All Forum Posts by: Frank Chin

 Dan:

Agree with you here. I bought a business from someone thru an LLC. He business was in an S Corp, sued for $3 million dollars, but only insured for $1 million. Most importantly he was not added as an additional insured under the S Corp which he should have. When I heard that, called my insurance agent and she assured me that she added me as an additional insured under the LLC so this wouldn't happen.

A customer of my business staged a slip and fall, witnessed by my employees, and wanted several thousand dollars to go away. Spoke with my insurance agent who suggested I file a claim even though I was at first reluctant as it would run my premiums up. What happened? The customer got a lawyer, so I had him contact the insurance company. Eight months later, the customer came back complaining his lawyer was not returning his calls. Even though it's not my problem, I called the insurance company claims department who advised they got 3 threatening letters and phone calls from the lawyer who most likely work on a contingency basis, and that's all he'll do in these cases and drop the matter. They just filed the letters. I got back to the customer that I originally agreed to pay the cost of a doctor's visit, but since he decided to go with a lawyer, told him he's stuck dealing with the insurance company. He's looking for $10,000.

Funny thing is, he continued patronizing my business. Some people have no shame. Bottom line is, for me, an LLC did not help me in this case, but the insurance company provided the shield and did all the work. Since then, I spoke to local attorneys who advised me they normally sue the actual owners personally for negligence anyway, so LLC or not does not matter.

I don't have my rentals in LLC's. I placed the business in an LLC for financial, tax, insurance issues and reasons, not as a shield.

I'm not a CPA, but there's an article which I found that gives more details to this issue, See: LLC vs Home ownership

It goes into why a property used as personal residence should not be placed in an LLC, particularly with issues of taxation as pointed out by above CPA"s. There are also issues with homestead exemptions.

There are reasons not to. See LLC for a Home

The most important one is you can lose the homestead exemption in some cases. The exemption protects the homeowner from losing his home from lawsuits depending on the state.

 Hi Maria:

I'm glad I was able to relate the story about the crooked cop to you. But I would like to mention a few more experiences with cash transactions as my dad was in a cash business, and while I refused to deal with actual cash from tenants, I made exceptions in a few cases. By the way, I had a recent tenant who's monthly rent is $2,250 pays me with 3 postal money orders each, $1,000, $1,000, and $250. due to limits on money orders.

A while back, I had an owner of a dry cleaner paying me rent, and I had him pay me via money orders. I know it's a cash business, and it's a hassle to run over to the bank to get bank checks or money orders. He's downstairs from me in the duplex I owned and lived in, and he asked if I can accommodate him a few months since his wife is the one who runs to the bank, and is about 7 months pregnant. I said OK. The following month, she bought an envelope with the monthly rent of $1,500. My wife invited her in, they sat down to count the cash on the dining room table, and it was $20 short. To make sure it was counted again, and it's still $20 short. So the tenant had to go back to her apartment and fetch the additional $20. Whether she expected us to count the money in front of her, I don't know. 

Funny thing is I had to make the bank deposit slip the next morning and had the cash on the dining room table but ran out of deposit slips I keep out in that area and had to get them from the bedroom. Lo and behold, I bought the deposit to the bank with the cash, the teller counted it twice and said it was $20 short. I was shocked after counting it twice in front of the tenant. I had to get $20 from my wallet to make up the deficiency.

To make a long story short, my daughter had a bad habit of swiping cash when we're not looking. After some questioning, she admitted to swiping $20 from the pile not realizing it was counted twice. To tell you the truth, I at first thought the bank teller pulled a fast one. My dad worked at Chinese laundry as a teenager, the owner complained when he made cash deposits, tellers frequently tell them it was short, even though it was always counted twice. So finally, two of them from the business will go to the bank together and watch the teller count the cash, and noticed the teller dropped a ten-dollar bill on the floor. So, one of got the bank manager over right away, while the other kept an eye on the teller. The manager did find the bill on the floor. So much with dealing in cash. But my dad always thought the bank teller did it because the laundry owner had trouble with English, and did not complain when it first happened.

As far as needing a business ID, that's not a big deal. I was in business for myself after being employed for many years and found I had to get my own health insurance. I had an LLC for a business with 8 employees but researching the laws, if I got an insurance plan for my business, I put myself on it, I have to somehow include my employees. I had rentals, but I found I cannot charge medical insurance to my rental business via the schedule E. So, I set up a C Corp as a business service company to handle accounting and collect rents. I cannot set it up as a property management firm as it requires licensing. Paid someone a small amount to set up the C Corp, and I was able to bill the insurance to my C Corp who turn charge me a management fee that I book on my schedule E. It was a while back, I paid a CPA to set up the C Corp, I recall it was a few hundred dollars, and it saved me a bundle each month.

I've been doing rentals for nearly 40 years and had a handful of tenants, for one reason or another had to pay cash. Way back before advances in digital banking, I had these tenants provide me money orders or bank checks, place them in rent payment boxes I placed in the foyer of each property. I come by around the 5th of each month to pick up the payments. Never had a problem, and I don't have tenants coming to my house.

I did have an interesting experience with one tenant. He was a young single fella, a police officer with the NYC police department for a few years. Did my credit and employment checks, and everything turned out OK. While I had tenants like auto mechanics and restaurant servers paid in cash and had to go through with them how they'll pay me, never had the thought that I have issues with police officers paid via checks, nowadays by direct deposit. I was shocked when he placed his first rent payment of $720 in cash at the time, in the rent box with the rent checks of the other tenants. I called him for an explanation, and he explained he had a side gig where he's paid in cash and would rather pay the rent that way, saving up his salary. Later on, whenever I call him after work, he was aways at his mom's place having dinner, or staying over. I didn't realize that he didn't even live there as the water bill dramatically went down. Little did I know.

So what's going on? It wasn't till 2 years later, when he told me he was thinking of moving out, when his next-door neighbor, a retired gentleman whom I used as property manager said the tenant was suspended for being part of a gang of crooked cops that extorted protection payment from local businesses. My apartment was used as the headquarters of the racket where the officers would meet weekly and split the loot there. Never thought my apartment would be used that way.

I was thinking of kicking him out. My wife and next-door neighbor thought it's not a good idea to do this to a crooked cop and I held off. They said, "what are you going to do when the crooked group decided to falsely arrest you for something, or shoot you". He left 2 years later, but not before removing carpets from the apartment that was newly installed when he moved in. I saw him doing it, told him to stop, but he took it anyway.

Anyway, it was an interesting experience with crooked cops. Any ideas what I should have done differently? Of course, one answer is never rent to cops.

I owned rentals and businesses and had businesses in an LLC, but not the rentals. And while I had the businesses in LLC's, my attorney and insurance agent insisted that I get an endorsement in the LLC policy that covers me personally and an umbrella in addition on top.

Furthermore, I bought an active business in an S Corp, through an LLC, and the owner was sued for $3 million. He had liability for his S Corp for $1 million, but no umbrella and none for himself. Reason? He thought the S Corp should shield him, why bother with anything beyond that.

I followed the case as my employees had to take time off to give depositions. I checked with my attorney if the LLC is sufficient and why bother with the personal endorsement and umbrella. I'm told litigants usually sue the owners and the corporate entities, both by default, the owner personally for negligence, unless I can show I have absolutely no personal involvement with operations. In other words, no corporate shield. In the case of real estate, you would have to use a property manager. In fact, the S Corp owner tried to get the case against him personally dismissed but was denied.

Thus, even I had and used LLCs for my active business, for rental, I did not. I relied on umbrella insurance. I used LLCs for active businesses to keep entities separate from other businesses to insulate one business from another in the operation of unemployment insurance, workman's comp insurance etc.

The pre-foreclosure I got into had supposedly a $130K ARV according to the realtor I worked with, but because of the circumstances the seller was willing to let it go for $70K. So, we entered into an assignable P&S contract for $70K.

Why sell it at $70K? The seller was in default on his 1st mortgage and SBA loan, both, totaling almost $70K. He was in the midst of a major renovation of his house, which is costing more than he thought. So?? Who's going to buy a house half torn apart, owner gave up on it? So, when a realtor approached me, say if I invest like $20K to $30K, finish the rehab, keep to 1st mortgagee at bay, we can flip it for $130K. It's a risk, and I decided to take it. 

Did we find a buyer and flip it for $130K? Yes, but for $129K. Did the flip go through? No. The buyer got a mortgage but lost his job supposedly a week before closing, and the buyer bank pull the mortgage. Fortunately, the realtor signed a partnership agreement with me that he gets nothing in that case, I can go and close and have 100% ownership. 

Did I get a mortgage? Yes, but the bank valued the property for $80K and only gave me a mortgage for $70K, my sign contract plus the money spent on renovations. But the small mortgage enabled me to make a minor cash flow even with the 13% mortgage rates in 1985. I refinanced it in 1993 to 7.5%.

What did I do with it? I have it till this day, currently ARV of $530K and mortgage free. For the last 10 years, mortgage free, I averaged $15K cash flow each year. I am currently evicting the tenant.

What now? I'm told that if I sell it, pay capital gains, I'll probably get $375K after expenses. If I invest it into an ETF, probably get $25K/year, more than the current cash flow after expenses. Not bad, considering I initially invested capital into it using my HELOC and overdraft facility in my bank account.

Thinking back, why did the seller do the deal at $70k? Believe it he was suffering from depression. The one funny part of the episode was he needed $10K in cash sometime before closing, I was ready and willing to give it to him, but his attorney vetoed it. His attorney said, he has no equity left, he would have to bring $10K to the closing, and I never had any seller owing money to the buyer at a closing and have to bring a check to the closing.

An even funnier thing happened at the closing. The SBA sent a young girl to pick up the check. She was busy reading a book all through the closing. She was given the check, and she shouted "sorry, the check has to be certified or a bank check". Both attorneys looked at her, said "sorry, the closing is over, and you'll have to take the check", then added,"unless you can find the title company guy who left 5 minutes ago, and take it up with him". They gave her 5 minutes. to look for the title guy in the parking lot and come back while we waited, but he already left. She came back crying saying,"I might lose my job". My attorney said,"next time, pay attention at the closing".

All in all, if you do enough real estate deals, you'll run into some strange ones. Fortunately, this one was very profitable and entertaining. Does it all make sense to you???

@Scott E. When I first look into sub-2's, in addition to not needing a hefty down payment, you will not encounter DCI issues with banks. I did pre-foreclosures where I invested money into it to do flips and get them well below market as the owners can't hang on.

While in theory, sub-2s violate the terms of the mortgage and the loan can be called. In practice, mortgages are sold immediately by the banks to Fannie Mae, Freddie Mac, so many do not even know where the original documents are and have lost court cases where smart borrowers are sued and demand the bank produce the documents and the banks lost because they can't find them. 

The main attraction for investors such as the Porter case is that the guardrails of down payments are disregarded and she actually acquired over 40 properties, not 20 that I mentioned earlier, and sued by over 20 homeowners where she failed to make payments. By not doing sub-2's, she surely would have not qualified, or turned down after the first one or two NOO loans, and no doc loans available are far too expensive back then. The Federal government pumped billions into Fannie Mae in the last real estate bust to prevent its collapse, and it would be a disservice to taxpayers leaving 3% mortgages on the books that shouldn't be there.

Given the gyrations of the market, where mortgages are extended at historically low rates in the last few years, I'm sure they will be more aggressive in enforcing purchased loan agreements. Sub-2 buyers will either make payments or they be discovered by more aggressive enforcement when they fall behind. 

I've been a real estate investor for 40 years and have looked into subject to for just as long but have not gotten into it.

I watched the video in your post and the main point is you can do many no money down deals. Unfortunately, investors tend to overextend themselves such as in the Porter case: Porter Case Problem here, Porter, as RE agent took over 20 properties subject to, rent them all out, and fell behind on payments when few of the tenants failed to pay their rents. When Porter failed to make the mortgage payments, owners lost their homes, and in this case, the situation snowballed, and turned into a disaster.

Another case is this method is used in foreclosure rescue scams. Joe Kaiser acquired many properties via subject to, then sold them pocketing the excess proceeds instead of turning them to the homeowners. Joe Kaiser The state of Washington imposed a $3.2 million dollar penalty and forbid him engaging in RE activities in Washington state.

Given all of the abuses of this method, many states such as NY State enacted legislation in response to protect homeowners, Home Equity Theft Prevention Act. HEPTA It was enacted to make it difficult for investors to acquire properties going into foreclosure particularly via methods such as subject-to.

I've taken a real estate course at NYU and the investor who taught the course uses long term NNN leases with option to buy as a less risky method of investing in such properties, and eventually acquiring it.

 Yes, QuickBooks is wonderful if you have some background in accounting. I used it for my real estate, auto repair business, IT business, and well as in the non-profit city financed senior center. I issued 1099's in some of the operations, and it's a simple matter of clicking on 1099 in the vendor file to do it, then purchase the blank 1099 forms, and QB will print a list of vendors where 1099's are required, you review and OK it, then print the forms. You can then use the class function to segregate properties.

But you have to be able to set it up, chart of accounts etc. and the IT business that I had, I set it up for my customers. When I hired accounting help at the senior center, I sent people to take a beginner's courses in QuickBooks to get started. And CPA and bookkeepers are easier to find for QuickBooks than some other software.