All Forum Posts by: Greg Scott

Niko:

Here is how I have done it before:

 - Buy the property in your name

- Form and LLC

- Quit claim the property into the LLC

 - Record the deed

- Change your insurance policies to reflect the LLC as the owner.

Doing this you do run the risk that the lender will call the note because of the due on sale clause.  Realistically, it seems a very rare that it happens.

To avoid all the brain damage from the above, another strategy is simply to beef up your insurance coverage.   I have $500K liability on all my properties and a $2M umbrella.   Those two things are going to cover 99.99% of potential issues.

Chris:

Selling would create a taxable event for you.   Unless that property just makes no sense for you any more, it is probably not the best financial decision.

A cash-out refi will likely give you $1M or more to go buy more real estate and you won't pay taxes on the loan proceeds.  It is a far better solution.

It is worth noting that on a commercial loan the property finances are much more important than your credit score.  Actually your tenant's credit worthiness will likely be more important than yours.   I would see if you can get a 25 year Am to maximize cash flow.

Consider getting a cash-out refi on your personal residence too.   If you can borrow at 5% and earn at 20%+ it is a no-brainer.

Good luck

@Jonathan Roberts

Be VERY careful with Michigan taxes.  Historical taxes are NOT an indication of what you will pay going forward.

A few years ago Michigan passed a law that your taxable value cannot go up faster than inflation.    Over time the value of many properties has grown much higher than the taxable value would suggest.   When a property is sold, the cap is removed and taxable value will rise to the current SEV.    

So, be sure you look at the tax rolls.   Compare SEV to Taxable Value.   For example, if Taxable Value is half of the SEV, expect the taxes to DOUBLE.   If Taxable Value is about the same as SEV, then you won't see a large bump.  (In Michigan, SEV should be 1/2 of market value)  Of course if you pay way above 2x SEV, your taxable value may still go up at purchase.

The property taxes on my 24 unit were $24K the year after I bought it but the previous owner was paying $17K because he had owned it a long time.   Fortunately, we planned for that.

Jacob:

Congrats on taking the first step.  That is the most important thing.

We all make mistakes, but yours wasn't a big one if the property still cash flows.  Thumbs up for  having adequate reserves.   Time will solve that minor bump in the road and you will never look back.

A few suggestions.   1) Be sure to rehab the one you have vacant ASAP.  Don't try to do it yourself unless it is super easy and quick.  Time is money.  Hire a contractor, get it re-rented, and start cash flowing.

2) Learn as you go.  You may learn it doesn't make sense to rehab the 2nd unit in which case you can sign your tenant to another year.   Or, you may get such a huge rent bump, it may make sense to let your lease expire and do an even bigger rehab on unit #2.

Keep moving forward.   

Jonathan:

Congratulations on getting started so young and good luck!

In the commercial loan space BRRRR has always just been a cash-out refinance and very common. In Single Family it disappeared for a few years so is now "new again" so was given a name. I make this point because the SF business has some big differences from MF and you need to get educated on the differences before you really know if you have a good deal.

True MF properties (5+ units) are valued based on NOI. With the little that you've given me this looks like it could be a good deal. However you haven't given an estimate of NOI and are missing the most difficult component of a small MF property: the cost of property management.

Please re-post with more info or feel free to IM me for more specific questions.

David:

Is the seller paying you rent?   Usually if they stay for a while, they should.  Delay rehab until she is out.

Some of my contractors refused to work on an occupied house.  Others give you a discount for having a vacant house because they don't have to deal with the hassle of people and furniture.    It may be cheaper for you to wait.

Aside from that, why would your insurance policy need to be any different from doing repairs on a tenant-occupied house?  The biggest issue insurers usually have is a completely vacant house.  They worry about theft so you have to buy a builders risk policy.   

Try Insurance One in Southfield.   I've used them for rent properties.   Nationally, I use NREIG and depending on the neighborhood, they are often cheaper and investor-oriented.

Good luck.

Corey:

Your lawyer should be helping you.  If he is experienced, he should be telling you what the restriction means.

Don't close until you are comfortable.   Work the deal, if you need to, so you can get there.   For example, if the seller is pushing you to close on time, you may have uncovered a land mine.    Be more cautious.   If it is no big deal, the seller shouldn't mind waiting another week so you can understand the issue.   Now, if the seller is in dire need of cash and you want this deal, you also might work out an arrangement for a non-refundable deposit that will be applied to closing as long as you get 7 more days.

Good luck.   Happy to take a peek at the docs if you want, but I do think you lawyer should be helping you with covenants.

Isiah:

Well the most important thing is your contract for rehab, including the terms and conditions you have in there.   You should have a lawyer help you with the legal stuff.   On your end, you better specify EXACTLY what work is expected, EXACTLY what materials should be used, and use your contractor's quote to contractually note a SPECIFIC cost  (do not pay by the hour).   Note, changes are common.  Handle them as addendum.

Critically important is documenting when you pay.  NEVER pay up front.  You can pay along the way, but always incentivize the contractor to finish the work to make his profit.   Also, you should have a penalty in your contract for exceeding a specified time limit.    If you are reasonable a good contractor won't mind that at all.  (For example, if the contractor says the rehab will take 2 weeks you can put in an clause saying $100/day penalty for every day over 3 weeks.)

Your accountant may want you to sign the 1099 paperwork if you do this a lot.   Then, when done, get a lien release.

Jane:

My Section 8 tenants often do not have enough spare cash to buy a new 9 volt batter to keep the smoke alarm from beeping.  They aren't going to buy insurance on their own.

Clean sheet of paper, the easiest way to handle it is to up your rent a few $ and as an amenity, YOU pay the premium on their renters insurance.  Then you have the added peace of mind that it stays in effect and isn't cancelled.

If you are worried about legal issues, don't get advice here.  Ask an attorney.   On regulatory issues, you should be able to get answers from your local Section 8 authority.

Be careful to parse marketing hype from reality.

Autonomous driving vehicles will have a huge impact on real estate, but not until the manufacturers, government, and insurance companies all agree on how it will work.    You probably won't see much change in 18 months.  However, 10 years from now might look very different.