hey everyone it's Kristen with Gunderson CFO and bookkeeping today I want to talk to y'all about long-term rentals and I actually have an example I went through this with a client yesterday so let me go ahead and share my screen all right y'all should be able to see this spreadsheet right now so when we had our meeting yesterday I went through and asked her the questions well how much did you purchase it for they purchased it for $250,000 they put $10,000 as a down payment and their loan was for 242 um based off of I think it's a 2.75 interest rate for 30 years their mortgage payment is $988 they are going to go ahead and put in $20,000 worth of improvements um and then one thing that we did have to figure out is we had to figure out how much was the building value and how much was the land value based off of their tax records 89% of it is being taxed as building value um so we get to depreciate the the building the house and then we also get to depreciate um the improve the big improvements that they're doing to the house so this ends up being about 76 um $0000 $7,600 that we get get to depreciate every single year for like 29 and a half years and then the improvements we get to depreciate um $1,300 over the next 15 years approximately so um found out more information it's a five bedroom um and I think about 2700 square feet I think they said two or three bathrooms um big yard and everything thing so they think that they could rent it out for $5,000 um $3,000 to $5,000 so I gave them um I told them that they need to go reach out to um a real estate professional to figure out what some good comps are for rentals in that property and they want to do like a midterm to long-term um like a month-to-month rental instead of a short-term rental and those are completely different last week I talked about short-term rentals and how it can benefit you and um and they actually get put on to your tax return on a different spot if it classifies as a short-term rental it gets put on as a Schedule C instead of as a long-term or midterm rental gets put on as a Schedule E so um and the difference is is that if it's a Schedule E you do not have to pay social security and Medicare tax on it um it just gets added to your your tax bracket and um taxes that you owe whereas if it's a Schedule C you do have to pay social security Medicare taxes on the profit the net profit that you have so we went through so I actually think we we decided that it was going to be 4,000 but then include all of the the utilities in this price that's why we went up to five grand so it's going to include the propane the electric the internet all that stuff so that's how we decided on the five grand for just right now um we also decided that there's probably going to be a 12 weeks out of the year three months where it's not going to be rented so we have a 23% bancy rate um and then I also put in all of their expenses their property taxes their insurance um just incidental repairs and maintenance like if the toilet breaks or um if they need to touch up a wall or something um administrative fees they're going to actually um have a company do the property management for them on this that way they really don't have to worry about it and then I just took in variable costs of 12% so it um that may come to about 5500 it may be more or less depending on how things go and then the utilities we we figured out how much their utilities was with the propane and this the the snow removal and the shoveling and all that um so they're going to be bringing in Bas based off of their vacancy rate 4 $6,000 on this home right like they're gonna they're going to go travel in an RV like they're going to go they're going to put their home on um like a midterm rental they're going to bring in $46,000 we we're I'm calculating their expenses to be about almost 25,000 and then their net cash flow and then um so 21,000 minus their mortgage payments of almost 12,000 so the people who are renting are going to be paying off their mortgage for them and then um their total cash flow is going to be $9,600 so they'll have an extra $9,600 and what they want to do is they want to like remodel the bathroom like every year they want to do a new remodel on the house right um so one things to take in consideration is on the tax return like are they going to pay taxes on 21,00 even though their their monthly increase their monthly stuff has increased 21,000 or after they're paying off their mortgage they're really increasing about 9,600 we'll say 10 grand are they going to pay taxes on the 10 grand no um So based off of you can't write off a mortgage but you can write off the mortgage interest so we have the 21,000 I'm plug this into my calculator 21 we's say 500 and then they have the the interest for the year so this year's say they rented at the beginning of the year um so that's 50 we'll say $5,800 worth of mortgage interest that they get to deduct and then I I told you we get to depreciate the cost of the building and improvements um that is $8,900 that they get to depreciate that's you know not coming out of their pocket so that brings it down to they're going to be paying taxes on only $6,800 approximately even though their their cash has increased really 2100 or 21,000 pay on their mortgage they're left over almost $10,000 and they're only going to be paying taxes on about 6,800 of it and remember they don't have to pay social security and Medicare taxes on this and um they get to depreciate it it turns out to be a really great deal their um their cash flow anal their cash flow is 9600 their cash return on investments going to be 30% this is why you do real estate their cash return on investment is going to be 30% this year and then their Total return on investment um including the appreciation we like we've been calculating how much their house has been appreciating worth it's appreciating at 23% rate every single year so the total return on investment is going to be 303 percent um that's pretty amazing so there's a few things that I do want you to know about um a lot of times um rental properties will actually because of the depreciation there'll actually be a negative on your tax return like you'll have a loss on your tax return because of the depreciation even though it is a positive cash flown I can do that spreadsheet for anyone any one of my tax advisory clients like that is stuff that I do with them to make sure that um before we buy the property or before we list a rental um or what we should like if they're considering it I do that for every single one of their properties um but the other thing that I want you to know about is if you have a loss can you take the loss against your W2 Wes well that's that's what I want to talk with you about right now let me pull up my next um spreadsheet or okay let me see if I can share my screen again okay so I have a PDF so um one second