All Forum Posts by: Brian Bern

That is hilarious. Where did you find that gem of an article?

Thank you for the confirmation. My wife and I may be able to qualify based on our current income. At least for the first rental. Perhaps we go that route for the first purchase. But like you said, we'll see what the lenders say.

I'm meeting with a couple of mortgage brokers next week, but a friend of mine mentioned that the mortgage companies are no longer offering 100% financing on income properties. He could just be blowing smoke in my face to distract me from my goal of financial independence, but I thought I'd throw this out to the forum.

Has anyone else encountered this lately? He claimed it is part of the fallout of the subprime mess. If so, what kind of percent down are you all seeing? My wife and I were planning on funding an emergency fund to cover unexpected maintenance and vacancies, but were hoping to keep that money and finance the property with a 100% or 95% loan.

Additionally, when during the home buying process should this issue have come out into the open? The closest thing I can think of is in the title search, but the title companies are really just checking the title for current and/or potential liens on the property. Is this something that as a buyer you must check into yourself?

My parents are trying to sell their house in Carmel, New York. They just discovered that the 2 additions done on the house before they purchased in 1984 got permits, but were never given CO's. The permits are from 1964 so they are 43 years old now. Can the inspector force them to tear open walls to inspect the electrical?

Thanks REI. I just wanted to share some of the research that I have been doing myself. As an engineer I tend to ask the question "why" a lot. Like "why" is an LLC the prefered corporation type for real estate investing. It's pretty obvious that the wife understands me well enough to track down that book by the smart start series so that I could get the answers. I'll still use accountants and lawyers as needed, but I like to have a general understanding of what they are talking about.

I was asking the same question for a long time until my wife bought me the book, How to Start a Business in Colorado from the Smart Start Series written by the Entrepreneur Press. Some exerpts are listed below. I've condensed a lot of the information. A lawyer that specializes in the formation or corporation can obviously give you far more detail and information, but in the mean time, the basics are listed below...

General (C) Corporations
A general business corporation is the most formalized and most common type of corporation. In a c-corp, its owners are stockholders, and ownership is based on shares of stock. There is no limit to the number of stock holders. SInce the corporation operates as a seperate entity, each stockholder's personal assets are protected from attachment by creditors of the corporation. Thus, as a stockholder, your liability is limited to the capital that you have invested in the purchase of stock.
Advantages:
1. a corporation has a lifespan independent from its owners (stockholders)
2. fringe benefit costs are tax-deductible
3. personal assets are protected from business liability
4. ownership can be transfered through the sale of stock
5. It may be easy to raise operating capital through the sale of stock
Disadvantages:
1. Incorporating involves considerable start-up expenses
2. profits are subject to dual taxation - as profits and again as dividends
3. many legal formalities exist when filing and trying to maintain corporate status
4. activities are limited to those defined in the corporate charter

S Corporations
The S Corporation is a form of the general corporation that has a special tax status with the IRS and many states.
-The most attractive benefit of an S corporation is the avoidance of double taxation. S corporations avoid this dual taxation because all losses and profits are "passed through" the corporation to the shareholders and are declared only once to the IRS, as part of each shareholder's income.
-There is a downside however, all profits must be taxed. If the corporation makes a profit, each share holder is required to pay taxes on their proportionate share of that profit regardless if that profit is distributed or not. If there is a disagreement with the IRS, the IRS can obtain payment from the assets of individual shareholders.
-On the other hand, if the s corp loses money, there may be a significant tax benefit to it shareholders. THe loss is passed on to the each shareholder proportionate to their stock ownership.
-As in other forms of corporations, each shareholder's personal assets are protected from the business's debts.
-In order to form an S Corporation, you must meet specific requirements set by the IRS (I only listed some of the larger items of interest below). Your business must:
1. already exist as a corporation (c-corp most likely)
2. have no more than 75 shareholders
3. Be headquartered in the US
4. Not have shareholders who are nonresident aliens
5. not be a financial institution that takes deposits or makes loans
6. not have more than 25% of the corporation's gross receipts from passive sources, such as interest, dividends, RENT, royalties, or proceeds from the sale of securities. This provision has several conditoins, so be sure to clearly understand how it may affect you if you company expects income from these sources.

Limited Liability Company
LLC's are still a relatively new and highly touted business entity. It is similiar to an S-Corp without its restrictions. In an LLC, owners are referred to as members. The loss of a member through death, retirement, or resignation can result in the dissolution of the business. However, like a corporation, an LLC offers some protection for personal assets from business creditors. An interesting characteristic is the lack of limitation on the number and nature of its members. However, most states will require at least two members to form an LLC.
Advantages:
1. profits and losses pass through the company to its owners for tax purposes
2. personal assets are protected from business liability
3. there is no limitation on the number or nature of owners
4. an LLC is simpler to operate than a corporation
5. LLCs are not subject to corporate formalities
6. Owners may participate in the management of the business
7. Some tax advantages result from business losses or high profits
Disadvantages
1. an LLC may be recognized differently in different states
2. limits of liability have not been extensively tested in litigation
3. legal assistance is needed to properly set up and structure an LLC

ENJOY!

I'm assuming you are past the "motivational" step of the process (ie. any of the Rich Dad Poor Dad series and Think and Grow Rich).

Let me state now before I go any further that I am a newbie myself. I haven't done any deals yet except for the house that I live in.

A good book that a friend loaned me is a book titled "How to Buy & Manage Rental Properties" by Irene and Mike Milin. The book is now 20 years old, but with the exception of the out of date financing and interest rates, still seems relavent.

Another book that my wife recently purchased for me is from the Smart Start Series "How to start a business in Colorado". It goes through the steps necessary for creating an LLC and explains the pros and cons of other business structures (s corps, c corps, partnerships, limited libability partnerships, etc). It then goes into the steps of creating a good business plan and goes over some of the essential finance and accounting methods.

As a newbie myself, I am looking to create my LLC some time in Q2 of 2008 and then to close on my first deal some time in Q3 or Q4 (assuming I can find the property the best fits my goals).

Good post.

Thanks for the comments guys.

REI,
I agree that I may not need a full blown spiral bound plan at this time, but I would like the first purchase to be part of an overall plan. At the moment my wife and I are focusing on generating the capital needed for an adequately funded reserve. Rather than sitting around while that happens, we are beginning to put together a plan on how we are going to create and maintain our "empire" as Heathen put it.

Heathen/MikeOH,
I hadn't thought about the impact a well presented business plan could have on the bankers. I was planning on doing a business plan mostly for myself to create a "roadmap" as REI put it. Something to give me direction going forward and something to help evaluate where I am and where I came from in the future, but if I am going to go to that trouble, why not go the extra step and create something presentable for the banks. This is where I was having dificulty deciding if a well thought out business plan would have the same impact for a real estate investor as it would for say a small restaraunt owner trying to get funding. Looks like it will.

I'm still a REI newby. I purchased my home last March and have since made a new years resolution to buy my first rental in 2008. I've read many of the forums on biggerpockets, have already read as many motivational books I need, and now I am into the nitty gritty books with the details of running a business. The book I am reading through at the moment is from the Smart Start Series, How to Start a Business in Colorado. I believe a lot of the essentials apply to REI, but not all of it.

My question to the biggerpockets community is how important is it to have a detailed business plan going into REI's? I understand the importance of analyzing each property before going forward with a deal, but do many of you have a business plan for your corporation as a whole, or is it more of a property by property analysis?