Investing Goals, am I making sense?

Question

I have been listening to podcasts and browsing this site and a few others for a couple months now trying to narrow down my actual goal in RE. Currently I am involved in a mid-size residential remodeling company with a pretty stable workload which supports myself and my family. At first my goal was to flip houses, since I am very handy it would seem logical. However the more I think about it, I am fearful it would take up too much of my time, my resources, and ultimately take away from my primary business. I am leaning towards going the buy and hold route. I think a smaller, steady stream of cash makes more sense for me, and ultimately should require a significantly less time (managing) than flipping would.

My company owns a 7 unit industrial property, and I manage a 10 unit commercial property so I am somewhat familiar with the overall landlord role. I have no real experience with residential rentals yet. Would the first logical step be opening an LLC for the rental property to be purchased with? I have good credit, some cash (homes are pricing in my area, I don't have 20% down), so I am thinking I could be a guarantor for the loan if need be. Am I totally off base with starting an LLC first? Does it make sense to go this route vs. the flip?

Darren Flater · Answer

I have an LLC for  our partnership but again having a large umbrella policy will also help protect you.

Charles Morgan · Answer

I do not have an LLC yet, but probably should.  I own 3 SFR, (technically 4 1/2), I just haven't transferred one over to my son yet and the other is half owned by a partner who is living in it. This does leave me pretty open, and I am not happy with it.

Drew Liljedahl · Answer

Wow, thank you everyone for replying so quickly! It sounds like to get a conventional loan it would need to be in my name. I was just worried if I ever got sued, but perhaps a larger ins. policy would be money well spent.

CT does have very high taxes, and property in my area is very expensive. Flipping houses sounds really good, but the small steady stream of cash appeals to me even more.

Brianna, thanks for your story, that is my goal, to fix things once and properly to avoid constant calls for maintenance. In the 17 non-residential units I take care of, I probably spend less than 2 hours a months with issues.

Elizabeth Joiner · Answer

If you go the route of not having an LLC and you get sued, than all of your personal assets are in jeopardy. In a lawsuit, They can not go after your personal assets or your other businesses when your property is purchased under your LLC. Forming an LLC now, minimizes risk and will not only offer you the financial protection of only impacting your properties under the LLC, it will also give you tax breaks for everything you purchase under the LLC. It will give you the opportunity to build your business credit. Which can later be used to purchase homes. You don't have to get a loan from a traditional bank, there are private money lenders willing to give loans to investors.

Especially investors with proven track records of success. Private money lenders want to know that the numbers on your deal makes sense, and that you will be successful in your venture.  You can find them on this website, or by doing a Google search for other investor websites, than looking them up. Both forming an LLC, and not forming an LLC have pluses and minuses to them. It just depends on what strategy you want to implement for wealth development.

Darren Flater · Answer

I own my first rentals in my own name.  If you're worried about liability just make sure to have a large umbrella policy. That's how I've been advised. We have been able to lock in 30 year loans at 4.85% with 25% down. That makes for great cash flow

Patrick Snyder · Answer

You also may want to check out a few other potential costs (code compliance, insurance, property/income tax consequences), as well as doing some reading/research on landlord-tenant law, just so you know exactly what you're getting into.  While I have no experience with industrial/commercial leases, I am pretty certain that the laws are VERY different, and state specific.

As for your strategy, I agre that loong-term rentals are a solid way to go, as long as you buy right and know all your costs.  Connecticut has some of the  highest property taxes in the nation, which will take a sizeable chunk of your cash-flow.

Good luck with whatever you choose!

Brie Schmidt · Answer

Agreed, you cannot get conventional financing with a LLC.  We are buy and hold investors.  We bought our first 3 flat fully renovated with a FHA and 3.5% down.  Lived in 1 and rented out the other 2.  Then we bought another renovated 3 flat and rented it out.  Then we bought another and moved out of the original and into the new one.  Because we bought already renovated building the time it takes to manage them are minimal.  We mow the lawns once a month in summer.  Outside of that we get a repair call probably once every 3 months (total across all units) so I would say on average we spend 2 hours a month managing the 6 units

Jonathan Makovsky · Answer

@Andy Collins great points. My understanding was that an investor might be putting themselves at a financial risk by not incorporating; for example if there was a lawsuit of some sort. Is that the case?

Jon Holdman · Answer

Start an LLC?  No.  The LLC may be able to get a loan, but will still need 20% or more down.  And will only get shorter term (15-20 year max), balloon, or ARM financing.  If you're looking for 30 year fixed rate financing you will have to do that in your own name and will likely need 20% down.

Creating the LLC is just a distraction.  If you want to own rentals, get things in line to buy one.

Rentals create a small, but long term income stream.  "Passive" is a misconception, but they're really not a ton of work.

Fix and flips create much larger paydays.  Or, can if you do it right.  But they require a lot more work.

Rentals are an investment.  Fix and flips are a job.  Both do require money.

Andy Collins · Answer

you can't get a traditional mortgage (30 year low interest, etc) in a LLC,,,only individuals qualify for conforming mortgages,,,you can have up to 10 mortgages including your own home,,so slowly add a house here and there until you get to the 10 limit,,if done properly you can build cash flow up that will be flowing in and increasing with time and more properties.

After you hit the 10 limit you will need commercial financing,,thats when the LLC will be needed,,,others will say form an LLC and put your rentals in them now,,but by doing so you are losing out on locking in the low rates we have now