All Forum Posts by: Greg Scott

@Bill Gulley gives some good advice.

My reaction to the property you described was "that must be a rougher neighborhood".  You don't often see smashed windows and notifications in the nicer rental areas.  If the property has any significant value, usually the owner will at least pay someone to board up the open windows.

In nicer areas, you don't need smashed windows.   Tall grass is a sign, but also look for roofs that need replacing, rotted wood trim, overgrown landscaping, or any sign that you may have an owner that is unable to care properly for the property.  Often the outside is better than the inside.

I have heard (but not done myself) that a letter writing campaign to properties with maintenance issues can yield high returns.

Good luck!  I hope you find a good one.

Here is an alternate way to go.  It requires more effort and is more complicated, so it may be too much for a first deal.  Still, if you can manage it, you may be better off in the long run.  This is how I have been buying single-family houses.

1) Find a house in terrible condition, deeply discounted because a retail buyer cannot get a conventional loan on the place.  The price should be cheap enough that purchase+rehab is much lower than buying the nice fixed-up one next door.  The 70% rule is a good starting place

2) Get a hard-money loan (or private loan) for purchase and much of the rehab.   Get a reliable contractor to fix up the place as fast as possible.   Hard money loans are expensive, often 10%+ with points up-front, so you don't want to stay in them very long.

3) Once the rehab is done put a conventional mortgage in place.  Be sure to talk with a mortgage broker BEFORE you start this process to know you will qualify.  It would be a huge mistake to get stuck with a hard money loan.

By doing the above, it is possible to have a deal where you have 0%-20% "down payment" instead of 25%.  Moreover, you could wind up with thousands of equity from the start.   Also, because you bought it lower, your cash flow will be better.

Lorenzo:

Congrats on getting going.  You've taken some big steps.

I noted you said make offers on things that look like deals, but it wasn't clear how you were generating your deal flow.  How were you going to generate the list of deals?  Direct mail?  Driving for dollars?   Generating deal flow can be one of the more challenging parts.

Good luck.

@Justin Fox, I do the same.  I have $1M on each property and a $2M umbrella.  I do not personally know any Single Family owner that has been sued, but heard an insurance exec talking on a podcast who said in 30 years he saw a handful of liability cases each year exceeding $100K and the biggest ever was $1M.   That doesn't mean it can't happen to us, but the odds are low.

@Marcus Kennedy, I agree with Justin.  One KEY benefit of Real Estate Professional status is it allows you to take passive losses (e.g. excess depreciation on a rental) against active income (e.g. your spouse's W2 income).  Regular business expenses can always be applied against regular business income.

I don't know your specific situation so probably best to talk with your professionals.

Early on I put my rent properties in LLCs.  Later I joined a large Real Estate group where most experienced members didn't, so I stopped.  Then when I wanted to refinance some of the early ones I had to pull them out of the LLCs for refinancing and never put them back.   For liability protection I am really relying on 1) good management practices 2) good property insurance, and 3) good umbrella policy insurance.

For accounting, I created an "agreement" between myself and our LLC (it was a difficult negotiation LOL). The LLC "manages" all our properties for us. All my cash runs through my LLC bank accounts and the finances run through the LLC books. Mostly it just keeps everything clean for tax time.

In contrast, we have done some shared deals with family members. All of those we put into LLCs, but it was as much for the contractual arrangement between members embedded in the LLC operating agreement, with liability protection as an added benefit.

Yes you can deduct any legal business expenses, whether they are made within an LLC or as a sole proprietorship. Be sure to document it either way.

Regardless, I'd recommend getting a CPA on your team to help with your taxes.  A good one will EARN you more than they cost.

Robert:

I don't think anyone could accuse you of being unresponsive to a tenants needs.

I've had mold in my own house and have allergies.  Normally removing the mold and the source of the water fixes it, which is what we did.  I also have a house in Texas that had a leak behind the wall and expected to do the same.  Unfortunately in Texas, mold in a rental is treated like asbestos and I had to pay a lot for the guys in spacesuits to clean it all out.  Not sure the rules in PA, but expect the colder states are not as crazy on mold rules.  You may want to check on that for CYA purposes.

Assuming PA has no crazy mold rules, it sounds like you have gone above and beyond for this person.  I don't think I would have provided 3 months free rent if I resolved the problem quickly.

The part I'm having trouble reconciling is that he grew up in that house.  If he complains again, I might have a mold inspector come in to check. (Mostly to protect you; obviously if they find a real problem, it is something that could be corrected.)  If the inspector says the house is in normal range, I would tell the tenant and then stop doing repairs that may not be fixing anything.   

You may be better off letting them move out at the end of their lease.

Kristine:

Congratulations on getting your first rental!  That is a huge step and hopefully the first of many that take you to financial freedom.

Frankly, I would consider this situation to be a very minor worry.   Yes, they could theoretically be awful.  They could also be terrible in much worse ways than this.   (I wont elaborate so that you won't worry about those too.)  Remember, they are also worrying that you will actually close on the house, so it is a two way street.

Hopefully you have enough padding in your finances to cover any short-term vacancies or any repairs you may discover after the owners move out.  In your first deal these can be scary things.   However, 6 months after you have the place rented out you will look back and laugh at how worried you were about minor things.  I know I did.

Jasmin:

Glad you ran those numbers.  With the amount of money at stake here I would definitely sit down with your partner and write out exactly how each of you thinks this will work, and how it will work if you encounter problem A or problem B.  You may then want to consult an attorney.  Remember, you are going to be the one most at risk here because you are putting your cash into something he owns and without a contract, you are on thin ice if things fall apart.

I'm a little concerned about the comment that the hard money loan did not work out.   Hard money lenders are looking to the value of the deal to secure their loan and often credit rating is secondary.  If a hard money lender walks away from a deal, you should think about it again.  You may want to ask them why they backed out.

Related to that, if you don't have cash or an existing line of credit, I don't see how you could get a loan for the rehab on his house.  A hard money lender is where I would normally go for that kind of funding.

Lots to work out here.  I hope you can figure it out.

Good luck!

The one needed piece of information is what will be the total repair costs?

Also important, what kind of seller financing are you getting? (for example, is this an interest only payment with a balloon)

FWIW, my tenants are responsible for caring for the lawn.