multi families for cash flow

[Robert Granara]

any other investors out there buying multi families for cash flow...most of the investors on this site seem to favor single families for cash flow, but to me it seems you get better cash flow on 3 family properties than from singles...

in my area you can now cash flow around $1500 on 3 family homes...

[Michael Rossi]

If you set up your business as a LLC and buy the property in the LLC, it will be a commmercial loan regardless of the number of units. I've bought almost all my properties, SFHs, duplexes, quads, apartment buildings using commercial loans. Finally, I disagree that commercial loans will only consider the numbers of the deal. The lender will still want a personal financial statement and will look carefully at the borrower.

Mike

[Will Barnard]

Mike, you have stated many times before that you pay no income tax from your business, thus you report no net income. If that is the case, then how do you get your commercial loans from the bank when, as you just stated above, that the bank WILL look at your personal financial statements? This is just no possible, so which one is it - you either do pay taxes and show sufficient income, or you are not getting these loans you are claiming.

[Mike W.]

Depreciation is not considered when reviewing a tax return for qualifying purposes at a bank. If Mike doesn't report any net income, like many of us, it is because the depreciation and expenses associated with his portfolio reported a paper loss which offsets any income for tax purposes only.

[Account Closed]

EDIT: Yeah, what mike_mn said.

[Dave Kennedy]

Mike,

Do you set up and LLC for each property you buy or can an LLC buy multiple properties?

I understand what you are saying about the personal financial statements as well.

So if I were to buy a SF home, as a rental investment under a LLC it could be a commercial loan and they would base the majority of the lending on property operations...with some consideration of how my personal finances are?

If this is the case then I would be able to buy my own home(through residential loans and my income) and still pick up an investment property (through an LLC). Is this true for the most part? I've got good credit 726, as of 2 months ago. No student loans anymore but I do have a car loan(damn thing!).

[Michael Rossi]

Dave,

No, I don't set up an LLC for each property. That provides maximum asset protection but is quite cumbersome. If you had a relatively large portfolio, would you want to have 50 or 100 checkbooks; 50 or 100 tax returns; etc. It's just too much.

So, what I do is have multiple rentals in each LLC, grouped by risk. I try to keep about 10 per LLC. Nice SFHs together in an LLC. Nicer duplexes, tri's, and quads in other LLCs. Low income apartment buildings in their own LLCs, etc. You get the idea.

Yes, I think that you would be able to buy a home and still pick up investment properties through a LLC.

Mike

[Dave Kennedy]

Very interesting Mike.

Opened up a new door for me. I was really stressing out about choosing between buying a home for myself or making an investment. I was afraid I wouldn't qualify for both.

What if I bought a mutli family and owner occupied one of the units? Can it still be an investment property and purchased in an LLC?

Thanks!

[Kevin Colwell]

Originally posted by Michael Rossi:

So, what I do is have multiple rentals in each LLC, grouped by risk. I try to keep about 10 per LLC. Nice SFHs together in an LLC. Nicer duplexes, tri's, and quads in other LLCs. Low income apartment buildings in their own LLCs, etc. You get the idea.

Mike

Mike I understand the hassle if you were to have 30 properties with 30 different LLC's. I guess being a new investor I am slightly confused by the fact that the LLC is there to provide maximum asset protection. However, wouldn't grouping multiple properties appear in my novice eyes to defeat that purpose? No matter how nice the SFH or multi's that you have in one LLC am I incorrect to think that one lawsuit can jeopardize all of the properties in the LLC? Or is the risk of having them grouped together outweigh the LLC costs and tax preparation and checking issues? Please advise

[Michael Shadow]

I prefer Multi's. If I find a SFH at an eye popping price I would buy it.

-Michael

[Christian Malesic]

Originally posted by TheMasterKey:

Mike + Christian, why do you recommend starting small (with SFR or 3-4 units) instead of a 10-20 unit as Taz recommends? Wouldn't the success in either investment come down to doing the proper due diligence?

We talk quite a lot about this and related topics around here. Check out the Rental Property Questions & Landlording Issues forum. One of the big reasons is simple. You need real life experience. Dealing with tenants is a unique business that has little else to which to compare.

Take a sports analogy... Would you encourage your son or neighborhood boy to play for the NFL if they had never played Smurfs / Pee Wee / High School / or College ball? Probably not. You need to learn the lessons - pros & cons - before moving to the bigger units that are harder to manage & harder to sell if you decide you want out.

[Will Barnard]

Kevin,
Rookie or not, you are correct in your thinking. Having multiple properties in one LLC exposes all of the assets in that LLC to law suites. Grouping the nice homes together in one LLC and the low end units in another, etc. etc. does nothing for liability protection, or accounting/paperwork reductions. It all depends on the "equity" in the property, regardless of the fact that the property may be a high end unit or low end unit, or a residential or commercial property. Separating your assets into multiple LLC's does add cost (Entity formation costs, etc.) and more paperwork, so the decision to do so should be based solely on the "equity" you choose to expose in one LLC. Also, an LLC does not give you "maximum" liability protection, only additional protection. You should always have adequate insurance, operate your business in a responsible manner (do not be negligent), and do not do anything to allow an attorney an easy way to "pierce the corporate veil".

[J J]

Originally posted by TheMasterKey:

Mike + Christian, why do you recommend starting small (with SFR or 3-4 units) instead of a 10-20 unit as Taz recommends? Wouldn't the success in either investment come down to doing the proper due diligence?

Brian, I am neither of the ones you addressed this to however I read there responses and want to add the following:

Everyone is answering from their own perspective. And some of the analogies are really bogus.

Learning to fly a 747? Getting basic experience first?

Rubbish.

Here is the thing to remember, anything over 4 units is a whole different ballgame and there is damn little about apartments you can learn from owning a sfh, duplex, triplex or quad. Anyone who says you can learn how to invest in apartments by buying a house is nuts. I don't care how much experience they claim nor do I care how many books they wrote or lectures they gave. I've found in this business by the time the ink dries on the paper most books on this subject are out of date.

Just my crusty old opinion based on over 50 years and thousands of deals.

Now, I think it is time for my oatmeal, gotta stay regular.

[Brian G.]

Thanks for the responses. JJ, I also started my day with oatmeal : - )

The reserves seem to be a big issue. Let's assume an investor with little capital is looking to do an apartment deal with 100% financing, is it possible or common to include a cash reserve fund in the projections for the investment?

Thanks.

Brian

[Dave Kennedy]

I don't know about 100% financed deals but cant you just build the reserves into the fully loaded price and get financing on that?

If a lender is willing to give you 10M for a property they might require 800k of that 10 M to be held in an escrow reserve account for a back stop. If all of a sudden you incur a major cost unexpected.

I could be wrong and you might be thinking of reserve accounts.