All Forum Posts by: Allan C.

@Sean Willette if you are simply a LP and not doing biz in CA than you likely don't need to register the foreign LLC in CA. If you create an out of state LLC and are doing some form of business in CA (even managing out of state properties) then you'll likely need to register the foreign LLC in CA and pay the annual FTB fee.

@Luke Doyle high yield savings account or a

T-bill ladder is where I park reserves at the moment. Stocks are risky as others mentioned.

@Clara Settje I suspect that your OA doesn’t have many exit clauses written in, if you even have an OA. Since this is a business you cannot simply look at the property value to determine how much the buy-out is. Most businesses are valued on future cash flows that are discounted back to today dollars.

For example, if his share of the business creates $10k/yr earnings before tax, he may ask for a 6x to 10x multiple…. meaning his buy-out is $60k to $100k. He may ask for a 20x multiple, and this is where the negotiation gets complex. Each person will value future cash flow differently so you’ll need to come to a fair compromise.

Quote from @V.G Jason:

Quote from @Allan C.:

Quote from @V.G Jason:

Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?

Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

My goals are vanilla; cash flow, appreciation, buy & hold long term. In high interest rate environments the % of interest in P&I is almost engulfing. So you're really shorting yourself principal payments(=equity) for very little to no gain, actually a net loss.

I think I used a hard example before, but am willing to again just to understand how IO is making any sense. I want more options in my toolbox, so I'm all ears.

Let's use a $400k house, $100k down(25%) so $300k loan(75%). Interest rates now are 9% & future rates in 10 years are say 5%.  House appreciates to $500k in 10 years(so IO option only own 25% still, fixed rate likely own +10% more so 35%).

Correct me if I'm wrong or if my math is way off, but these are your four options using just P&I no taxes & ins for simpler math.

Pay 10 years of IO @ 9%($2,250/mo) + 20 years fixed rate at 9% on 300k, no refi($2,700/mo)
Pay 10 years of IO @ 9%($2,250/mo)+ 30 years fixed rate at 5% on 375k(75%LTV), $25k cash aside if refi(2,000/mo)
Pay 10 years of fixed rate conv at 9% on 300k(2,400/mo) + 30 years of fixed rate at 5% on 325k(65% LTV), $75k cash aside if refi($1,750mo)
Pay 30 years of fixed rate conv at 9% on 300k($2,400/mo)

Let's simplify this and just use 2 scenarios for a $100k property:  Scenario 1) you pay $100k all cash for a property and Scenario 2) you obtain a $75k loan with 30 year interest-only terms (no principal payment for 30 yrs). Let's also assume that your goal is to eventually own the property free and clear after 30 years. 

All else being equal, would you rather pay $100k cash up front or pay $25k now and then the additional $75k 30 yrs from now? 

Yes there are a lot more factors to consider, but the main point is most investors can capture higher yield than prevailing interest rates, thus maximize liquidity to capture more deals instead of paying down principal. It's similar concept as 30 yr vs 15 yr mortgages. Also think about it this way, even if inflation is 2%, paying $75k to own the property free and clear in 30 years is equivalent to paying $42k on a Net Present Value basis. Irrespective of the timeline by which you pay down principle, wouldn't you rather pay $42k instead of $75k on a NPV basis? The delta NPV is real money that can invest or use however else you'd like. 

Quote from @V.G Jason:

Quote from @Allan C.:

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

How does it maximize return on equity, when you gain no equity?

Equity is a function of several factors - down payment, principal pay down, appreciation, etc.  Return is also a function of several factors - cash flow from operations, return of cash from sale, return of cash from refi, etc.

By definition, you maximize returns by increasing the spread between the numerator and denominator. You can decrease the denominator by minimizing down payment, minimizing principal pay down or stripping equity through refi. Increasing the numerator is more obvious. As an investor one of your goals is to maximize the return on your investment/equity.  It's not the only goal, but a big one for most folks on this forum.  

You'll need to define what your goals and strategies are.

@V.G Jason I/O is a great strategy for maximizing return on equity. It's no different than the refi till you die believers where you keep stripping equity to buy more assets, except you avoid the inefficiencies of constantly refinancing.

It also works for high appreciation markets where you don’t expect to hold the asset forever. It can also work for buy and hold investors in growth mode.

@Greg Schreffler I never allow lenders pull my credit until I select the one I’m going with. You can give them redacted bank statements to show your liquidity if they won’t take your word. Many credit card companies also have a proxy credit rating so you can do screenshot to give the lender an indicative range of your credit.

These days lenders don’t have many folks knocking on their doors, so you should build relationships with a few and be insistent that they give you general loan terms w/o pulling your credit.

@Urvashi Vasishtha it’s an attractive option, but so are 40 yr amorts and interest only terms as well. Creative options to reduce monthly debt servicing will continue to grow, which means investors should get more sophisticated with their underwriting tools to determine which terms are best suited for their needs.

@Tyler Richmond I don't take issue with the CA market, but I think holding a SFH in CA doesn't pencil out well. You got the right view of diversifying your investment. Getting more doors, even if in CA, makes sense if you're up for it.

@V.G Jason in all discussions I've had with lawyers they suggest that single-member LLCs effectively provide no protection. But you should spend the $ and talk to lawyers to form your own opinion. The WY LLC will provide anonymity if you set it up correctly, purchase properties with the correct vesting and obtain financing solely through the LLC.

The multi-layer administrative process is hard to maintain long term for majority of common people, hence why you see so much push back against this approach.