospect, we're definitely glad that we kept our townhouse as a rental instead of selling it. I think it's one of the easiest ways to get into RE investing, other than house hacking.

We also used HELOC on the townhouse as part of the down payment for the SFH. It took us a long time to pay it down, but at least you know it's an option.

Thank you so much for your response and for sharing your experience. Yes, it does seem to appreciate well!! Yes, I think I was more hesitant due to remembering a statement like "Don't try to buy a proper that will break even" from one of the books I read.

I think we will also go for the rental. Did it also help you with tax deductions to your regular income?

0 Votes

Fairfax, Virginia

Hello, I am evaluating an option with my wife to turn our current primary home into rental properties within a few years as my first step to becoming a real estate investor. Getting the expert's opinions on this would be wonderful for us!

We purchased a newly built townhouse in 2019 for $584,000. On Redfin, it is estimated to be priced at around $737,800.00. It has a double garage, three beds with four baths, 2,646 sq Ft, four stores, and one double car garage.

We now have a loan balance of $480,000 with an interest rate of 2.25%. I think this is one of the reasons why we want to keep the house for a long time.
Zillow estimate on my rent is about $3,674.00, but I would be more conservative and consider it $3,400.

My property tax is about $5600 a year. I estimated the landlord insurance cost per year by multiplying 25% by what I currently pay for my home insurance = 800 * 1.25. I took Repair to 7% and CapEx to 5% of the estimated monthly rent. The HOA fee is about $98 per month. 9% for the property management fee. I want my tenants to pay for the electricity and water.

I am disregarding all the past costs we paid to purchase the house or obtain this loan, considering it is a sunk cost, and I would like to have some long-term investment property. (Please correct me if this thought is wrong).

We are considering moving to a new area with better school ratings as we are expecting a baby and will be renting out the place to ensure that the rental property management goes well before making some cash investment to buy another primary home. We are also aware turning our primary home into a rental property will incur the capital gain taxes. However, I thought this would be minor compared to the profits we will gain over the long term.

In Summary, this is the breakdown I have :

I am now looking at some negative monthly cash flow, but when I think about the tax deduction and our income range, this might be actually fine.

I couldn't figure out an exact way to analyze turning an existing primary residence into a rental property, and it would be wonderful to get other people's thoughts and feedback. If there are better calculations I could run on this, please let me know!

1 Vote

Fairfax, Virginia

Quote from @Jack Seiden:

Quote from @Yong Jin Lee:

Quote from @Jack Seiden:

Quote from @Yong Jin Lee:

Hello, I am living in Northern Virginia, close to Washington D.C. I am looking to invest in my area as I feel more comfortable being around my investment and would like to drive around the neighborhood.

I joined BiggerPocket while reading Rental Properting Investing from Brandon Turner. I wanted to get wisdom from more experienced investors by reading their posts in the forum and getting more information.

Fun fact: I am a Data Engineer. While I am going through how to analyze the property, it seems like as long as there are some data I could utilize, I would be able to implement Machine Learning to automate my analysis to some degree. So I am pretty excited about that.

It is my pleasure to meet you all!

Welcome to BP! Can you tell us a little more about your investment goals?

Thank you all for your response to my thread! My investment goal is to build enough passive income so I can support my family even if I lose a job. My current goal is to achieve a cash flow equivalent to my current annual salary in the next 10 years. I am still learning about real estate investing, so my goal and plan should change as I gain more knowledge. I am currently storing my assets mostly in cash, stocks, and bonds. I am about to redistribute those in next two years or so to real estate.

For the question of my risk tolerance is that I don't think there wouldn't be any huge gain without any risk, but also, the risks can be moderately mitigated if the analysis is done right.

If you’re looking to balance cash flow and risk I’d look to markets near you with decent cash flow but maybe not nova specifically which has some of the lowest yield’s in the country. I’d suggest checking out the Front Royal, Frederick, Baltimore and Eastern shore of Maryland areas.

Thank you all for sharing your insights!! I will look at those distant locations. Thanks again for the suggestion!

0 Votes

All Forum Posts by: Yong Jin Lee

Yong Jin Lee has started 4 posts and replied 12 times.

Post: Seeking Insight on Rehab Costs for a Property to Prepare for Sale

Post: Seeking Insight on Rehab Costs for a Property to Prepare for Sale

Post: ?: Tax Deduction on people who are on W2 and do the rental property Investing

Post: ?: Tax Deduction on people who are on W2 and do the rental property Investing

Post: Thinking about having my primary home as a rental property in few years

Post: Thinking about having my primary home as a rental property in few years

Post: Thinking about having my primary home as a rental property in few years

Post: Thinking about having my primary home as a rental property in few years

Post: Thinking about having my primary home as a rental property in few years

Post: Newbie from Northern Virginia! (DMV Area)