It reduces taxable income from the property and if that income becomes negative, it is subtracted from other passive income (other property that may have positive income) or ordinary income (if you make less than $100K or you are a real estate professional) or is carried over to the next year.Once the property is sold, all previous depreciation becomes a subject to recapture - it is added to the income and taxed at a special rate (20% or so - ask your CPA).

In regards to Ben's comments, the main reason why we are only getting 32 units is because of "net worth" limitations since we are working with Freddie Mac to finance 75% of purchase price.I can't afford to owner-operate this property since I run another business that requires 80% of my time and I don't have the time nor the resources to put together a team before closing, therefore I need to find a good PM company that runs this well, even if cash flow is substantially reduced.

Depending on ARV I could take more than the $175k initial investment out but the loan payment would start to reduce my ROI at above $175k.

Gross, otherwise it would be unfair to owners who know what they are doing and how to reduce expenses.

So it makes your rental income tax free- and potentially lets you use that loss to reduce your other income as well. 

Unless of course, the sellers are willing to fix it or reduce the price enough for me to fix it. 

If that is the case you might have to offer a price for the property that reduces base rent so that tenants can pay cam.Seller will not like all of this but it sounds like their fault for kicking the can down the road and not collecting for 4 years .No legal advice given.

The VAFF is typically financed in your loan amount at close but there are strategies to remove the VAFF completely upon close if you want to reduce the financial impact of the higher cost of closing that the VAFF causes.Best,

It also reduces my exposure and time investment into each deal.

This ARV would mean I will come out less money than expected for this project.Now with a 175K ARV the HML was pretty much going to cover everything but they reduced the % on the loan to make sure I had some skin in the game especially being my first deal with them, I was fine with that.