The most important person in your financial life — outside of your spouse if you’re married — is your tax advisor. Taxes represent one of the largest expenses you’ll face in your lifetime. And, if you understand the tax law, they are also one of the most straightforward expenses to reduce.
The right tax advisor will work with you to design our real estate business in a way that helps you reach your financial goals while legally (and permanently) reducing or eliminating your taxes. Choose the wrong advisor, and you’ll find yourself paying more taxes and missing out on some great wealth-building opportunities by investing in ways the government incentivizes. What exactly does the right advisor look like? As you evaluate your options, here is a guide with seven questions to consider when hiring a real estate tax CPA.
1. What are their credentials?
It’s easy to call yourself a tax advisor. You want to avoid someone who claims to be a tax advisor simply because they are authorized to prepare federal tax returns. Instead, look for a Certified Public Accountant specializing in tax.
2. What system do they use for tax reduction?
The best advisors don’t just rely on their knowledge and experience; they follow a proven system for permanent tax reduction. A top-notch CPA should be able to show you evidence that they’ve used this system for many clients with real estate investments. Working with someone who consistently replicates results is a far better predictor of your future success than partnering with an advisor who operates without a system.
3. Who is in their network?
A top-notch real estate tax CPA is not an island. They are connected to a strong network of specialists, including real estate attorneys, mortgage brokers, cost segregation specialists, insurance brokers and more. As your financial plans evolve and become more complex, having access to this vast pool of expertise can prove invaluable.
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4. How often will we meet?
To be a true advisor, your CPA should meet with you throughout the year, not just at tax time. You’re looking for someone who will proactively reach out to offer new ideas, get regular updates on your business and check in on your long-term goals. As a rule of thumb, something is wrong if you visit your dentist more often than you speak with your tax advisor.
5. How will they handle an IRS audit?
If you do become audited, you deserve an experienced tax advisor who will go to bat for you and your business. Ask prospective CPAs to share examples of how they’ve handled client audits. If a CPA suggests skipping legitimate tax deductions to avoid an audit, look for a different CPA. You want a CPA who isn’t afraid of the IRS, who will handle all communication with the agency and who is comfortable with the process.
6. What do they think about real estate?
Any good tax advisor loves real estate. It’s one of the best investments you can make to create wealth while permanently reducing taxes. As you listen to the response to this question, also look for signs that the CPA has an entrepreneurial mindset. A CPA who thinks like an entrepreneur can be a game-changer. They will be more innovative when it comes to helping you accomplish your financial goals.
7. Can I check their background?
Before hiring a real estate tax CPA, it’s crucial to conduct a thorough background check. This process should involve checking their credentials, verifying their license, reviewing client testimonials, and even checking for any disciplinary actions or complaints.
THE BOTTOM LINE
Finding the right real estate tax CPA involves more than choosing someone with an impressive resume. It’s about finding a strategic partner who can help you navigate the complex world of real estate taxes, leverage opportunities and ultimately build wealth. By asking these seven questions, you’ll be well on your way to finding a CPA who can take your real estate investment game to the next level.
Provided by Rent Magazine, written by Tom Wheelwright, CPA CEO WeathAbility
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Provide long-term income and boost your home’s value with an income suite or rentable accessory dwelling unit.
Installing an independent housing unit at your property can be a big investment, but if planned well, an income suite (also known as an in-law suite or accessory dwelling unit), can be a terrific way to pay down a mortgage faster, build equity in a home, and increase its resale value. However, there are 10 important things to consider before installing an income suite in your home or property to ensure that you and your tenants have a positive experience.
1. Do you want to be a landlord?
Whether your plan is to have a long-term or short-term rental, being a landlord requires work and effort. Plus, a landlord’s duties often come at short notice or inconvenient times. Tasks can include screening potential tenants, performing regular maintenance work, handling repairs, and dealing with disputes or rental payment problems. Think about whether you are willing to put in the work yourself or if you might prefer to hire a property manager to care for your rental management duties.
2. What are the laws regarding landlords and tenants in your area?
Familiarize yourself with the laws governing residential tenants and landlords in your area. By knowing your rights and those of your tenant and understanding each person’s obligations, you can start the landlord-tenant relationship off on the right foot, avoid missteps, and have a plan in place for dealing with any potential disputes or legal issues.
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3. How will rental income affect your taxes?
Rental income can be a great way to increase your household revenue, but it’s not “free” money. The rent money you earn is subject to income tax. When you file your taxes, you can deduct from your rental income expenses incurred, such as repair costs, operating expenses, and utilities. You should also be aware that capital gains tax may apply if you sell your home, depending on how much rental income you earned while you owned it.
4. What will you be giving up?
Installing an income suite in your home or property may mean giving up more than just extra living space. Having tenants may also mean giving up a portion of your privacy, storage space, and perhaps even some peace and quiet. Consider how having tenants within your property may affect your daily life, and make sure you can live with the inconveniences that may be involved.
5. What are your local ordinances?
Before drawing up plans, research your local zoning laws and building codes. Some municipalities do not allow for certain types of accessory dwelling units, and many have very specific requirements on what constitutes a legal suite.
Your local zoning office can supply you with your jurisdiction’s requirements on things like ceiling height, windows, fire safety, and emergency exits. Make sure you know what you can and can’t do before you apply for building permits.
6. How much will the project cost?
Installing an income suite is a major project that can take a significant amount of time and money. Expect to spend anywhere from $40,000 up to $150,000 or more, depending on the size of the space, whether structural work is needed—such as digging out and underpinning a basement—and whether the suite is a standalone structure or within an existing home.
Resist the temptation to take shortcuts to contain costs. Protect yourself and your future tenants by including the time and money in your budget to do everything legally.
7. How will you access shared utilities?
Many houses have utility access in the basement, which could be a problem if you’re planning on renting the space. If possible, try to place utilities such as the furnace, electrical panel, and water shutoff in a shared space outside of the rental unit so that maintenance tasks and emergency work can happen without having to coordinate access to the unit with the tenant.
8. Will you share an HVAC system?
While most building codes allow for a single furnace to heat an entire house with more than one dwelling unit, you might want to consider installing a separate HVAC system for each unit. Sharing air ducts will likely mean also sharing cooking smells, scents, dust, and noise. Plus, having one thermostat controlling both units may be problematic if you and your tenants have different preferences for temperature.
9. Will you hire an architect or a contractor first?
If contractors in your area tend to book up quickly, you may be tempted to find one before you get an architect to draw up the plans. But hiring an architect first is almost always the wisest course, as the money you spend upfront for an architect can be balanced out by bids from builders that are more accurate and easier to compare.
If you’re not interested in bidding out your project, consider working with a design-build firm. By hiring an architect and contractor at one firm, it may also help smooth the permit and inspection processes.
10. If you were your tenant, what would you want?
Not only do you want your rental unit to be up-to-code and above-board, but you also want it to be comfortable and a pleasure to live in. Long-term tenant
turnover zaps rental profit and adds heaps to your workload, so once you find quality tenants, it’s ideal when they stay a long time.
As you design your income suite, think about how you would use the space if you were living there. For example, if the kitchen area is limited, would you rather an 18-inch stove and 24-inch fridge, or vice versa? If you only had room for either a dishwasher or a laundry machine, which would you choose?
Article provided by Bob Villa. Written by Jahleen Turnbull-Sousa.
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In 2004, I was living in NYC when I decided to start a new career. To identify potential business opportunities, I thought about some of the more frustrating experiences I’d had. I quickly narrowed the list to buying investment properties.
The problem was that all real estate agents could do was send me MLS data sheets for the properties I selected; no analytics, processes, or services. I had to do everything myself. This was time-consuming, and I made frustrating mistakes that cost me time and money to correct later.
So, there was a business opportunity. Now, I need to know where to create this business (not New York or New Jersey).
How I Did My Analysis
I started researching how retail store chains select locations for new stores. Based on my research, I determined the sequence of events necessary for success, as shown in the chart.
My first decision was location. Based on my research, I selected Las Vegas.
The next step was to determine the right tenant pool segment to target. This step is crucial because the only way to have a reliable income is if reliable tenants continuously occupy the property. A reliable tenant stays for many years, always pays the rent on schedule, and takes good care of the property.
Based on my experience with rental properties and what I learned from others, reliable tenants are the exception, not the norm. Because my clients and I plan to hold these properties for many years, we will need multiple reliable tenants throughout the hold time. The best way to increase the chances of always having a reliable tenant is to purchase properties that attract people from a segment with a high concentration of reliable people.
Therefore, my task was to find a tenant segment with a high concentration of reliable tenants.
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As an engineer, I used the standard approach of analyzing data. I tried various (paid and free) data sets and wrote a lot of software, but (I would be embarrassed to tell you how long I persisted) I finally decided that classic data analysis would not work. The fundamental problem is that humans do not behave algorithmically. So, I ditched this approach.
Next, I decided to mine historical rental data to understand past tenant behaviors. I downloaded about 10 years of MLS rental history data and started over. I tried many things (that failed), and then I plotted monthly rent versus length of stay.
The result was similar to the chart, showing a strong correlation between how long a tenant stays in the property and the amount of rent. This was the starting point I had been searching for.
I investigated the segment of tenants who stayed over five years, converting the low and upper rent range of properties they occupied to approximate gross monthly income using monthly rent/30% = gross monthly wage.
I next interviewed property managers and cruised job boards to determine probable jobs based on gross monthly income. By doing this, I concluded that people earning below a certain wage tended to have lower-skilled jobs, which made them vulnerable to layoffs during economic downturns. Therefore, I raised the lower-income threshold above this wage.
I next looked at the upper-end income range and determined that jobs above a certain wage were primarily administrative. These workers would also be laid off during economic downturns. So, I lowered the upper-income threshold below this wage level.
The result was a narrow wage/rent range that I believed to have secure jobs due to the nature of their work, as shown in the chart.
Each tenant segment has specific housing requirements and is unlikely to rent a property if it does not meet all their requirements. So if you buy a property that matches the housing requirements of a specific tenant segment, most of the applicants will be from that segment.
Creating a Property Profile
To determine the characteristics of properties that would attract my target tenant segment, I used data analytics to determine what and where they rent today. From this, I created what I refer to as a property profile.
A property profile is a physical description of the properties that this segment is currently renting. It has at least four elements:
- Location: The locations where significant percentages of the target segment are renting today.
- Property type: What type of properties are they renting today? Condo, high-rise, multifamily, single-family?
- Rent range: What the segment is willing and able to pay.
- Configuration: Two bedrooms, three-car garage, large backyard, single-story, two stories?
I ran correlations between properties identified by the property profile and actual historical rental data and found a high correlation between the two. After so long, I thought I had what I needed.
And then reality came crashing down.
The issue was that numerous new listings entered the market daily, and the most desirable properties often went under contract within two to three days. This left us only 24 to 36 hours after a property was listed to identify it as a potential option, evaluate it, gather analytical information, and submit an offer.
Doing this process manually for hundreds of properties each day was impossible. So, once again, I turned to data analytics.
Our Data Mining Engine
I’ve worked on data mining engines for investment property selection since 2007. All the algorithms I tried were similar to what Rentometer, Zillow, and Opendoor were using, which was not nearly good enough to make purchase decisions.
Finally, around 2015, I discovered a very different methodology to find good properties. I am still enhancing that software to this day.
Our data mining engine architecture is illustrated here.
After years of improvements, the engine can now find the small number of potential investment properties from among thousands in less than five minutes.
However, data analytics can only go so far because software only deals with data, and we are dealing with humans.
I next put together a team and processes that took the output of the data mining engine and selected properties that matched individual clients’ requirements. These properties are then rigorously evaluated by a team of experts, as illustrated in the chart.
Only if a property matches the client’s requirements and passes evaluation by multiple team members do we send the client a property report containing the analytical information they need to make an informed decision. Due to our software, processes, and team members, we can evaluate numerous properties in a single day and present our clients with actionable information on properties that match their individual profiles within that same day.
Our clients feel our data analytics and processes are effective.
Final Thoughts
Data analytics and processes are the cornerstone of our business. Without data analytics, we could not find the properties needed to meet our client’s specific financial goals. Also, we could not evaluate properties fast enough to make offers before they were gone.
Provided by Bigger Pockets. Written by: Eric Fernwood
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