It has been 12 months since we started on this real estate journey. We have learned A TON and know there is so much we still don’t know, understand, or even know exists. And that is why we keep chugging forward 100 miles a min. This past week we had our offer accepted on what will be our second short term rental property. If all goes well, in May we will have 3 STR listings along with the 2 long term properties with 10 units total. Seemed like a good time to write a year in review post! (I clearly wrote this post in April. We now own 3 STRs and are looking for a warm location next!)
What did we learn and what do we think everyone should know? A LOT! First, get your legal self in order early. We have recently decided to restructure the way we have the LLCs set up. Tell your Lawyer and Accountant what you are trying to accomplish and set it up early to hit your goals. For us personally, we plan to have a lot of properties and were opening LLCs for each, that was expensive come tax season! So, we worked with our accountant and lawyer to find a more efficient path that also keeps us protected. Everyone’s goal is different but I will say, don’t wait. It is harder when you have more!
Speaking of taxes, something many people mention but never clearly explain is depreciation and who/when you can use it. As W-2 income goes up so does the percent you pay in taxes. So many people love the idea that you can use long-term rentals to depreciate against taxable income. Well, not everyone follows that sentence with, you must also be considered a Real Estate Professional by the government. You have to invest most of your time in real estate for this to be possible. Basically, you cannot have a W-2 job and have this status. Therefore, if you are working while you build, do not expect to realize the depreciation on your taxes.
However, after listening to a lot of real estate podcasts on taxes I found that there is a specific tax code that states if you manage your short-term rental (specifically STRs) that is non-passive and can be used. With this we decided to pay to have a cost segregation done to really capitalize. A cost segregation breaks down the house and all it’s parts to allow for different timeframes of depreciation. Your roof will depreciate over more time than your flooring, etc. We worked with our Accountant who is able to perform a cost segregation. If you have questions I would start with your accountant! Make sure they understand real estate per our other posts, those that don’t may advise against this path. Make sure you understand how it works and what gets paid back when you sell. If you don’t plan to hold a property for a while it may not be worth it.
The depreciation that could be realized toward our W-2 income allowed us to have more money to put down on this current short-term rental and helped us continue to propel forward. Now, I want to call out I am not an accountant or a lawyer, so nothing I call out here is to be considered advice! Please, connect with your accountant. We are simply sharing what worked for us!
Finally, systems, systems, systems. Set them up! Once a property is up and running, we barely interact with it. I would say I spend about 10 min a week on it at most (Probably less). We created comprehensive guestbooks online to avoid a lot of questions and we automate everything; pricing, messaging, expense filing, etc. If you can set up systems, legal, and realize that depreciation in year one, you are off to a great start!