All Forum Posts by: Greg Scott

In your initial set-up, I thought you were going to be looking at commercial properties or multi-family (apartments of 5+ units, not multi-unit single family). That is the sort of LLC structure you would want on a syndication. Then you went on to describe problems related to owning single family properties.

Instead of buying a lot of single family, you may want to look at stepping up to bigger properties.     Even if you look at small multi-family (say a 8-15 unit apartments) that is a great structure for managing those types of properties.

@Chris K.

Thank you for providing a voice from the legal community that isn't just "you should buy more entities".   There is too much of that in the industry.   We need more discussion about the balance of risks, costs, and filing requirements.

@Cara Lonsdale  LLCs can be set up as pass through entities but that is not always the case.  Some LLCs must file tax returns.   

Setting up 1 LLC per property can actually increase your risk exposure. You must be certain to run the LLC as an independent entity, ideally each one with its own bank account and books. If you fail to operate them correctly a lawyer can easily argue to pierce the corporate veil and disregard your LLc structures entirely. So, if you are going to go that route you are wasting money unless you put in all the other effort to maintain the entity correctly. If you have more than a handful of properties, that gets really tedious really quickly.

Yes.  Others have done it.

Lifestyles Unlimited has a national MLS feed so you can easily find sales comps and rental comps for any property in the country. https://www.lifestylesdiscovery.com/   I believe you have to have at least their basic membership and there is a month-to-month usage fee for the system.   I've used this system before with very good results.

I am not aware of any other national system.

If you are an active SF real estate investor, having something like this is invaluable.

I've had Michigan LLCs own properties in other states and have had Texas LLCs for properties there, while living in Michigan. Either way it is kind of a pain. In most cases you are going to have to have to file the state LLC paperwork and in the other state file the LLC as a registered foreign corporation. You will likely also need to have a registered agent in the state where you do not live.

In most cases, I stopped putting properties in LLCs and shifted focus to protection via insurance.   I beefed up my individual property liability to $500K and then bought a $2M umbrella policy off of my homeowners policy.  That strategy is much easier to execute, avoids any due-on-sale issues, makes it easier to refinance, and still allows me to sleep well at night.

@Brock Hoffman 

Your electrician was partly correct.  It is unlikely you would need to re-run wires throughout the property, but you would need to separate electrical usage from Tenant A and Tenant B.   At a minimum that would require a separate meter and separate box, probably $2-3K.  If you have a few runs that are shared between Tenant A & B that would require running new lines.  Generally it is hard to make the numbers box on sub-metering utilities, but it is occasionally cost effective.

In cases where it is not, you can have your lease indicate tenant repays you for utilities, pro-rated between the two units.

To get back to your original problem, utilities should be a minor cost in the scheme of things.  If you are trying to decide if you have a deal based on utilities, you don't  have a deal.  If you want to get an estimate, your local utility could probably help.  Also, find an experienced investor.  They can easily give you a ballpark.

Bob:

Not trying to be harsh here, but it appears the biggest problem here is you do not appear interested in being a landlord.  You have repeatedly cut corners on several very important issues and it has put you into a bind.   Now it appears now you are trying to find a way to cut corners and avoid listening to your attorney.

If you want to get out of this with the least pain, find experts to help you resolve the issues, then follow their advice.    If you don't think you have an attorney who is an expert in real estate, get another one.   Don't ignore their advice because they are just doing "whatever is legal".   

This not a hard issue to resolve, but you got into this mess cutting corners.  To get out you will need to follow the rules and best practices.

I wish you the best of luck.

@Sayra Chorey   Were you ever able to collect anything?

@Hal Cranmer

I'm researching collecting on judgments.   Can you give us a status update on this situation.   Did you ever collect anything?

Think through this mental model with me.   Say you have a $100K house that rents for $1000/mo, has $5K per year in expenses (taxes, insurance, repairs).   

  Owning Free and Clear

   - Cash flow is $1000*12months less $5K or $7K per year.   Your equity is $100K so return on equity is 7%.

  With a Mortgage

   - Take a 50% loan out on the first property and buy one exactly like it, two properties, $200K value, $100K in mortgages

   - Cash flow is $1000*12monts*2 properties less $10K or $14K (before interest)  If interest is at 5%, your cash flow is $9K

  - Since your equity is the same, your return on equity has gone from 7% to 9% and cash flow has gone up.

  Wait, it Gets Better

   - In this illustration, depreciation will be about $3K per year per house

   - With one house, your cash flow is $7K and taxable income will be $4K

   - With two houses, your cash flow is $9K but your taxable income drops to $3K

50% LTV is a very conservative position. If you are comfortable with it, the numbers above get better with higher leverage. (Buy 4 houses with 75% LTV.)

I would look at putting a mortgage on either of your properties.