Based on true events. Details have been changed or combined to protect privacy.
As regular visitors to vacation destinations, savvy investors gain a first-hand understanding of the local rental market—including rental rates and purchase price, plus identifying all the “must have” features. After careful consideration, if the numbers add up, it’s time to add another location to their investment portfolio.
Our story opens with successful entrepreneurs who saw potential in a rental property. Meet Frankie & Barb, both savvy professionals and seeking a luxe vacation experience. Captivated by the unique charm of a quaint town, Frankie and his wife decided it was a destination they wanted to add to their portfolio. They found the perfect beachfront property and wasted no time purchasing it. In addition to it being an investment, their growing family loved spending time at the beach, savoring ice cream cones, swimming, and listening to the crashing ocean waves.
After a few successful years in the rental market, Frankie & Barb noticed a change in their family’s needs as well as the needs of the market. Services such as AirB&B and VRBO changed expectations, with renters wanting and expecting more. Plus, their family now wanted more privacy and amenities at their fingertips. So, over the next three years, Frankie and his wife made significant improvements to their property, rebuilding their deck and remodeling their gourmet kitchen, well beyond the average annual repairs and upkeep they had always done. The improvements added significant value to renters but increased their cost basis in the property. After countless heated discussions between Frankie and Barb they realized neither one could answer a vital question: How much had they spent on improvements?
Unfortunately, Frankie and Barb failed to keep a consistent and complete record of the improvements on this property. With misplaced invoices, discarded bank statements, and foggy memories, it added up to a problem come tax time. Arguments ensued, and tempers quickly flared. Their CPA kept emailing with the same questions. After seven months had passed, they were no closer to providing answers. By all indications, they would miss out on valuable tax deductions and depreciation—that is, if they hadn’t hired a helpful guide—their DMM!
How did their DMM help? She took the time to deliberately review improvements made, by asking investigative questions to spark memories and ideas from the owners. Next, she slowly pieced together tidbits of information, communicating with vendors, ordering replacements—then reviewing—bank statements, plus analyzing the existing accounting records. Eventually, their DMM arrived at a significantly higher cost basis, resulting in a higher depreciation expense, which thus resulted in a tax deduction.
Now that the renovation is 100% complete and the bookkeeping dust settled, Frankie and Barb sat shocked at the actual cost of their beloved bungalow. Once their shock subsided, they whole-heartedly agreed that the investment was not only their financial rate of return, but all the priceless memories created at their beachside home. Plus, they breathed a sigh of relief that the niggling task was behind them and applauded their DMM for her diligence and creative approach. Together, with their DMM guide, all is once again peaceful and calm with a forecast of clear blue skies.
At Organized Instincts, our seasoned team of daily money managers will help you sift through your rental property renovation records. Schedule a conversation today and learn how our team can help save the day.