You got your first property..now how do you get your second?
Victor LauPro Member
Member since 2019 · 22 posts · 5 votesFellow investors! After you acquired your first multiplex property, how and when did you acquire your second? How did you leverage your first to get your second property? What does the bank look for when lending you on the second property? At what point do you set up an LLC? Please share your thoughts Thanks!
Hey @Victor Lau,
I will talk more on the point about the LLC, since I have much more experience with with those entities. When you establish the LLC can vary on several different factors, so I would encourage you to look at asset protection as a whole. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
Having spent my early career cutting my teeth litigating major insurance companies for refusing claims, I personally have always placed properties into LLCs. You will need to do it eventually if you continue to grow, so the real question is when you start.
This is not legal advice, just my opinion as a real estate investor. Feel free to tag me or connect if you have more questions.
@Victor Lau Check out these forums here and Joe Fairless and the Apartment syndication school. Forming an LLC depends on your situation
@Victor Lau
I set up my LLC on my first property because I wanted to grow...and doing that mentally helped me remember that one property wouldn't be enough for me.
As far as banks go, I started with portfolio loans, so the process was the same for the 2nd, 3rd, 4th, etc properties.
@Joe M.
There's not a right or wrong way. Depends on your goals, cash flow of future deals, etc.
I lived in my initial multiplex properties, moving from one to the next.
Each time the bank either formally or informally appraised each property. Interestingly, they liked properties with equity, even if the properties had mortgages, even more than they liked money in the bank in savings or checking.
The LLC question has a lot of facets. I'd like to read what other folks have to say on that one...
@Victor Lau
I set up my LLC on my first property because I wanted to grow...and doing that mentally helped me remember that one property wouldn't be enough for me.
As far as banks go, I started with portfolio loans, so the process was the same for the 2nd, 3rd, 4th, etc properties.
So at what point after your first property did you realize it was time to get a second?
Maybe a simple example would be if my 1st rental brings in a NOI of $20,000 and I'm looking to buy another 8 unit at $500,000. Assuming I get a $20,000 return every year does this mean I'll have to wait 6-7years do save up for my down then purchase the next property? Any other way to leverage the 1st property to be able for me to get the 2nd quicker? I feel like something is missing.
Hi Victor, I'm in a similar situation, but am trying to lead-turn the problem by building a base of investors who would want to structure a partnership with me through debt or equity. As much as we want to do it alone, I think using other people's money has to be in our future to grow. I don't know if you've been able to force appreciation on your initial property, but my first one was a 6-plex and I was able to increase the equity by increasing NOI and that gave me $50K in equity to tap into.
Best of luck!
Cheers,
Brian
Hey @Victor Lau,
I will talk more on the point about the LLC, since I have much more experience with with those entities. When you establish the LLC can vary on several different factors, so I would encourage you to look at asset protection as a whole. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
Having spent my early career cutting my teeth litigating major insurance companies for refusing claims, I personally have always placed properties into LLCs. You will need to do it eventually if you continue to grow, so the real question is when you start.
This is not legal advice, just my opinion as a real estate investor. Feel free to tag me or connect if you have more questions.
@Victor Lau
I BRRRR'd my first property. Had around $55K into it, apprasied for $100K, pulled out $65K in a refi and immediately purchased a duplex about a month later. So to answer your question, I moved on the second property as soon as the refi was completed and I had my initial investment back in my account.
@Scott P. That’s what I’m doing now. I live in one of my units and renting out the other. Now I’m thinking do I want to do this again. Like move out after a year. Or save up the 25% to buy my next property. Don’t want to keep moving .
@Tim Pritchett if I were single that is exactly how I'd acquire properties right now. If you live in the property it qualifies as a primary residence (I think up to 4 units). You can get FHA financing with minimal down but you'd have to pay PMI. I bought my first property with 20 percent down, improved it and increased rents, and refinanced it a year later. Pulled out my down payment and another 10 percent for the next property. I live in a highly appreciating market which is helpful with this strategy. The more properties you acquire the quicker you can access equity for more properties. I worked up to 6 duplexes over a 4 year period. I currently focus on SFR. Easier to manage, rent, and sell. Repairs and maintenance tend to be less for me as well.
Thats where the power of the BRRRR comes into play. You COULD save up for 6-7 years and buy another, but any time you can find a way to build instant equity and pull capital out - it allows you to scale horizontally quicker.
Another idea to consider is going in with some partners - they help provide most of the capital and you do the leg work to find and manage the deal.
@Victor Lau
1st: FHA in my name only.
2nd: FHA in partners name only.
3rd and beyond: Took on two partners and formed an LLC. 20% down.
Hi Victor, I'm in a similar situation, but am trying to lead-turn the problem by building a base of investors who would want to structure a partnership with me through debt or equity. As much as we want to do it alone, I think using other people's money has to be in our future to grow. I don't know if you've been able to force appreciation on your initial property, but my first one was a 6-plex and I was able to increase the equity by increasing NOI and that gave me $50K in equity to tap into.
Best of luck!
Cheers,
Brian
Thanks for your response. Haven't purchased my 1st property yet, but just thinking beyond the first. Is it worth it then to put all the down on one property or split it to obtain 2 properties?
Thats where the power of the BRRRR comes into play. You COULD save up for 6-7 years and buy another, but any time you can find a way to build instant equity and pull capital out - it allows you to scale horizontally quicker.
Another idea to consider is going in with some partners - they help provide most of the capital and you do the leg work to find and manage the deal.
Thanks for the reply. I would ultimately like to bring in investors but will need to learn the ropes first in the first or second property. Once I have some experience under my belt to show for then I feel the investors will be more confident in me. What you think?
@Victor Lau
I BRRRR'd my first property. Had around $55K into it, apprasied for $100K, pulled out $65K in a refi and immediately purchased a duplex about a month later. So to answer your question, I moved on the second property as soon as the refi was completed and I had my initial investment back in my account.
Was your first a SFR or a Duplex?
Hey @Victor Lau,
I will talk more on the point about the LLC, since I have much more experience with with those entities. When you establish the LLC can vary on several different factors, so I would encourage you to look at asset protection as a whole. When I sit down with clients, I always discuss (1) their personal assets, and (2) what their current investments portfolio and other business ventures are before discussing (3) their future goals. Each of these variables will dramatically change the advice I give the individual asking me this question. Generally though, I break it down into the "five pillars" of protecting your assets.
The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.
The second pillar is a good insurance policy as that cover the majority of your exposure. However, insurance is limited because it only protects you from one type of liability: accidents/negligence. Insurance doesn’t protect you from any part of the sale or acquisition of a property (e.x. Somebody wanting to sue for you backing out of a bad deal or accusing you of selling them a property with defects like unknown termite damage). Insurance also doesn’t protect you from misunderstandings, especially those made in writing and email. What happens in these misunderstandings is that something goes wrong either in the sale or after, and then they sue you for some statement you made that they “misunderstood”. That lawsuit is a claim for fraud, and that’s what fraud typically is...a misunderstanding and someone being “injured” and wanting to hold the other responsible for it. Insurance never protects you from these kinds of claims and they happen all the time.
The third pillar applies after you have good insurance You need to protect yourself from what insurance doesn't cover by compartmentalizing your assets. Compartmentalization means that if something happens to one property, people suing can't touch you or the other properties. You should use either LLC's (the old and expensive way) or a Series LLC (the new and more cost/time effective way). No matter where you live or where you own assets, I personally recommend the Series LLC to be a great tool for the individual investor who is planning to expand their operation, as it allows for you to scale infinitely for FREE. If you're interested in using an LLC, this article also further explains the advantages of a Series.
The fourth pillar is somewhat similar - you want to separate your operations from your assets. One company owns everything and does nothing (this is your SLLC a/k/a "asset holding company") and a completely separate company handles all of your operations (this is a traditional LLC a/k/a "operating company") For the operating company which serves as your face to the world and through which you do all your business, you establish a Traditional LLC to carry out the operations of your investments. The operating company takes on all of the liability that would otherwise blow back on you including: paying property management, paying contractors, collecting rent, marketing, etc.
The fifth pillar is owning everything anonymously. If people don't know that you have assets, then they are less likely to sue because there's no use in suing people that qualify for food stamps. This anonymity can be accomplished for free by using land trusts to own your companies as well as the assets. Trusts create this anonymity by removing your name from public record. Even if they can see you used to own a property, when properly transferred it will look like it was sold to investors. If they somehow guess you are the owner though, it still doesn't matter because you would not be the owner. The land trust and the LLC are the owner of the asset/real estate, so even in the scenario that potential litigants guess, they would guess wrong.
Having spent my early career cutting my teeth litigating major insurance companies for refusing claims, I personally have always placed properties into LLCs. You will need to do it eventually if you continue to grow, so the real question is when you start.
This is not legal advice, just my opinion as a real estate investor. Feel free to tag me or connect if you have more questions.
Thanks for your insight Scott! Will definitely file this as a reminder when I set up a LLC .
@Victor Lau
A SFR
Hi Victor, I'm in a similar situation, but am trying to lead-turn the problem by building a base of investors who would want to structure a partnership with me through debt or equity. As much as we want to do it alone, I think using other people's money has to be in our future to grow. I don't know if you've been able to force appreciation on your initial property, but my first one was a 6-plex and I was able to increase the equity by increasing NOI and that gave me $50K in equity to tap into.
Best of luck!
Cheers,
Brian
Thanks for your response. Haven't purchased my 1st property yet, but just thinking beyond the first. Is it worth it then to put all the down on one property or split it to obtain 2 properties?
I think that's just going to be situation dependent. If you think you can BRRRR it all back then maybe go for it. I still have trapped equity but can use a HELOC to tap into that equity.
I keep it simple. Buy 1 and then focus on making more money and save for a down payment for the 2nd. Buy the 2nd and repeat for the 3rd. If there is equity and the risk is minimal then you can pull cash out.
@Victor Lau you should not be worried beyond your first property. I can't count the number of people who have come on BP worried about property 2 or property 5 or property 10 and through all the worry, never buy property one. Whenever someone asks how to I buy property ten, my answer is buy 1-9 first. So to answer your question, the way to buy property two is to buy property one first.
Every purchase will come with it's own challenges and you will work through those over time. Have a long term goal, but don'g get hung up on the details until the challenge is in front of you.
Thanks for your response. Haven't purchased my 1st property yet, but just thinking beyond the first. Is it worth it then to put all the down on one property or split it to obtain 2 properties?
I'd buy 2. I put down as little as possible to purchase with no PMI so that I can buy another rental faster. From what I've heard and read there seems to be those who favor the conservative approach of pay off debt first and fast then buy more REI, and the opposite who just keep buying more REI, leveraging for another and taking on good debt. I prefer the aggressive approach and plan to start doing more of this in additional to investing in syndication deals. I'm not an expert on this, just my 2c.
@Scott Smith
Thanks Scott. Great info. Sure seems like sooner is better than after you’ve been sued.
Bruce
@Victor Lau congrats on the first property!
if you buy the first one well you could BRRRR it and pull all or most of the money out.
more often then not your first property may not be a "home run" because you want to get your feet wet and don't know what you don't know....
If you only have down paymnet for one property then buying well upfront is the key to growing your portfolio. by buying well i mean buying a value add opportunity.
if you manage to add some value you should be able to pull some money out after 6 month seasoning. the repeat the process.
if your properties cash flow you should be effectively doing OK with serviceability.
You are referring to NOI, that's a number before debt servicing, are you not borrowing money to buy?
If you mange to buy 1 good deal a year you are doing well.
but of course you can do better if you put more time in to it.
The LLC would come in to the play at the stage when you close on the deal, OR after you took ownership. some lenders (conventional 2-4 mainly) would allow LLC ownership. -- seek legal advise.