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All Forum Posts by: Zach Westerfield

Zach Westerfield has started 8 posts and replied 236 times.

Post: Need some advice on how to get out of Hard money loan

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

@Aldara Bermudez what is your time window and ultimate goal for the project? If you are doing ground up development as it sounds, I would encourage you to secure all of your capital up front. That is, have enough funds up front to purchase the property, build the new property, and cover holding costs in the interim. Your calculations should cover you through reposition, which is the point at which the new property cash flows, or you sell the new property. If you dont take this approach, you run the risk of running out of money mid project. If that happens, you could easier be in a situation where you owe more than the property is currently worth, and/or you have monthly expenses just to hold the property that continue to compound and the minutes tick by. This can be a death spiral. 

There is no set strategy for how to secure this capital, whether it is hard money, personal reserves, bank financing, etc, or a combination of several. I would just have that strategy clearly lined up and guaranteed before you buy the property. 

Post: Advice about foundation problem please ?

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

You could start with a good contractor. They may be able to assess what is going on, and if they can fix it refer you to a foundation repair company. If you already have a trusted contractor, go that route. if not, contact the foundation repair company directly. 

Post: Rental Property Tax Questions

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

@David Chase First and foremost, I am not a CPA. What follows is just the real estate investors interpretation of taxes. As such I will keep it general, and avoid specific numbers. I would highly recommend reading, Real Estate Loopholes by Diane Kennedy and Garrett Sutton. 

The biggest con I can think of is that rental income is taxed as ordinary income, and subject to your tax bracket. If you aren't careful, rental income can push you into another tax bracket. However, remember real estate is a business. When considering taxes, think about real estate in business terms. 

Real Estate is an "asset heavy" business, meaning in order to produce income the business has to spend substantial capital to acquire and maintain PP&E (Plants, Property & Equipment), aka assets. Another asset heavy business is the airline industry. The IRS recognizes capital must be spent to maintain these assets, and allows for deductions for these expenses. Repairs, maintenance, mortgage interest and property taxes are examples of items that can be deductible. For the average SFR rental property, these can take 50% or more of the income.

Another advantage of real estate is depreciation. The IRS recognizes when an asset is purchased today, it decreases in value over time. This decrease in value is considered a loss, as it theoretically can never be recovered. A tax deduction is given to account for this loss. The IRS typically has schedules for depreciation, or timeframes in which the value of the asset goes to 0. For example, a single family house (which the IRS considers a piece of equipment, or asset) is depreciated over a 27.5 year schedule. Note: this does not include the value of the land. So, if you buy a property for $150,000, and it is determined the house on it is worth $100,000, you get to claim a loss of $3636 per year for 27.5 years. You can also depreciate capital improvements (kitchen upgrades, new roof, etc) on different schedules as well. 

These two factors can add up to a substantial yearly tax deduction. In a lot of cases when depreciation comes in to play, the deductions total more than the net income the property generates. As such, its is possible to pay no income tax on rental income. 

A final note, if the deductions on real estate exceed the income, it is possible to apply these deductions to other income as well, lowering the overall tax burden of the individual. This is a huge reason for many high income earners such as doctors and lawyers to invest in real estate. However, there are many rules and considerations for this to apply, so please consult an accountant. 

Post: Should I go this JV route?

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

@Marcus Taylor I think experience is arguable more important that capital. Finding someone with capital is not that hard. Finding someone with good experience that is willing to partner with a new investor is tougher. If you do find someone willing to go that route, I would definitely take the opportunity to partner with them. The opportunity to learn from them is worth way more than capital. If you find someone willing to go the JV route, that is even better as they will have "skin" in the game and be more committed to the project success versus someone who only agrees to mentor you through a project.

The challenge will be getting an experienced investor to agree to this. Start by identifying what you can bring to the table. Two things come to mind, either find a deal and/or offer to manage the project for them. A lot of experienced investors have a limit on how many projects they can handle at once. If you can convince them you can expand this number, it may be worth their while. 

Post: How do the rehab costs for BRRRRs compare with Flips?

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

Yes it does. Its another reason I like the BRRR method - it gives financial incentive to fix the property up nicely. I have found by doing so I attract higher quality tenants and typically get a higher than average rent for the market.

Post: How do the rehab costs for BRRRRs compare with Flips?

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

For the most part yes, but there are small differences. For starters, I underwrite all my flips as a BRRR as well as a back up plan. Sometimes when I start a project I don't know for sure whether it will wind up as a flip or BRRR when I'm done. For both methods, comps drive my level of rehab. In both situations, the goal is to get maximum value for a property with the lowest amount of input. This doesn't mean being cheap or cutting corners. If you cover up a problem with a flip, the inspector may find it, and you will have to repair it anyway, as well as you have lost credibility. If you cover up problems with a BRRR, eventually they come to light and you have to repair them anyway. My philosophy is spend the money and do it right the first time.

There may be subtle differences for a property I know will be a BRRR vs a flip. For example, I do certain things to "tenant proof" my rentals. I mount bathroom hardware to boards not just sheetrock, for example. I also never put carpet in rentals, but I will in a flip depending on the property.

Overall, my goal is to not flip a property that couldn't be a successfull BRRR.

Post: In search of Crestview FL PM

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

I personally use Michelle Leavins with La Bella Vida Property Group. i highly recommend them. 

Post: BRRRR question for experience investors

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

I would start by talking to local banks. Just because one says no, dont get discouraged. i have talked to over 20+ banks in the last 2 years, i dont think any 2 of them gave me the same answer, other than a lot that just said no. My wife is self employed, and a lot of banks wanted to see that income reported on two years of tax returns before they would count it. 

If you are a remodeling contractor, you might want to consider partnering with someone as well. You bring a very critical part of the business to the table. 

Post: Doing a cash buy with a rehab loan - BRRR strategy advice

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

@Rueben Pacheco 

@Rueben Pacheco Its not a bad idea at all. Whether you use debt for the purchase, rehab, some or all of the project does not really matter. What matters is the cost of the debt and how that factors into your overall budget. Right now debt is historically cheap, even for commercial and bridge loan products. I am able to get financing on my projects with a local commercial bank for 5.25%, interest only. At those low rates I prefer to keep my cash in reserve and employ it elsewhere. 

One tip, make sure as a newbie you are keeping plenty of cash reserves. if you have 100K in cash, and the project is expected to take 100k, i would try to find some debt to use and keep at least10-15K in reserves. 

Post: Best way to finance a rehab?

Zach Westerfield
Pro Member
Posted
  • Warner Robins, GA
  • Posts 244
  • Votes 167

@Ryan Kawash consider how much will this increase the value of the property, and how much equity you will have. If you have decent credit, you have more options. 1. if you have enough equity already, you could use a heloc on the property, then refi afterwards and pay the heloc off. 2. if not enough equity, use the same strategy with credit cards. you can get a couple credit cards that have 0% interest for 1-2 years. If you dont have equity or credit, you might be able to find a hard money lender to put of the money, then refi afterwards and pay them back.