All Forum Posts by: MJ S.

Hi David! Congratulations on finding your first two homes. Many others have weighed in with good insight. Here are a few things that may have been missed.

Regarding insurance - the insurance should follow title. If the property is titled in your personal name, the insurance should be also. If the property is titled to the LLC, the insured should be the LLC.

The insurance policies will be different than typical home owner policies. The type of policy for a rental home is called a Dwelling Fire policy.  This type of policy will offer landlord's liability coverage, and will offer the proper coverage for a rental.  I would recommend at least $500K in landlord's liability coverage. Any knowledgeable agent will know this and be sure you're covered correctly. 

Typically a Dwelling Fire policy will have very little, if any, personal property coverage. The easiest way to define personal property is "all the stuff inside the house" Since landlords don't usually provide furnishings, decor, etc., it's typically not included, but on the off chance that you're providing furniture or anything else for the tenants, it's easy to add personal property coverage, as well. Be sure to let your agent know if you have items in the home that need to be insured. (Built-in appliances are already covered)

As mentioned above, if you choose to title the properties under your own name, you will want the insurance in your name. Many insurance carriers will limit the number of rentals that they will insure on your policy. It's common to limit the number to four, but check with your agent on what they allow. If you purchase more rentals, you may need to look at a commercial policy... which may or may not be allowed in your own name, depending on the insurance carrier requirements.

If you choose to title and insure the properties under your own name, a personal umbrella is beneficial, although more risk (the rentals) will increase the cost of an umbrella policy (vs if you have a personal umbrella for your home and autos only). 

If you choose to insure and title the properties under an LLC, a personal umbrella does not protect you from claims on your rentals since the lawsuit will fall to your LLC. You will want a commercial umbrella policy for that coverage. However, you could also discuss raising landlord's liability to $1M on your individual policies. Again, talk to your agent to determine the best options for your situation.

Regarding deduction of expenses - Yes, you can deduct expenses with an LLC. You (or your accountant) will file a separate tax form for the LLC. You will want to set up a business checking account in the name of the LLC, and even if you don't set up an LLC, I would recommend a separate business account for your business transactions. It's easier to track income and expenses, and much more convenient if you are ever audited down the road. Whether you're using an LLC or your own name, be sure to run all expenses and income through the business account, if possible.

Best wishes for lots of success!

Congratulations on starting your business and the formation of your LLC! It's always good to have a few potential investors in your contacts so that if it doesn't work out with one, you have a back-up (or two). If you attend local real estate investment groups, or even reach out on BP, you'll likely meet some hard money lenders. They are expensive, but a good resource and can usually close quickly (which can be a necessity with many deals). Private money isn't as easy to find, but is certainly available in your area. They can also close quickly, may be a better value with lower fees and interest, and potentially more flexible on terms than hard money. Again, local real estate investment groups or reaching out on BP will help you find private money.

Beware of any lender that requests fees upfront.  There are plenty of scams that promise low interest and fees for an upfront charge, and then take your money and run. Some lenders may request an appraisal fee, but be sure to do extra due diligence if anything feels sketchy or too good to be true. 

Private and hard money is available everywhere, however finding connections in your local area may provide more peace of mind since you are more likely to have the opportunity to meet and connect with the lender in person.

My pleasure, @Brandeis Brockman. Best of luck on your flips!

Hi Tim! I have some insight on local home inspectors. I'll message you. 

Hi Geraldine! Welcome to the wonderful world of real estate investors!

You might receive more valuable responses if you clarify your question and what you hope to accomplish. 

I'm a little unclear on how your home ownership relates to your potential LLC. Do you plan to use the home as a rental and wonder if you should put it in an LLC?

What type of real estate activities to you plan to pursue? Flipping? Wholesaling? Buy and Hold? Some entities have advantages over others depending on the activities of your business.

From both a tax standpoint and a liability standpoint, forming some type of entity is usually the best option. If you clarify a bit more, there are many of us on Bigger Pockets that would love to offer suggestions and share knowledge. :-)

In my experience, it doesn't make much difference to the bank if you're an individual or an LLC when applying for a line of credit.

Even on a business line of credit for an LLC, it's highly likely that the bank will request personal financials and a personal guarantee. If your LLC has been in business for awhile, they will want both personal tax statements and business tax statements for your LLC. Of course, this isn't relevant with a new LLC.

Banks will want your deposit accounts if they are considering granting a line of credit so if you have an LLC, they may want both a personal account and a business account with their bank.

If your situation allows you to take out a home equity line of credit, the rates are almost always more favorable than a line of credit. A HELOC will work with either a sole propietorship or an LLC, although the line of credit itself will be under your personal name (assuming your home is titled in your name)

With a hard money lender, it's possible that they will view you as more professional with an LLC (although that isn't necessarily true), but just like with a bank, it really comes down to the risk. Hard money lenders vary though so if there's a hard money lender you're considering, you may want to ask them directly if they have a preference.

Lending aside, there are many good reasons to use an LLC for your real estate business so regardless of the lending aspect, it's definitely something to consider. In most states, it's easy to apply. I believe the fees in Kansas (my home state) are $160 to set up and $50 per year to renew.

Hi Brandeis-

It's not necessarily true that private lenders run credit. Private lenders can vary dramatically in fees, terms, and protocol. 

Some private lenders may require a personal guarantee, and some just require the property as collateral. Some will require that you have a certain amount of skin in the game, and others may loan up to their LTV limit regardless of whether you invest $1000 or $100,000. And private lenders may have a set LTV limit of 60%, 70%, 80%... or some determine the LTV on a deal by deal basis.

When researching private lenders, you may want to confirm the following:

            What are the terms for fees and interest?

Some private lenders may require monthly interest payments, but some will let the interest ride until you sell the home so that you don't have payments during the process.

Almost all charge origination points and/or other fees. Be sure to ask about all the fees up front so you know before closing if there are administration fees, exit fees, etc. If you think you're clear on points and interest, you don't want to find out at the closing table that they have another $1000 in "other" fees.

Is there a prepayment penalty and how much is it?

And obviously, ask about the interest rate. Is it a set rate? Does it increase half way through the term?

            How long is the loan term? What happens at its expiration?

If they grant you a 6 month loan with a balloon at the end, what happens if you haven't flipped the house in that time period? Do you need to find other financing at 6 months? (Not always an easy task) Do they allow extensions on the loan? If so, is there an increase in interest, additional fees, etc?

            What about draws?

Will they fund all the money upfront or require draws? If they require draws, how long will it take you to get the additional funds and what is required when you request the additional funds? (photos of completed work? an onsite inspection? your word?)

I would suggest asking the same questions of hard money lenders.

As far as the difference between private and HML, private money doesn't have the same regulations so they may be more flexible with terms. In my experience, private money tends to be less expensive than hard money, as well.

Regardless of whether you work with private or hard money, developing a good working relationship is beneficial. Private and HML will often lower rates and offer better terms if you're a desirable client. Do a few deals with them where you pay early or on-time, respond quickly to their requests for information, and make working together easy... and they will want to offer their best rates and terms to you.

Hi Laura-

If you choose to work with an experienced private lender, they will probably already have their own contracts and documents prepared. Private lending contracts can vary greatly, depending on the lender. In most cases, there will be a mortgage or deed of trust (depending on the state), and a promissory note (or similar document). 

Some private lenders require a personal guarantee, and some do not. If they are also funding renovations, they may have requirements related to construction draws. If there are additional restrictions and/or qualifications, they may include those items in the mortgage or promissory note, or they may have additional documents and contracts. Private lending terms - rate, points, and pay-off - can vary dramatically from one lender to another so you might work with a dozen different private lenders and have different contracts and requirements every time. Of course, you can always have these documents reviewed by your own real estate attorney.

In the case of a newer private lender, or one that might prefer using documents prepared by the borrower, I think all would agree it's a good idea to use an attorney familiar with the real estate laws and regulations in your state. 

Best wishes on finding fabulous investment properties in 2016! 

Hi Marc-

Welcome to the Bigger Pockets family. I'm also in the KC area and we have a fabulous real estate market right now! I wanted to second Mike's post. He offered some great insight on wholesaling. It does take some time to build a buyer's list, as well as time to put together your strategy to find great wholesale deals.

As far as your considerations regarding SFH vs multi-family, keep in mind that there are more exit options for single family homes than for multi-family. I'm not necessarily recommending one over the other, as there is potential for great cash flow with multi-family - just offering the reminder that you will have more options to exit a single family home when the time comes.

Correct spelling of Brian and Michelle's last name is Winberry.