All Forum Posts by: David Fitch

Thanks! I'll take a peek at those you mentioned. Much appreciated.

Curious to get some tips from folks that have a larger portfolio (say 50+ units or larger) across multiple MF buildings (so different acquisition dates, financing, etc.) and what software you use?

My property manager uses AppFolio, which is fine for transaction level detail and a few dashboards. I use Quickbooks online for the formal accounting so it's easy for my tax guy to get in there and do his piece every year, since I have an LLC per building. Are there other SaaS platforms folks use to aggregate views for their own use? Any suggestions are welcome.

First, they have to maintain required reserves that are dictated by regulators, and that money isn't part of what gets distributed to shareholders as profit. 

Second, as a result of the same changes I already mentioned, those reserves have gotten absolutely crushed. Example: let's say an Insurer brings in $20B in revenue. Let's say that $17B of that normally gets paid out in claims; that $2B of that is the cost of operating the company, and that leaves $1B. Let's say $500M of that gets put on the pile of investable cash, and the other $500M is distributed to shareholders as dividends. 

Now, let's look at the severity of events over the last 5+ years. There have been MULTIPLE $4B+ individual loss events between fires, floods, etc. That is orders of magnitude larger than previous decades. Using your analogy, it would be equivalent of that high roller sitting down with a million bucks, and within a few hours being up $250M. I guarantee you the Casino would politely cut that person off LONG before they made that much money. It happens all the time - if someone goes up too much, they suspect cheating but if they can't prove it, they simply as the player to leave.

I'm not an Insurance Agent, but I have worked in Tech within Insurance Companies for most of my career, so I understand the business model quite well.

Punchline - your comparison to a Vegas Casino is interesting/funny, but not accurate in any way. 

Every casino game has well known and understood odds; all of them favor the "house", some more than others. But there are a very small number of variables in each game, and none of those variables EVER change. Over time, the Casino can always see what their actual results are as compared to the statistical odds.

Conversely, Insurance Companies use vast amounts of data to underwrite the aggregate risk associated with pools of people, and with certain events happening. They have for decades been extremely good at predicting the likelihood of these events happening, and pricing the cost of of those events. 

The real answer here is that climate change has dramatically changed the frequency, and severity of all manner of events (hurricanes, tornadoes, floods, fires, etc.), and everyone - including Insurance Companies (but also Governments, etc.) are struggling to keep up with that rate of change. Historical models are no longer predictive enough, so Insurance companies are having to withdraw from markets where regulators prevent them from raising rates enough to cover the costs they believe are likely the "new normal". This has been coming for years, and people have been saying that the cost of climate change will start rearing its ugly head more and more. Welcome to that reality.   

Brian -

I looked at your site; I'll submit a request for a consultation. I am open to the idea that I should have more support specific to this topic.

Thanks

David

Thanks Brian; I appreciate any and all input. 

To be clear, I may be a bit more sophisticated than the ~10 folks per month that you referenced. I run syndicated REI deals, each with a multi-LLC structure, requisite SEC filings, state filings where investors reside, etc. I use attorney's for most of that, including developing the Operating Agreements, and handling the filings, but I register the LLCs myself. I could certainly engage them in this scenario if justified. However, I'm the arbiter of when an expense is justified because I'm the one writing the checks. I reject the assumption that an attorney is required for any and all activities that have a whiff of complexity. I deal with similar complexity every day. I also read contracts, and interpret regs constantly, so I'm perfectly willing to debate and defend a position that isn't contradicted by black and white language, with an IRS Auditor or anyone else.

Your point about it becoming less profitable to them is valid, but irrelevant in the scenario I described. As I said, my custodian already allows it, and they aren't suggesting that I use an attorney that results in them receiving any additional $$. 

Your last point is the one that differs from reading that I've done; which is to say, I understand that I CAN pay for services in support of my IRA out of my IRA (including formation of an LLC), but NOT with personal funds (which you're saying is acceptable). I don't see anything written by the IRS that allows the latter, but not the former. Or, perhaps you're saying it is allowable to pay for activities considered to be "administration" of the IRA with personal funds, but not for services that support investments held by the IRA? That is a distinction I could understand, but then I'd be on the hunt for where that is spelled out by the IRS, tax court, or other pronouncement.

In any event, I appreciate you reading my post and responding. 

David

I know there are a number of threads on this topic, but none that I've found addressed my specific question / dilemma. 

I already have an established SDIRA, and have done a few investments through my current Custodian via their normal compliance review, and subsequent funding process on a deal-by-deal basis. I am now trying to establish a Single Member, Manager Managed LLC of which my SDIRA will be the sole member, and I will individually be the Manager. That will then become the only investment at the Custodian level, and all individual transactions will be owned by the LLC. Like many of you that have done this already, my objective is simply to have checkbook control and be able to move quickly when deals come along.

My current custodian is supportive of this model, however they said that if I register the LLC myself, that would be considered a prohibited transaction. Curiously though, they said I was free to use personal funds to pay an attorney to register the LLC for me, which seems to be MORE of a violation of the spirit of the rules than would be the act of registering an LLC. When I pressed them and asked for a link to a tax court pronouncement, or other IRS guidance on that, I was simply told "The IRS is quirky sometimes on how it decides things". That was not a satisfactory answer, and I'm skeptical that they even know what the IRS has "decided" on this topic, so I'm looking to others here that may have encountered this before.

I have exhaustively read IRC 4975 and related docs (even the IRS guidelines for auditors examining prohibited transaction violations), and I can't find anything to support what I was told by my custodian. Further, when I told them I was comfortable with my own analysis of the reg and that I would defend my decision to the IRS if ever required, they essentially said "OK, but our Compliance department may not approve the structure unless an attorney registered the LLC", which I find to be absurd. There is no legal basis for that requirement.

Anyone encounter this before, or have thoughts on this?

Thanks,
David

2% rule is not attainable anywhere in SoCal - it's hard to find even in the more well known "cash flow" happy investor cities. You'd be lucky to find a place that you could rent at 1% of purchase price in SoCal - even that would be near impossible unless you're looking at larger multi-family properties. Most realistic on SFH rentals is you may get a monthly rate of between 0.5% - 0.75% of purchase price.

As mentioned, whether or not you can have positive cash flow on a $700k purchase price depends on:

1) How much of that is financed (and by extension, what your monthly PITI payment amounts to).

2) How much your other total monthly costs are (10% for maintenance? 5% for vacancy allowance? 8% for a PM? Gardening, Utilities, etc.)

3) Add #1 and #2, and compare to how much you think you can rent it for. Rentometer is a good source, as mentioned.

If 1+2 > 3, then you are not cash flowing. If 1+2 < 3, then you are. 

Obviously the biggest lever you have to move that needle, is how much $$ you put down. The more you put down, the less your monthly out of pocket expense, the more likely you are to achieve positive cash flow. 

It's not clear why you zeroed in on this property specifically. Typically you want to start with an understanding of rent to purchase price ratios in a given area, and if you find a deal in that area with a favorable ratio compared to everything else, then you start a more detailed analysis of that specific property. It seems like here, you started with the property and are trying to reverse engineer what price you should pay based on how close you can get to some mythical rule. If that's what you're doing, I'd recommend taking a step back and looking at the broader area first, and then deciding if this specific property is a good deal or not. 

My only contribution is to acknowledge that there are a higher than average number of funny responses in this thread. It's clear that there are some experienced, well-worn landlords around here :)

That aside, I agree with the general sentiment - I wouldn't do it. Either run it as a business (e.g. profitably), or don't rent it at all, and just sell it. Take the equity off the table and do something else with it rather than just giving it away to someone else for free in the form of negative cash flow. 

I'm not sure it's fair to lay that at Tyler's feet. He seemed pretty transparent about both the ups, and downs - the first post is replete with red flags that he ignored, as then did the theoretical others that lost their life savings as a result of his subsequent posts (which, maybe happened, maybe not). 

The net result is, I think, still positive for the community when real, unbiased investors (even naive new ones) post truthfully about their experiences. The reality in this line of investing, as with any other, is that human beings are greedy and dumb, and a percentage will always put themselves in a position to lose everything even for the slightest glimmer of a chance to get rich. It's a spectrum - some will lose it all in one shot; some will simply give in to the greed a little bit, but not enough to be unrecoverable; some are completely unemotional and analytical about every angle, every decision, and don't really make mistakes. 

If someone read this thread and plowed half a million bucks into a bunch of houses with one provider, without doing any more analysis, just because Tyler popped into this thread once a month to claim victory on his rent check, I'd call that an inevitable sucker and his/her money being parted. Sad? Sure. Inevitable, here or elsewhere? Yes. So, I don't think Tyler needs to carry that on his back. He paid a fair price for his lesson; others are accountable for their own actions.