All Forum Posts by: Robert Feol

Hi Karl

Years ago on my radio show I had a guest named Walter Woffard, who gave me some of the most impactful and insightful information I have gotten in real estate and it changed my way of thinking permanently.  In essence, I was running into this exact issue that you are, and explaining to him what a hassle it was - and he said 'Robert, the problem you are having is you are putting banks in a position to say yes or no.  When you remove this from your life your investing career will become so much easier.'  

What was he talking about?  He was discussing private lending.  You should, in fact, shop around for various mortgage brokers, and many have different rules.  One may say no and another may say yes.  Alternatively, if you have a strong deposit relationship with a bank you can ask them about 'warehouse lending', which is a shorter type of in house lending they offer and generally your banker can say yes or no from the desk.  Barring these options working for you, engaging a private lending relationship with a negotiable interest rate and financing terms is a great way to get someone to say 'yes' to your budding real estate portfolio.  I started a lending program several years ago that was based on peer to peer lending and used this to pay off 9 homes in a five year period.  It worked for me, so I know it can work for you.  

If you are unfamiliar with private lending, Alan Cowgill offers a home study course on the benefits of this, I took one with him through Baltimore REIA when I was visiting up there it was very useful and changed my ways of thinking permanently, and in an extremely profitable way,.

Hope that helps.

Hi Jordan

The most beneficial for your mother(I am not a CPA here by the way just a real estate investor who has had a great one who taught me alot about the tax code) from a tax standpoint would be to use the Fannie Mae or Freddie Mac programs on a 30 year mortgage term, which allows the highest deductible interest payment and the maximum amount of monthly cash flow.  Freddie Mac allows you up to 6 mortgages with an 80% refinance based on appraisal(new rule just changed this week), so in markets like Memphis where the acquisition cost is low she can actually use a turnkey provider as Charles Moore was suggesting, acquire a home below market value(using a private lender) which is renovated and rented, and then refinance it which would create a very low out of pocket cost situation for her.

Depending on how serious she is about doing it, or how committed she is to reducing her tax liability, she could(given her age, I am assuming she is retired) structure her real estate business where she could qualify as a 'real estate professional', and this would allow her to depreciate things like her 'home office', which is a specific amount of square footage on her primary, as well as take the mortgage interest write offs on loans plus depreciation, and other goodies like meals(when applicable), maintenance, and so on.  A good CPA can help her with the specifics of qualifying for this status but it sounds like she is doing well, and sheltering income and keeping more of what you earn obviously is paramount.  

Let me know if I can help.

 Hi Bob.  I'm a bit unclear on what your discussion point is.  Can you elaborate a bit further for those of us that are less experienced can understand?

Hi Lance

For us, buying real estate in Memphis can be a HUGE win - Alex Craig is right about being sure to buy in the 'right' areas, and use a provider with a proven track record.  I will say this - for my wife and I, the prices in Memphis were so cheap(we live here) that we started to buy homes and put them on very aggressive payoffs(5 years or 7 years).  This made us do two things - 1) commit to holding the rental properties and not sell them, as we would have them paid off in a very reasonable amount of time, and 2) Use an intermediate strategy which forced us to focus on buying the 'right' houses, with the goal of paying them off and keeping them as a long term source of unencumbered(paid off) cash flow.

To be clear, the strategy works -  we have paid off three rental houses this year alone, have more paid off in total so far, and we feel very blessed.  It is hard to consider buying and paying off in five years when home prices are 200k+ in various markets, but in Memphis you can get great cash flow and low price points.  Take a look at what is available here and remember - paid off homes are a very achievable, and noble, goal that can be life changing.  It can happen for you, it certainly did for us.

Dexter

That 50k in gross sales for an 850 foot house is very impressive.  I wonder if you have blogged about this or would be willing to give some information the the site(s) and strategies you used, I have been thinking about doing this on some level but would love to hear from someone who is an expert and having success.  Thanks!

Hi Jake

Lots of opinions here, all valid.  If I could, I would state that you are wanting your 40k to create for you what most people are looking for - financial freedom.  The question you really are asking is - 'how can I become financially free using this 40k I have worked for so hard?'

That requires a more complex answer.

I can't give you an answer, but I can tell you about assets. The key to wealth, in my experience, is in acquiring assets. That doesn't mean that you cannot acquire mutual funds, as many REI people would have you believe. Mutual funds are assets, as much as real estate. Intangible though they may be, barring something catastrophic they certainly hold value and can increase your personal net worth substantially.

I would encourage you to consider the following question - 'how can i get people to pay my bills for me?'  When people pay your bills, whether through rent or a business you own, you can reinvest your hard earned money into - you guessed it - acquiring more assets.  Monopoly taught us a valuable lesson we took for granted in terms of green and red houses and hotels, but the real key to the 'real' game is to change your perspective from being an earning employee to an entrepreneurial acquirer of assets - through your lifetime, and ideally, onto your heirs lifetime(s).

Focus on asset accumulation, whatever the vehicle or vehicle(s), and you will see a vast horizon beyond your current 40k mental construct.  It isn't a question of real estate vs. mutual funds, it is a question of 'how do I get more?'

Hope this helps.

rf

Hi Andrew!

Partnerships can be a powerful way to accelerate growth in any business venture, real estate not withstanding.  With that being said and your post requesting a focus on partnerships, here are a few things to consider as you move forward.

1) Do you need a partner - or are you simply looking for accessible forms of investment capital that will allow you to acquire properties with minimal hassles, given the underwriting requirements of most institutional/Fannie Mae lenders.  Private money sources abound and are often easily negotiable to a win - win position for both borrower and lender.  Private money allowed me to acquire far more properties than the Fannie Mae restrictions would ever have, and taught me to think 'outside the bank' to get deals done.  This is a good skillset to acquire if you have not done so already.

2) If you need a partner, what is the goal of the partnership and time frame for the partnership?  If you need a partner for capital and support as you get started, presumably, 10 years from now your goals will have changed and you may not want(or need) a partner as you do currently.  As such, it is good to ascertain tangible goals and time frames, investment objectives, and so on for the partnership BEFORE it's formation and incorporation.

3) If you form a partnership - CRITICAL - insure that you have a dissolution agreement in place BEFORE you incorporate, as part of the incorporation documents.  A well written dissolution document, established by both partners in agreement during times of peace(i.e., before any investments are made) which outlines what will happen if the partnership is to dissolve for ANY reason, will allow you both to equitable split assets which may not be liquid at the time of a split.  Real estate is relatively illiquid, and if one partner decides he or she needs to leave the partnership and access equity from assets(though the other partner may not want this or view it favorably), the dissolution document will allow for governance of what is or is not possible, and help avoid adversarial emotion when such an incident occurs.

3.5) 51/49 split - make sure your partnership allows for you to make a majority vote when you may need to.  A deadlock of disagreeing partners can be a terrible(and costly) thing.  Be the majority(and decision making partner).

4) Vet your 'partners' - real estate is filled with many people who will lie brazenly for money.  I have seen many of these types, even locally in the Memphis area where I live. Active, well known real estate salespeople from popular organizations who simply cannot, or are unable to, tell the truth if lying means they can get a check.  DON'T make these types a partner for yourself, lest you subject yourself and your finances to great and terrible risk.

5) Tax implications - understand the formation of the LLC in Tennessee(you said you are looking at Memphis), how business 'flow through' income works for partnerships in corporations, and also learn which types of income are subject to social security tax vs. which are not. For example, anyone who receives a 1099 from you corporation would be subject to social security tax. However, you and your partner would (hopefully) not take distributions this way, you would simply take them as business income which is NOT subject to social security tax. Find a good CPA well versed in Tennessee real estate tax law to help you.

Real estate is easy to get into and somewhat more difficult to get out of if you need to in case of emergency.  Learn the perils and pitfalls of what can happen to you, and try to avoid those.  You are starting off by asking the right questions.  Get the information you need and always make sure you are insuring that YOU are the decision maker and YOU have majority control in a partnership.

Knowledge is powerful.  Make sure you have what you need before you sign on with a partner.

Hi Nathan

Welcome to landlording!!!  If I could, while understanding the tenant giving you no notice to vacate is certainly irritating, I would encourage you that this also brings opportunities for you to further prosper.  A few things:

1) In Tennessee, A judicial state, it is unlikely a judge is going to award you the lease balance as relief for the the tenant breaking the lease. I have seen tenants fall behind in rents many times, and assuming you get to court, the judge awards you for back rent and attorney fees, never unpaid future rent balances.  That is, of course, in Memphis. Nashville courts may be different but always remember getting a judgment and collecting are two different things.

2) You could probably tell the tenant that, since they have been a great tenant, you are willing to let them out of their lease under the following conditions, a) they forfeit their security deposit as a condition of you releasing them from their contractual obligation without further recourse, leaving the house in broom clean condition, and b) part of this agreement is they pay an additional month of rent since it is unfair to you to be left 'hanging' since they opted NOT to disclose to you that they were buying a house which, clearly, would be a violation of their lease agreement if buying a home precluded them from paying you rent(which it does).  

The flip side of this for you is that, based on limited information that you have given, you seem to own in a desirable neighborhood with high occupancy.  You may be able to get a rent increase($1095, anyone?) and rent the house by January 1st.

Assuming your tenants pay AND leave the house in excellent condition, you may find yourself with a security deposit in your pocket you can bank for future repairs.

On a final note, and you may know this but for the benefit of other new investors,  using the judicial system should be a last resort.  When tenants choose to 'not behave' according to their contract, you should always try to remedy the situation by holding them accountable and then, if the still choose not to cooperate, find a creative way to 'encourage' them to move out and leave the house in good condition, without putting yourself at the mercy of judges and lawyers.  A vacant house ready to rent is always better than an occupied house which awaits a court date or the dreaded (inevitable) bankruptcy.

Hope that helps.

We have found that the MLS can contain many good deals but one has to know how to find them. Of course, as an agent you have to disclose everything, the more the better. My partner and I purchase things from the MLS and receive a commission for acting as our own buyer's agent, then aagain to resell the property as a collapsed closing to an end buyer.

Don't think that all opportunities on the MLS are overpriced: Robyn Thompson says that she finds tons of great deals on the MLS, and does MLS searches daily. Also, all I am saying is this particular model works for my partner and I. I am not really qualified to discuss generalities that are more theoretical in nature - I am only describing a system that works for us, and we live in Memphis, which may be different from other geographic locations. I never suggested that you can get both sides of a realty commission. We buy lots of houses from the MLS and resell them as true wholesale deals(read: 70 cents on the dollar and below after repairs) and then repeat the process.

Just my two cents.

Robert Feol

No we don't work jobs in the office a la floor agent style.

I'll send yo the link, you have to email me: robertfeol at gmail.

Send me a request and I'll link it back.

RF