@Ian Kinder Thanks for chiming in here.
Ultimately you'll want to get "legal advice" from an attorney that handles these types of scenarios for your specific state, but from my own experience here's what I did.
1. When I was just starting out, I formed a quick LLC in Delaware or Wyoming using one of the online LLC formation companies (LegalZoom, etc) - Making sure my registered agent is not myself and listed at my own home address. In order to bank in Michigan, you most likely will need to register this LLC as a "foreign entity" (just Google the steps). I then will list the property I'm holding in the operating agreement of the LLC (that's how you identify from the LLC's organization side that you own property that is held in the LLC, and not just naming it at the county level).
2. Next, I would go to the county recording office and "quick claim" the deed from your individual name to your LLC. Once again super easy to do but just need to do a little research.
3. Next, I'd open all utilities in my LLC's name and have all the mail go to a PO BOX that I set up for my LLC(s).
4. Next, if I was hiring a property manager, I'd give him/her my EIN number once the LLC is official so that statements at the end of the year are easily completed by my accountant for K1's and Schedule E's.
As you buy more and more of the same type of property (STR's) then you will then need to decide to place the properties into a trust or create a separate LLC for each one (More tax preparation and fees). If paying cash each and every time, I'd suggest talking to a estate planning attorney and stacking those in a trust(s) for the purpose of holding all STR's.
If you begin to flip properties, then you'll need a separate LLC that is building credit and a P&L so you can navigate financing in the future. Don't mix asset classes IMO. We have them currently structured as follows:
-All STR's are held in separate LLC's under a holding company.
-All FLIP's are completed by one designated LLC that retains profit and builds credit. We pay ourselves as employees.
-All LTR's are held in LLC's and trusts only depending on the partnership structure.
-All assignments are completed by a separate LLC for risk mitigation.
-All "Subject To" are completed and held by a separate LLC for risk mitigation.
Many different ways to structure your companies, but get advice early and don't just listen to me or anyone else on here unless they are legally able to provide you the advice. Each state is diff. This is what I did, not suggesting what you should do...
Congrats and keep stacking em!
When scaling a real estate investment business, there are several significant challenges that we had to overcome while getting to the 7 figure mark in holdings and roughly $10K net cash flow.
Let me preface this to everyone: "Everyone will have a different take on what are the most important aspects to scaling your investment business, so while I want to have a healthy debate, I'm not ranking or ordering these in any sort of hierarchy of importance."
Here are the most common issues we faced...
It's important to note that each real estate market and investment business is unique, and the specific challenges faced during scaling may vary so don't use this as a blueprint for your own business until you get some advice from your mentor or coach. Don't re-invent the wheel is my advice...
Best of luck everyone and don't stop hustling!
100% Agree haha. I deal with a lot of problem tenant solutions in my state.
I'm not the first to talk about this strategy and won't be the last so feel free to chime in here. Over the past decade of deploying a very successful BRRR model across the Pacific Northwest, I've been able to perfect my "cash for keys" process. But before I give you my play-by-play, let me first overview what this concept includes for anyone new to property management or owning rental properties.
**DISCLAIMER: "Always seek legal counsel regarding tenants rights in your state and speak with a trusted and licensed property management company before doing any of this!**
"Cash for keys" is a strategy that landlords can use to encourage a tenant to vacate a property without having to go through a formal eviction process. This can be a useful tool in situations where a tenant is uncooperative or unwilling to leave, but it's important to approach the process carefully to ensure that it's successful.
Here are some strategies that I use for cash for keys with a stubborn tenant:
Start by having an open and honest conversation with the tenant. Explain why you need them to vacate the property and the benefits of accepting cash for keys, such as avoiding the eviction process and potentially receiving a financial incentive to help with moving expenses. Ask them questions on what they ultimately need to make the move - is it time? is it money? is it links to available rentals? Dig into what they need and see if you can provide the administrative support as I mention in #4 below. Next, ask them if you can inspect the property for any damage prior to agreeing to the payment amount. Take pictures and measure your risk/reward. The walkthrough can play a critical role in determining compensation. Many investors skip this step because they are so "stuck" on getting the tenant out.
Determine a fair amount of money to offer the tenant in exchange for vacating the property by a specific date. This amount should be enough to provide a financial incentive for the tenant to leave but not so high that it becomes prohibitively expensive for you as the landlord. In Oregon where I own most my properties, relocation fees for no-cause evictions is one months rent. I typically provide that as a starting point and then assess my situation/budget for the BRRR/and timeline for my next move with the investment.
Put the agreement in writing. This should include the amount of money being offered, the date by which the tenant must vacate the property, and any other terms and conditions of the agreement. Let them know that your "attorney will draft it" so they know you have legal means if things go sideways. Make sure it's signed prior to you handling the compensation. A good way to do this is have it electronically signed the night before you meet with them to exchange money. Get their email addresses and draft the documents. Inform them that loitering or come back to the property will constitute trespassing.
Consider offering the tenant additional support, such as help finding a new place to live or arranging for movers. This can make the process less stressful for the tenant and increase the chances that they will accept the cash for keys offer. I will even go as far as paying for the UHAUL for local moves and using the proactive scheduling method..."So how does Saturday, March 7th work at 10AM? I'll have the truck here for you and I'll help you guys move. Play ball with them.
Be prepared to follow through on the agreement. If the tenant accepts the cash for keys offer, make sure you provide the agreed-upon amount of money promptly and follow through on any other commitments you made. This can help build trust with the tenant and ensure a successful outcome. I typically have a cashier's check from the bank with the tenant(s) name on it. I'll then take a picture of it in their hands so I have proof it was provided.
Make sure to have new locks installed the day the key transfer happens. I typically wait at the property until the locksmith or handyman has rekeyed the entire property. Helpful hint here - Always install key code locks that can be reprogramed. Then a locksmith isn't necessary.
Don't forget to transfer all utilities to your name the same day as key transfer! No internet = no tenants a lot of the times...
Ensure them you'll leave them a fair reference if any future landlords contact you about their tenancy. You should notice I didn't say "Positive Review" or "Great Review" - this is critical to the psychology of such statement.
Overall, the key to using cash for keys successfully with a stubborn tenant is to approach the process with empathy and open communication. By being clear about your expectations and offering a fair financial incentive, you can increase the chances that the tenant will accept the offer and vacate the property without having to go through a formal eviction process. And always remember evictions can cost typically 2X-5X than CFK's - But your time is the most valuable LOSS in this all!
Thanks for your comments @Evan Polaski - All valid points.
@Allan C.Totally agree 100% and I should have prefaced the entire post as this should be used for newbie investors with limited cash on hand to get started with short term holds/BRRR. Comparing a seasoned investor and their leverage/equity/cash position is going to drastically change how they evaluate areas for growth and their portfolio building strategy using specific metrics. Most of the first time investors I know with have limited DP money and need to cash flow from the start or they will not be able to fund their LLC's operating expenses, PM, build reserves, etc to acquire more doors in a reasonable time frame. I'm coming from the syndication side, so IRR is very important to the mix as well. It was my mistake to blanket statement that CoCr was the most #1 priority vs. other key metrics to use in specific situations based on type of investor and their goals. A very liquid cash investor is going to have a different mode of attack vs. a financed investor from day#1. I'm old school so if it doesn't cash flow after I perform a BRRR, then I'm not banking on appreciation even if growth trends show it. NOI vs. APPRECIATION is a whole other argument :)
Agree to disagree. I've made millions and acquired tons of units by using this methodology. I see your point and agree that quality land & structures is super important. But I can also say that I've turned poop into gold. Knowing the markets and understanding demand is key as well.
When I first got started in this business my mentor said "Start with the numbers and be an expert at spreadsheets!" Boy was he right...This game is more underwriting than anything. It doesn't matter how much money you have, how long you've been selling real estate, or what property management experience you have under your belt. When you know how to analyze properties then you can make smart decisions, limit risk, and create faster acceleration with your portfolio. I tell everyone I mentor the same. Don't start with cap rate, gross rent multiplier, 1% rule, or any other metric. Start with CoCr!
When it comes to investing in real estate, one of the most important metrics to consider is cash on cash return (CCR). This is a measure of the amount of cash generated by an investment property compared to the amount of cash invested. Understanding CCR can help investors make informed decisions about which properties to invest in and can help them maximize their returns.
Cash on cash return is calculated by dividing the net operating income (NOI) by the amount of cash invested in the property. The NOI is the income generated by the property, minus all of the operating expenses, such as property taxes, insurance, and maintenance. The cash invested in the property includes the down payment, closing costs, and any other costs associated with the purchase of the property.
For example, if an investor purchases a property for $200,000 with a down payment of $50,000 and generates $20,000 in net operating income per year, the CCR would be 40% ($20,000 / $50,000).
A high CCR indicates that an investment property is generating a significant amount of cash relative to the amount of cash invested. This can be a good indication that the property is a good investment, as it has the potential to generate significant returns. However, a high CCR alone does not necessarily indicate a good investment, as there are other factors to consider, such as location, market trends, and property condition.
CCR analysis is particularly useful for investors who are looking to purchase rental properties. Rental properties generate income through rent payments from tenants, and the CCR metric helps investors understand how much income they can expect to generate relative to the amount of cash invested in the property.
Another important factor to consider when analyzing CCR is financing. If an investor finances a property with a mortgage, the monthly mortgage payment will need to be deducted from the net operating income before calculating the CCR. This means that the CCR will be lower if the investor finances the property, but it may still be a good investment if the CCR is higher than the investor's required rate of return.
In addition to analyzing CCR, investors should also consider other metrics such as cash flow, capitalization rate, and internal rate of return when evaluating a potential investment property. These metrics can provide a more complete picture of the potential returns and risks associated with a particular property.
In conclusion, cash on cash return analysis is an important tool for real estate investors to evaluate the potential returns of investment properties. Understanding CCR can help investors make informed decisions about which properties to invest in and can help them maximize their returns. However, it is important to consider other factors in addition to CCR when evaluating a potential investment property. By analyzing multiple metrics, investors can make more informed and effective investment decisions.
PHONE RINGS...My wife who does our real estate brokerage accounting and investment business bookkeeping just called me to say we owe $47K in taxes...{heart stops}.
BUT I didn't blink an eye because I understand the true tax advantages of this professional - So let me kick it off for the newbies...
When it comes to investing in real estate, there are several perks of tax shelter that investors should be aware of. A tax shelter is a legal way to reduce the amount of taxes paid on investment income, and it can be a valuable tool for real estate investors. Here are some of the benefits of tax shelter with investment property.
In conclusion, the perks of tax shelter with investment property are numerous, and they can help investors reduce their tax burden and increase their overall profitability. Depreciation, deductible expenses, capital gains exclusion, 1031 exchange, and self-directed IRAs are just a few of the tax benefits available to real estate investors. By taking advantage of these tax shelters, investors can maximize their return on investment and build long-term wealth through real estate.
BOTTOM LINE: Talk to a licensed CPA who can tell you what to do to save the most money possible!