All Forum Posts by: Greg Scott

I experience behavior like this every day.

You may not like what I have to say.

It seems that the biggest problem was how you managed the process.  Your lease should specify how a tenant breaks a lease.  Saying "no problem" should never be part of the process.  Everything should be written.  If his lease was formally terminated, and you have a new tenant coming, he is out and does not have the option to stay.  If he stays anyway, most leases have a punitive holdover clause that would charge him bucket of money because he is injuring not on your property but also the incoming resident.  We would never extend a lease to a resident misbehaving like that.

I'd encourage you to tighten up your procedures and, following your lease, get this resident out at the soonest possible time.

I'm curious why you would want to do this.  This seems mostly an academic exercise as lease rate and Cap Rate are largely set by the market. You don't get to pick them.

The math should be fairly elementary. NOI / Cap Rate = Value. With NNN there is no reduction from operating expenses so monthly NNN x12 should equal NOI. At any fixed valuation Cap Rate and NNN must be perfectly proportional. If NNN goes up 10%, Cap Rate must go up 10%.

Realistically, these are things that should have been discussed before you started. Changing things now is much harder. Let's break it down into two pieces, the LLC and the partnership

The LLC

Your current operating agreement should lay out ownership structures and contribution. It should also indicate how you might add or remove members. If it does not, there are only two solutions. 1) You could restate your operating agreement. I've twice asked attorneys to do that and both times they refused. They said it was a lot easier and better to simply create a new LLC to properly match what you are trying to do. 2) So, that is the other route, creating a brand new LLC.

The Partnership

The hardest ship to sail is a partnership, and there is no "fairest way" to do things.  There are so many pitfalls going into business with relatives, there have been books on the topic.  Changing things after you have already started the business throws up a bunch of red flags. These issues should have been ironed out in advance.  You are in dangerous territory. I would be very, very careful or holidays will suck forever.

Unless you choose to remove the husband from the lease, they both remain leaseholders even if he is not living there. They have joint and several liability.  In other words, you could get payment from either or both.

At the end of the lease and beginning of a new one, the wife would have to qualify by herself.  It may seem harsh to terminate her tenancy, but they are in an emotional time and "comfort of home" may feel better now. However, if she really can't afford the property and she gets evicted later, she still has to move and then has a bigger problem of damaged credit.

But, do not rush to a decision with no information.  She may be getting alimony payments sufficient to allow her to qualify on her own.

First, you should know that 75% of the rent on the lease counts towards your income. If you have a rent property with good cashflow, odds are you are BETTER qualified for the next mortgage than if you sold the rent property. The downside of trying to get a mortgage after you have a rental is that you can't walk into any bank because they do not understand how to calculate DTI correctly. Talk to a company that works with investors.

Frankly, I would hesitate to sell the property.  If you had sold it a year ago, you could have taken the homestead deduction and paid zero capital gains on the increase in value.  However, if you sold now, you would be hit with capital gains tax and depreciation recapture. 

Finally, I recommend you check out Lifestyles Unlimited.  They provide great education on how to properly buy and manage rent property and they have a huge physical office in your backyard.

Sounds like you have been letting fear get in the way of taking the leap.  You have enough to buy multiple rent properties.  With $150K, I could easily put together a portfolio of 6 rent properties from deals I see every week, including last week.

Just get started.

What is your interest rate on your mortgage?

If you know how to make rates of return higher than that, I would say it is better to invest the money than pay down your mortgage early.

If you don't know how to do that, then either pay down your mortgage or learn how to improve your investment returns.

A friend of a friend lives in a development just like this in Ann Arbor, Michigan.  I went there and saw the place about 10 years ago.  Occasionally, I see both of these people.

Out of curiosity, I asked what it was like living there and how it was going.  This was his summary:

The upside is the feeling of community.  The downside is that 10% of the people do 90% of the work to maintain the community.   The 10% that care eventually get burned out.  He was one of the 10%.  They were looking to move.