All Forum Posts by: Andy D.

@Samantha Klein Absolutely! Simply because repairs are true expenses and therefore indeed hurt your cash flow. It litterally costs you money. And therefore it will impact your overall financial situation and consequently have an impact on anything re obtaining more loans.

@Mike Dymski It just occured to me that, probably, DTI - for purposes of income - uses the results of line 26 of Schedule E / line 17 of 1040. Does it not? That would, indeed, mean that depreciation does play a role in that regard. Currently makes no sense to me but maybe there are actually approaches to disregard the figures from line 18 of Schedule E for calculating income for purposes of DTI. I honestly don't know.

It's your property. You are responsible for your property. Tenant pays you rent for the right to use your property. Portion of that rent is to be attributed to normal wear and tear. Things that get used break. Heck, they even break without being used. Therefore, it's you that needs to pay. Again, it's your property.

If, however, tenant is responsible for breaking something then that's not normal wear and tear and/or normal usage. Therefore in this case the tenant is responsible for any repairs/the costs.

Oh, and a broken bathroom vent fan is something you probably want to fix fairly quickly. Nothing more joyful than mold build up due to insufficient airflow in a space that has a lot of humidity generated.

Remember, rent is not a gift to you. It is a payment based on a contractual obligation. Such contractual obligations go both ways.

@Jessica Zolotorofe I can't even cross-thread tag someone...

What you said about the POA is exactly how I approached it at first. Sure enough, got called back into the classroom... Maybe it was specific to the title co. I need to look into this again, especially since I have done a few deals by now and will continue to do so. It is highly annoying...

@Jessica Zolotorofe Yes, the power of attorney works (notarized), but it requires the specific property address (so not "good forever", unfortunately). So by the time you get to the point where you know that this particular property is the one that you will be closing on - you might as well just sign the deed docs yourself and hop over to the consulate... But the poa saves you the expensive courier fees imposed by title co! LOL

Re lending to a trust: don't have experience with that (yet) but you describe what will most likely be the problematic element with conventional lenders: it's not an individual. I'm pretty sure any lender that sells to F/F will balk at this and will reject. But there are good lenders out there with actual human beings and a brain who do sensible (manual) underwriting.

@Joseph Mceneaney Your down payment is your "skin in the game". Lenders want you to be "accountable" by doing so. Why, therefore, should you get your "deposit money"/downpayment back? That would lead to the lender financing 100%. Good luck finding one doing that.

You can only get cash out from a refinance if there is equity in the place, meaning it has increased in value. Lender will then increase loan amount to be, say, 80% of new appraised value. You will still have 20% "skin in the game". But you will get the delta of those 20% and what the place is worth now as cash. But this requires the property to be worth more than it was at the time you bought it.

@Bryan O. Agreed, we are talking about whether DOS can be triggered or not from a legal point of view (acceleration of note).

Re par. 18: Wow, that is very strict wording! However, I initially stopped at "...the intent of which is the transfer of title by Borrower at a future date to a purchaser.". Breaking this down, I think I am deriving at the following:

1) If Trust

a) sells an LLC (which the trust owns) to a third party (a person or legal entity that has nothing to do with the trust; this could, however, also be the Settlor of the trust!) with this LLC holding a property or

b) makes the LLC sell the property which the LLC owns to such a party as just described

then we are, in my opinion, without a doubt in the realm of "DOS issues"/note acceleration and within your quoted par. 18.

2) Let's assume that Trust is the (direct) owner of the property (i.e. property is, at that point, not held by an LLC which in turn is owned by the trust). Trust now wants to transfer ownership of property to LLC1 (for whichever reason, maybe because of commercial financing or asset protection) which is wholly owned by Trust.

From my point of view (I very well might be wrong here!) with #2 there would not be a change of ownership in this case. Why? Because even though the owner is LLC1 now, this LLC is owned by Trust. Therefore it's still "the Trust" who ultimately owns the property. In addition there was no sale: one cannot sell within a trust. Therefore there is no purchaser as described in par. 18. This might be stretching it a bit, but that's the result when sticking to the wording used, wouldn't you agree?

3) There are proposals to approach this whole topic of avoiding DOS with a trust while at the same time using a legal entity for asset protection. This is proposed to be achieved by having the beneficiary of the trust assign his/her beneficial interest to an LLC (outside of the trust). While this is all great, I see no point in doing this as I see no asset protection happening here, at least not when it comes to the trust assets (Trust is still the owner of the property and therefore liable; and such a trust does not offer protection). It would, however, achieve the goal of avoiding DOS. This simply because there was no change in ownership and/or change in borrower: it's still the trust and therefore the settlor as borrower who initially was vetted by the lender who is responsible for the loan. I might be missing something here, and probably are, but to me this does not seem to be a solution in achieving asset protection and is therefore a pointless move. But maybe not.

One should also not forget the idea behind the DOS clause. Because what's the goal of this clause? That's easy: lender has vetted borrower and agreed to lend to this specific borrower using a very specific object as collateral. If borrower relinquishes ownership in the collateral (= property), the parameters under which lender agreed to lend have fundamentaly changed. Lender has no interest in dealing with a new owner who now controls the collateral with the lender not knowing anything about this new owner.

Having said that, this is why - I guess - in praxi the DOS is not enforced when a person transfers ownership from his/her own name into a single-member LLC which he/she is the sole shareholder. This because the LLC's asset is the property and therefore a) the collateral hasn't really changed and b) the controlling person of the LLC (aka shareholder) is the same as before. This would, however, be different if there were other people involved and/or if the LLC were to assign interest to other parties etc. This, at least, is my personal opinion. This last paragraph is not what this discussion is about, it was just a closing remark deriving out of the logic behind the DOS clause the way I understand it.

Disclaimer again: the above is a theorization and my personal analysis/opinion. No one should take this as advice, nor is it in any way intended to be advice. Not to mention that it's probably wrong LOL. Use lawyers to get advice on this topic. We are just brainstorming.

@Jessica Zolotorofe Great input, and I agree with what you said. One additional aspect to consider when using a trust is related to overseas investors. When we buy or sell a property held in our names then quite a few documents need to be notarized by us. Typically not really a big deal if you're physically present in the US. You simply go to your local USPS/UPS/FedEX/copy shop and get it done. Heck, you can even us a mobile notary. Not so when you are, like myself, outside the US. We have to actually go to the consulate to get this notarized! This means appointments, more time, and significantly higher costs.

While I agree that this can be avoided when the property is bought in a legal entity, with then the local manager signing on behalf of the entity at the notary, this would not allow the use of conventional financing (as one can't use an LLC to buy the property). If an LLC were to be used ultimately, we would have the issue of DOS clause.

So the way I understand land trusts, the use of such a trust would avoid all of the above as

a) the trust being the buyer would not disallow conventional financing (as it's not an LLC/legal entity)

b) the trustee would be the one signing the paperwork (and that being a person/entity in the US, therefore making it easy, see above)

c) any subsequent transfer into an LLC owned by the trust would again be less hassle and possibly not even requiring notarization (is the latter true??) and

d) potentially no issues with DOS.

Would you agree?

Point d, however, is something which I'm honestly not sure about. There is an interesting post by @Bryan Otteson in another thread where he shows wording that would pretty much negate what I so far believed with respect to point d. Maybe you have some thoughts on this when reading the last couple posts of that linked thread?

I'm surprised you say you can't find something that - after costs etc, of course - doesn't cash flow. Considering the high rents in SoCal (yes, even Costa Mesa, all things considered) you are maybe looking at the wrong area or, more likely, focusing too much on the MLS? Should you find a partner who is experienced in doing a rehab then you should really be able to find an interesting property, i.e. one that leads to "proper" figures when doing the math. Check local REI meetings etc or look at a different area (further away from the ocean!) to find cheaper properties that still get you a decent rent. I'm not saying you should not look at a multiplex but I want to caution you. They can be a different beast, really, and I would highly recommend to use a property manager in such a case. The property then could also be further away from where you live, possibly making it a better deal. Good luck.

@Samantha Klein You need to distinguish between what shows up on your Schedule E as "profit" and what actually lands in your bank account. The latter should be much higher (in relation) due to the fact that depreciation is not something that cuts into your actual cash flow. We are talking here about ensuring that one uses the depreciation as intelligently as possible to reduce the taxable income. Doesn't mean that we starve at the end of the month - on the contrary. ;-)

Who, really, is to blame here... 7 years of not noticing that a monthly rent of  $4800 is not coming in?? This landlord SHOULD be punished as far as I'm concerned...