We're planning on investing an additional $100k into our existing rental property, which has a main house and an accessory dwelling unit (ADU).
Currently, we get about $30k annually for just the main house. After renovations, we hope to get an additional $24k for the ADU, for $54k total.
What's the best way to model this?
Currently, I have just created a second property (Rental #2) with zero cost basis and zero equity and added the $24k in income there. I then put a $50k HELOC and $50k cash expense on the main house (Rental #1), while also crediting the $100k in increased equity to Rental #1 as well.
Is this the "right" way to do it, or is there a better way where I can increase the income on Rental #1 by $24,000 in a future year?
@solowriter Rather than the tool thinking you have two rental properties, with all the associated parameters for improvement percentage, depreciation period, etc you could "sell" it and buy again with the new rent income? Just spitballing here, you'd have to be careful the sale doesn't cause taxes that aren't real, etc. If this will happen this year or next, maybe just go with the new income and offset it with an expense? You could put the extra income in other income but I'm not a fan of disassociating it from the property, as you'd have to remember to cancel it out when the property sells. You will/should be updating this plan each January anyway, so it will self-correct if it's off a bit in the near term.
@hines202 Hi Bill, thanks, interesting suggestion. Would I need to set appreciation to 0%? Otherwise, since it’s a rental, wouldn’t I incur cap gains? Though I guess if I used a 1031 exchange for the new property that would cancel it out? Not sure if the tool has that built in.
@solowriter Yeah I think you'd have to set current market value equal to cost basis and make sure the real appreciation rate zeros out any inflationary growth for the "old" property and bake all that stuff into the "new" property. Double check the tabular numbers to be sure it all looks good. Maybe we need a feature where we can attach a "sticky note" to items, such as a reminder that there's an entry in other income to solve this more cleanly, that needs to be deleted when the property is sold for real. You could add something short in the asset description for now. But that other income would still need to be offset by expenses and the taxation on the income checked to ensure it's in line with reality.
