Accidental Landlord? Where do I go next?

Question

Hi, I'm hoping for some advice from more experienced people. Maybe this post isn't original, maybe some already had this problem but I couldn't find a message thread about it so here goes.

About 5 years ago I purchased a house near my medical school since the school did not have student housing on campus. It was post 2008 and the market was horrible near ATL and everything was being sold for 50% or less of it's value so I bought it with cash from a family loan that I can pay back at my convenience without interest and lived in it. While I was there I had received rent for living expenses and when I had to move out of the area for training 2 years after purchase, I rented the house out to a couple of colleagues thinking if I had to move back there for the next phase of my training then I'll have my house back. When I did have to move back at year 3 I realized that the housing market was returning to normal in the area and the house was worth 75% of it's original value before the crash. So I did a business turn and bought another house nearby with the same financing deal as the first house within walking distance of my school for about 75% of it's value but needed a LOT of work (new roof, fence, kitchen, 3 bathrooms, new flooring and some electrical work). I did break even on the fixing in estimated worth in the current value of the house and I am making good money on the rent. It is also rented out as a furnished house because that was the other thing I recognized lacking in the market I was in. I kinda got the whole buy low, rent competitive, plan to sell high later part down. But I'm totally confused on what to do with my accounting/bookkeeping, taxes, I have been using TurboTax for personal investors and I feel like I'm doing it wrong somehow because I'm guestimating and I want to do it right. Some people are advising me to put it in a LLC to protect my investments and I feel like that would be a good thing but I have no idea what to do with State boundaries because I've recently accepted a training position in NC and my properties are in GA. Do I need a NC property lawyer or a GA lawyer? I'm living in NC and now I'm looking at getting a mortgage for the first time for a place I'm going to actually live in for the next few years of my training. Should I attempt to sell my properties as rented out properties and see if any investors are interested? Should I just hire an accountant and a lawyer to make my life easier?

Yizhen Su · Answer

That's my question, since I reside in NC and have my primary residence in NC but own property in GA, should I get a GA attorney (who would be familiar with the local reg) or a NC attorney (who is more conveniently located to me)? I'm assuming the tax laws for real estate are different in each state too so should I get a CPA in NC because that's where I'm at?

Ariel Smith · Answer

@Yizhen Su Hire a CPA and an attorney to answer your questions. Seems pretty straight forward to me...

Yizhen Su · Answer

I haven't sold the houses because I haven't had time due to school and it's been 1 year since I've moved away from that area and there hasn't been any major issues other than calling to make sure the lawn maintenance guy actually showed up instead of saying he did so it's been low maintenance. The renters I rent to are high quality professional students from my school with a lot of work and not enough time to do recreational things like throw a party at the house. The equity in the houses keeps going up in value and while the momentum has definitely slowed their value as a rental is greater than the profit from a single sale of the house because of the low cost of my initial investment. For example House 1 I purchased at 72,000. It's current estimate value based on neighboring sales is around $140,000. The house net profit is $900 as a rental per month. That's $10,800 a year. It's rented out for 1 to 2 year contracts due to the nature of the school. So far I've rented it out for 4 years (including next year), earning 15% of my initial investment per year after property taxes, insurance and saving for maintenance fees every year. I want to be clear that I could be asking up to $1100 net out of that property as comparable property in the area rent for higher than that with occupancy but I give a discount to students from my school in order to attract high quality renters as well as give a break to medical students like myself. My other house performs similarly. Due to the school growing in the area (they are adding more degrees like a physician's assistant degree) and they are currently at 60% occupancy of the land they actually own in the area, you can see there's only growth potential for a rental market within 1 mile of the school itself for a while so the equity will continue to increase in value while I continue to collect rent at the local market price. I think selling out at this moment may not be the best idea until the school is at least done growing and as if right now I have no urgent need for a cash infusion. The downside monetary wise to selling is that if I report a high gains on my income I will be told I made too much money by the government and need to pay more of my student loans back right now increasing my monthly payments to the government black hole and lose that investment profit and equity leverage I had before I sold.

Thomas S. · Answer

First thing I would do is try to sell since you will be moving away. If you find a buyer and make your profit you win. As for the LLC it is not necessary with only two properties but you still need to make sure you have as little equity in them as possible. If you own them outright you are losing money due to the value of the equity and the attraction to a lawsuit.Simply make sure you have plenty of insurance coverage with a umbrella and a LLC will not be of any real value.