biden tax changes impact on real estate investors

How does it impact your returns as a real estate investor or landlord, if you do (or don’t) make your own repairs and renovations?

Deni and Brian walk through the pros and cons of outsourcing repair work to contractors, and debunk the myth that you can only profitably invest in real estate if you’re handy and can do your own renovations.

Video Broadcast Version

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What short-term fix-and-flip loan options are available nowadays?

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We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

live off rents podcast transcript

Deni: Hello everyone and welcome to Spark Rental weekly Facebook Live podcasts. Please let us know where you are tuning in from. And as always, please just throw questions in the chat box. It doesn’t even have to do with what we’re talking about today. Speaking about what we’re talking about today, last week, we talked about things that you need to ask before you buy a rental property. And this week we’re going to be talking all about repairs and how they affect your returns and repairs are definitely one of those things that are kind of surprising at times most times. So, with that, Brian, why don’t you start us out and tell us? Tell us about this.


Brian: Sure, so, you know, I mentioned in our weekly newsletter today to our audience that I was on a podcast a couple months ago with an investing expert personal finance expert named Stacey Johnson. And he was talking about how, you know, he would never invest in real estate again if he weren’t going to be doing his or at least rental properties if you weren’t going to be doing his own repairs. He’s like, oh, you know, it’s too hard to make money in rental properties if you have to pay a contractor, you know, blah blah blah. And I actually I disagree as a very non-handyman man, you know, who has never banged a nail in straight in his life. You know, you can make money in real estate without doing the repairs yourself. That being said, if you are handy and if you are handle out of the repairs yourself, I mean, obviously you can save some money on repairs, of course, but it also helps you with estimating costs. It helps you with spotting property problems and issues, both when buying a property and on a regular basis when you do inspections. So, and of course, if you are handy, oftentimes you have other handy people that you know and that you work with and that you trust, and you can easily and affordably bring in to work on your properties. So being handy definitely helps you with this. Well, we’ll lay that out there right now, but it is not a prerequisite for investing in rental properties. Take that from someone who you know has never done any property repairs on his own in his entire life. I’m not exactly proud of that, but it is what it is.


Deni: It probably is worth mentioning. If you’re going to partner with somebody, you might want to look for somebody who has some of that handy ness to them.


Brian: Yeah, that definitely helps. So, you know, as we as we jump in here and we talk about, you know, how this impacts your returns, you know, whether you should invest in rental properties, especially fixer uppers, like if you’re doing the BR method or if you are flipping houses, you know, should you invest as someone who is not handy versus doing the repairs yourself? So, we’re going to walk through a couple questions to ask yourself here and a couple of distinctions that are worth making. And the first one of those is that your time has real value to it, like actual dollar value. And of course, it also has value in a more metaphysical sense as well. Time is your only nonrenewable resource. You can always go out and make more money. You cannot go out and get more time in your life, so your time has real value. Repairs are still a labor expense. Whether you pay someone else to do those repairs or whether you make the repairs yourself, it’s still a labor expense. So, Deni you and I talk all the time about how landlords and rental investors who plan to self-manage their properties. They should still estimate for property management fees and expenses when they forecast cash flow. Because it’s still an expense, it’s a labor expense. Now you might be doing that, labor yourself, but that is coming out of your time. So, I highly recommend that you get a sense for what you feel your time is worth as an hourly rate doesn’t have to be the same hourly rate that you earn at your job. You know, I really think that your hours away from your job, but maybe even have more value on a dollar wise basis because there are so few of them. You know, time with your family, time with your friends, time with your hobbies. So just wrap your head around your times, value the value of your time, both as a dollar figure, like an hourly rate, but also in a broader, more kind of metaphysical sense.


Deni: It’s funny, but I see this with younger people. They don’t take that into consideration because I don’t know when you’re younger, you just think, oh, I got plenty of time or whatever, but. And I was like that, I was like, You, I take that on. I’ll take that on. I can do this. I can handle that. But definitely when you get older, you realize that. So, listen to an old lady here. Tell you that time is important.


Brian: No. And that’s absolutely right. That the older you get, the more you realize the value of time. Because you do start getting a sense for your own mortality, right? You get a sense that your time is limited in every sense of the word. So, you know, you don’t want to be spending your time doing things you don’t enjoy. And that actually really brings us to the second distinction here is how much do you enjoy working on houses? Some people love it like it’s their hobby, you know, like it’s exactly what they want to be doing on their Saturday is working around a house, you know, putting in drywall or, you know, replacing the kitchen tiles or whatever it is. So, if you enjoy it, then that, you know, that changes matter a little bit. If you hate it, if you would much rather be spending time with your family, with your friends on other hobbies, then you know that changes the calculus here for whether you should even be thinking about doing repairs yourself, even if you are qualified to do it, even if you have the skills to do it. Which brings us to the third distinction here, which is your skill level. If it would take you twice as long to do the job half as well as a professional would, then it doesn’t make sense for you to do it, you know? Right. So, I mean, you have to delegate certain tasks to other people in life, preferably experts, preferably people who are better than you at that thing, at that, at that task. But you know, a lot of this comes back to your time having money. So, you want to delegate tasks that you don’t love, that you’re not good at because it’s just not a good use of your time.


Deni: And even if you can watch YouTube videos to do just about anything.


Brian: Well, that’s true. I mean, you know, YouTube University makes it a lot easier to learn home improvement nowadays. All right. So, here’s a fourth distinction. Before we get into some, some looser points here, the total time frame for finishing renovation jobs or repair jobs matters. It matters to your bottom line. You have carrying costs as a landlord or as a flipper. You know it costs you money every day that your property is sitting there vacant. You’re paying the mortgage on it, you’re paying property taxes on it, you’re paying property insurance on it. You’re paying for utilities. You know, so that vacancy that costs you real dollars. And so if it would take you three weeks to do a repair job yourself versus a professional crew taking one week to do that job, then you’re talking about paying for four two weeks of vacancy, you know, two weeks of mortgage payment, two weeks of taxes and insurance and utilities and all that stuff, you know, not to mention the opportunity cost of actually having the property rented out and earning you money. So. The time frame that it would take you matters here, it matters to your bottom line, and that says nothing of the headaches of having a half-finished job hanging over your head. So, you have to take that into account, and you do not want to be, as my father would say, a time optimist with this. Oh yeah, yeah, yeah. I can knock this out by next weekend. No problem. And then, of course, three weeks later, you know you’re still messing around with it. This cost you money. This eats into your returns as an investor. So even if you have those skills to do home improvement work, do repairs or renovations, suddenly this is costing you money rather than saving you money. I’m an investor.


Deni: And you definitely want to. Yeah, I mean, if it’s a small little job and you want to tackle it, it’s one thing, but you really want to make sure you have that distinction, correct? Because sometimes you embark on something that’s small, and it ends up being a nightmare.


Brian: Right And you know, that raises a good point, which is don’t be afraid to call in the cavalry when and if you get in over your head, right? And so, Deni, that’s actually a perfect point. I can’t tell you how many times you know you go in to do some minor repair on a property and you get behind the wall and you discover this much larger problem that you didn’t realize was there. So, when that happens, you know, this is not a pride point, right? Like, you know, this says nothing about your manliness or, you know.


Deni: I Can do it


Brian: Right. Like, just bring in help. Like, you know, it’s one thing to go in and say, oh, you know, I’m going to install some like gfci’s in the bathroom. You know, I can swap out these, these electrical outlets. You know, that might be a half hour thing on a Saturday. But if you get behind the wall and realize that there’s a major electrical problem back there, bringing in an electrician like don’t electrocute yourself, don’t ruin the wiring in the house, like just call in an expert like your prior to can can manage. All right, so let’s talk for a minute about what are some appropriate ways that handy people, you know, people with both the skills and the interest in doing home improvement work. So, what are some of the best ways that they can go about putting their skills to use without, you know, running into long time frame delays or, you know, vacancy costs or any of that stuff?


Deni: Well, if you’re skilled. You can if you can, you can live in a house that you’re flipping or whatnot. And then that’s kind of a house hacking and then fix it up by your living there. You’re saving money because you’re not paying living costs. Well, sort of. And then you’re still fixing the property up yourself. And that’s obviously if you’re handy.


Brian: Right? So, yeah, live in flips are perfect for handy people who you know they’re interested in doing home renovations. You know, they have both the skill and the interest in it. So, a live-in flip, you know, you buy a fixer-upper, you move in and, you know, over the course of months or even a year or two, you improve the property to bring it to top condition and then you turn around and you sell it for a significant profit on it. And so, like Deni said, it’s a form of house hacking because that profit that you run on it can theoretically reimburse you for all of the housing expenses that you paid while you lived there. And of course, those housing expenses are lower than they would have been otherwise because you did buy a fixer upper. You know, as opposed to a gleaming, perfect modern home. So that’s it’s a great way to do renovation projects at your own pace in your own home. You know, hopefully, your spouse doesn’t kill you having, you know, living in a constant work zone for the next year or so. But there are also there are some tax advantages there, too. You know, the first of which is if you hold the property for at least one year, then it you don’t owe. Or rather the gains are taxes, long term capital gains as opposed to your regular income tax rate. If you live in the property for at least two years, then you qualify for the homeowner exemption. So, the first $250000 of gains are tax-free if you’re single if you’re married, the first $500000 of gains or tax-free. So that can be a great way to make some money effectively live for free. Save on taxes and practice your home improvement skills, if that’s what you’re into.


Deni: Now, I did, not exactly this way, but I had a home and I wanted to redo the kitchen and I gave the option to, and I know people don’t like this, but it worked out really well for me. I was looking for somebody who had experience doing that and rent it to them, and it worked out great because I ordered the supplies and whatnot. But they redid the whole kitchen and it saved me thousands and thousands of dollars. Plus, they rent it, so they were in the property, renting it, paying rent. I just gave them a small like a reduction and that work. Now you have to be very careful. You want to make sure the person is knowledgeable and they’re not just, you know, like anybody doing it and then messing it up. But it did work out for me so that that could work.


Brian: Yeah, absolutely. You know, it’s a good point you can get creative with this. And, you know, so that’s that segues well into, you know, continuing this conversation of how hacking. So, renting out rooms in your house obviously is a great way to house hack. And you can also if you’re handy, one of the things you can do to House Hack, you know, in a even more comfortable way is to build out either a separate dwelling like an 80 you, an accessory dwelling unit to rent out, or you can make a garage apartment or a basement apartment or some separate section of the house, some separate unit of the house. Even if you don’t reclassify the property legally as a multifamily property. You know you can still rent out, you know, a basement apartment or an above garage apartment or, you know, an outside dwelling or whatever it is. And that way, you don’t have to share your actual living space with someone else. They have their own separate entrance. They have their own separate bathroom and bedroom and kitchen. So, you get rental income, but you don’t actually have to share your kitchen and you know, in the rest of your living space with someone else.


Deni: Absolutely.


Brian: So, and again, if you’re handy, that’s something that you can do on your own as a way to invest in real estate and reduce or even eliminate your housing payment. Now, what about long distance real estate investing, because obviously this is not feasible doing the repairs yourself if you invest long distance?


Deni: No, I mean, I think long distance is definitely a bit of a challenge on both ends, one you obviously aren’t going to be able to be there. So, you definitely want to assemble contractors and whatnot, at least have relationships with them, find them through other people so that that you have at least some type of a trust level with them. And you know you want to know what their prices are and whatnot. Because if you just invest and don’t know anyone and then you have a big problem, it’s going to. It’s not easy to find contractors, anyway, let alone finding good ones. So now when you’re in a place that’s unfamiliar to you, you’re it’s a whole different ballgame. So, to me is build relationships in the area that you’re looking in.


Brian: No question and you know, that really starts with either a turnkey seller that you’re buying from or even like a fixer upper. So, you know, if someone who finds you deals, you know, or you’re a long-term property management partner in that area, you know, so for example, Deni and I are partnered with Drew SIGIT in Michigan. We do co-investing deals with him where, you know, he is the boots on the ground. He finds the deals. He’s the property manager. He has a network of contractors. So, Deni and I are partnered with him, and we and we buy rental properties with him, and we open this up to our audience and they can join in partner with us for fractional shares of these rental properties. But this only works because we have a trusted partner on the ground, you know who can handle the management, who can handle the repairs, you know, who can who sources, who finds these deals, you know, finds off-market deals. So, you really do need to have, you know, at least one really trusted partner on the ground locally who can help you manage contractors in that case. But, you know, I think it’s worth saying here that when you invest long distance, you know, yes, it removes the opportunity for you to do the repairs yourself. You know, assuming that you’re not going to go take a month off of work and go move to this city and do, you know, live in the property, you know, camping and while you do all the renovations? But you know, it also removes the temptation to try to do everything yourself, which, as we talked about a few minutes ago, can get you in trouble. So, you know, it kind of forces you to go in knowing that you’re going to be hiring out the work, knowing that you need to hire people based on trust and referrals. So, you know, it’s not necessarily a bad thing that you are forced to hire this out.


Deni: Right. Tara made a comment. We did the same with tenants. We really trusted. They would give us the numbers beforehand, and we would approve it or not. And then they would take good care of the house so it can work, you know, hiring. You know, it’s funny. When I managed large apartment communities, we had live-in maintenance people. So that’s kind of


Brian: Like a superintendent.


Deni: Yeah, it’s kind of the same premise, but you know different scale.


Brian: Yeah, very different scale. But yeah, you know, the other advantage, you know? So yeah, you may not be able to do the repairs yourself if you invest long distance. But what you can do is you can invest in cities that have good cap rates and good rent to price ratios, which is going to you’re going to come out way better, more or, you know, way further ahead in the long term with your returns on that than by trying to do all the repairs yourself anyway. So, you know, this notion that you should only invest in your home city where you can do the repairs yourself? I think it kind of obscures the bigger picture here of investing where the returns are better. And that says nothing of Anti landlord regulation, too, which is something Deni you and I have talked a lot about over the last few weeks and really over the last year and a half. So, you know, you want to invest in areas that have investor-friendly regulations, landlord-friendly regulations rather than Anti Landlord laws. So, it makes a big difference. You really want to be strategic about where you invest and where you live is not necessarily a good place for investing in rental properties.


Deni: Absolutely, for many, many reasons.


Brian: So, the bottom line here is if you have a high skill level with home improvement, if you love working on houses, if you have plenty of time to do so, then yes, you can save some money on repairs and earn higher returns on your local rental investments. But all of those things have to be true. You know, you have to love doing it. You have to have the skills to do it. You have to have the time to do it. You have to be able to drop what you’re doing with your full-time job, potentially, and go handle emergency repairs. So, if, if not all of those things are true, then leave it to the professionals. And you know, working with contractors is one of the more difficult components of real estate investing. But it’s a skill set you need, you know, you need to know how to negotiate with contractors, how to deal with bad contractors, how to how to manage contractors and keep them on schedule, how to review their work and keep them in line. It’s part of the job of being a real estate investor, even if you buy turnkey properties.


Deni: You also want to. I mean, there’s so much information out there right now. And even like when you’re negotiating costs and whatnot, I mean, check your area out. Every area is different. So, you might have a property in Florida, and you live in Pennsylvania, but Florida’s rates for different contractors are going to be a little bit different than Pennsylvania. So, you want to make sure and do some research and see what the average cost is in your particular area.


Brian: Absolutely. Deni are there any other points you want to raise about doing your own repairs versus hiring them up before We call this episode complete.


Deni: No, I think you kind of set it all. I mean, if you like doing it, I have a cousin who. That’s his thing. He likes going into a property that he buys and just working in there. It’s like alone time. So, for him, it’s good. But if you’re in there and then you’re like, oh, this is, you know, you have to push yourself to go in there again. Yeah. You want to definitely seek out good contractors and the word is good contractors.


Brian: Absolutely. All right, guys, we’ll have a wonderful week, let us know what topics you’re interested in us covering in the coming weeks. You know, this is this podcast is all about you guys. It’s all about what you want to hear about. So let us know. Reach out anytime [email protected] Or message us through our Facebook page rate and review the podcast on iTunes or Stitcher or wherever you listen. And we will catch you next Tuesday at 2:00 p.m. Eastern.


Deni: Have a great week, guys. Bye now.


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