All Forum Posts by: Errol Graham

Hi @John Underwood, interesting response. I recently established an ownership structure similar to you with the help of a lawyer. One mistake we made was not bringing in a CPA upfront with the structure. I am curious to understand how you go about preparing and filing your taxes for the structure that you have? Do you have all your properties in the same state? 

Are there lessons that you have learned from your current structure that you could share at this point? Thanks

I have been in real estate since 2011 and still learning. It has been an awesome journey.

@Phil Shelton If I were in your position, my strategy would not be to focus on paying off any of the mortgages but to get the highest interest rate mortgage, that is the one at 6.625%, to the point on the amortization table where more of the payment goes to principal than to interest. So, I would make extra payment every month to that mortgage as the cash flow allows, bearing in mind the need to keep a prudent level of cash reserve for vacancies, repairs etc. 

I currently live in Kissimmee and have a portfolio of long-term rental condos and single family homes in Kissimmee. It’s a great area to invest but has its own challenges with rising insurance costs, reflecting the Florida wide issue. 

@Larry Cersosimo, what is good cash flow is a great question to ask in the very dynamic real estate market and general economy. 

If we take the opportunity cost of money approach, if you have $40k in cash you could either put it on a deposit in a secure bank, earning around 5% per year in a very passive way. Or, you could use the $40k for the 20% deposit on a $200,000 property (assuming away the closing costs). If you cash flow $250 per month on this property, you would make a pre-tax 7.5 percent return on your $40k. It may not be as passive as the deposit in the bank, but you get 2.5 percentage points more for your troubles. 

Now assume that the property you put the $40k on only cash flows $150 per month, equivalent to a return of 4.5%. Then using “cash flow” as your only decision parameter, would suggest that you are better off keeping your money on a deposit in the bank? To be sure, we can complicate the argument by introducing the tax advantages that real estate investment such as depreciation etc…but we won’t go there now.

so, if we assume that the appreciation of real estate in general is going to be negligible over the next several years, as a prudent investor you should look for properties that can cash flow at the minimum rate of return equivalent to or better than the rate the bank would give you on your money. 

This is all to say that a good cash flow is a dynamic metric, depending on the interest rate the bank will pay you on your money; the rate of inflation; the rate of appreciation of real estate, which is also tied to the inflation rate;  and also your equity stake in the property.

In my portfolio, I focus both on cash flow, to meet my operational expenses; secure a decent level of cash reserves for the rainy day; and to build a war chest to take advantage of deals; as well as on appreciation to build net worth. But, I am alway mindful of how my money is performing relative to its possible alternative uses and the fixed deposit rate is perhaps the easiest rate to focus on for a comparison. 

Thanks to all for the very useful responses. 

It would be quite cumbersome, administratively to have each property in their own LLC for the 10 properties that we have, which would mean filing ten 1065s! So, in this regard I do agree with Chris.

We have been in the real estate business since 2011 and have never been sued and we pray it stays that way! We pay meticulous attention to ensuring the safety of our tenants to minimize this risk.

My wife and I previously owned real estate in our joint names in both Florida (where we currently reside) and in Virginia (where we previously reside)

Following ur research and some legal advice, we established two trusts (one in each of our names) and also two LLCs one for all the properties in Virginia and the other for all the properties in Florida.

We have deeded all the properties in Florida into the Florida LLC, but we have not done so yet for the Virginia LLC. We have had some issues with getting insurance for the Florida properties in the LLC and also related issue with the Mortgage (which is in our name).

When our lawyer requested EINs for the LLCs we were informed by the IRS that we need to file a 1065 for each of the LLCs.

Our structure is that the LLCs are owned by the two Trusts (50%) in each of our names. Although we will file jointly for the first time, the Trusts are not considered disregarded entities, since Florida is not a Community Property state. 

We are currently waiting to see the experience with the Florida LLC, re insurance, tax, beneficial ownership issues before we deed the Virginia properties into the LLC. Depending on the experience we may opt not to go the LLC route and try to establish other strategies for asset protection that is consistent with management and cost minimization.

Would appreciate hearing about the experiences of other real estate investors, including about the pitfalls to avoid with this kind of structure?