All Forum Posts by: Drew Shirley

If your note has a due on sale clause, the transfer to the LLC would trigger it. However, with a private lender, there's virtually no risk of the loan getting called.

Each lender is different, but many/most will want you to guarantee the note personally, whether the property is titled in your name or the LLC. Find non-recourse financing if you can but it's hard to find, especially for beginners.

From your perspective, you would want the property in the LLC instead of your own name, every day of the week and twice on Sunday.

If the seller is represented by an agent, you can't cut the agent out of the deal. If the agent's marketing found the buyer "ready, willing and able" to close, the agent's commission is earned and payable. Cutting the agent out now could get you sued. I know this because I recently successfully sued a couple of clowns who tried to do that very thing. 

OP, your attorney can act as your buyer's agent and collect a commission on the transaction. However, TREC prohibits brokers from splitting fees with non-agents, so you might have to re-work the contract (slightly) so that the seller pays his agent 3% and your attorney 3%. 

Good luck. 

I would talk to the lenders you want to refinance you and find out exactly what their criteria are. The appraiser might have good info but it won't matter if you can't find a lender to fund the deal. Most lenders also require seasoning before a refi - how long have you owned these?

Bil,

I recommend the series LLC for real estate investors. Each series can choose its own federal tax status, although it is treated as one entity for Texas franchise tax purposes.

If the rent is $600 per side, that's $1,200 per month or $14,400 per year, gross. Estimated net is $7,920, so I would not pay more than $79,000 for this property,

@Glenn Mayo is the rent is $725 AFTER you put in $40-50,000 in rehab, then run, don't walk, to the nearest exit.

For an income property, you need to evaluate the cash flow and not the comps.

Does the property rent for $725 a side right now, or is that "pro forma market rent?" Crucial question. How much do the units rent for now, and how much will they rent for after upgrading?

Let's assume it's $725 now. So that's $1450 per month or $17,400 per year gross scheduled income. Does the seller have actual income and expense statements? If so, get them. If not, assume expenses will run about 45% of gross income, leaving you with $9,570 per year in net operating income. 

So now, if you were buying that property for cash, how much would you pay for it? Well, if you paid $95,700, you'd get a 10% return on your investment. If you paid $87,000, you'd get 11%. $79,750 returns 12%, and so on. 

A purchase price of $125,000 returns 7.656%. Pretty lousy if you ask me. We want double digit returns for all our hard work, expertise, and intelligence. :)

NOW, you need to consider the return on the rehab investment. If you spend $40,000 plus interest on renovations, how will you get that back? 

If the renovations will allow you to raise rents to $925 per side, that's $400 more per month, $4,800 per year. Will that additional income carry with it any additional expenses? Let's hope not, but if you want to be conservative, discount the additional income by 20% to get $3,840 per year. So you spent $40,000 to return $3,840 per year, that's 9.6% per year. Not bad.

AND you increased the value of your property by $38,400 (on a 10% cap rate), which is great. Now you might be able to sell that property for $130,000 in a few years. 

Now let's talk cash flow. If we're assuming $9,570 per year in net operating income, that's $797.50 per month. So you don't want your monthly nut to be more than $800. Don't go into a negative cash flow situation. Ever.

So you should not pay more than $800 per month for your financing with the seller. Period. If your seller finances $95,000 at 6% over 15 years, that's $801.66 per month. So you either need a lower interest rate or a longer amortization for your loan than that. 

If he's stuck on price, you can offer close to asking price IF you get a 0% note. You could offer $5 down with $110,000 financed at 0% over 220 months - that's $500 per month. That could work for you. But always pay attention to that monthly payment.

If you get a monthly payment you can work with, have your LLC buy the property and you move in to unit A. Pay your LLC the market rent of $725 per month and use that money for rehab. That's almost $9,000 in one year. Then, move into unit B, rent unit A for $825, and rehab unit B. THEN move out and rent unit B for $825, and now you'll be socking away $1,200 per month or more for that new roof.

THEN replace the roof, raise the rents to $925 each side, and you've got $1,000+ per month in positive cash flow, or a property you can sell for $130,000+. 

"Do I need to hire a contractor to do the repairs on my investment property?"

Only if you want them to be done right.

You can sue the contractor in small claims ("justice") court if the total dispute is $10,000 or less.

You don't necessarily have to have an attorney... but in a typical breach of contract case in Texas, the plaintiff can recover his attorney's fees if he wins the case. 

It depends on whether the defendant has assets and can be located and stuck with the judgment.

Of course, you can structure it however you want, but it's pretty common for the money partner to get a preferred return - e.g., 2/3 of the profits, or his money back plus a 9% preferred return, THEN a 50-50 split of the remaining profits. This should all be spelled out in the company agreement. Good luck.