All Forum Posts by: Graham Parham

I am an investor myself. leverage is always the key. going Fannie Mae is your best option.

Before you decide on what down payment is best for you first decide on the strategy of why you’re investing in real estate. Buying and holding real estate is subjective to how long you want to hold the property and why. Most customers that I deal with are looking into buy property for a long-term hold, mainly as a retirement asset. The are wanting the asset to generate a passive income today as well as when they retire. Even with that strategy some people feel they need to put at least 50% down when purchasing real estate to give them greater peace of mind knowing that they only have a 50% leverage on the property. Leverage is leverage. It all depends on the payment option that you feel comfortable with but not get too greedy. You will need to be smart with your money. You work hard for money and you want to see it grow for you.

I’ve been working with investors for over 17 years and have been fortunate enough to be an investor for the last 10 years. I personally feel that real estate investing is always the best way to go regardless of the economic environment. I love having discussions with some of my very seasoned landlords that have been vesting since the early 80s. To hear them talk about the difficulties of finding loans over the years and also accepting rates that today a lot of new investors would not even think about doing. Most of the investors that I work with have the same strategy that I do. Buy-and-hold. Because of that the sweet spot for down payment typically is 20% down. The main reason for 20% down is they don’t want to have private mortgage insurance and they want the options to escrow their tax and insurance payments. Most pro-formas that you will be presented when purchasing investment property will typically have a 20% down and 80% loan to value scenario.

Can you put less down the 20%? Yes, we do have a 15% down payment option available, but keep in mind it does require private mortgage insurance and your cash flow will not be as good.

An example of the benefits of putting a full 20% down versus 15%.

As you can see in the chart that for a measly $7500 more in a down payment, you would eliminate having to pay PMI for the next 44 months (44 X $71.00 = $3,124) as well as the cost of money is 0.250% better with 20% down ($7,500 @ .250% over 44 months is $951.57). You do the Math!The next example will show the benefits of using 20% down leveraging for properties versus buying one property and paying cash.

By paying cash for one property for a $150,000, your net cash flow is $1245. By putting 20% down with an 80% loan to value in a 5% interest rate your net cash flow is reduced to $600.81. Let’s not stop there. Keep in mind that 20% down payment on the hundred and $150,000 home was only $30,000. If you bought FOUR $150,000 homes and put 20% down on each with the same loan terms and monthly rents you could increase your return on investment $1158.24 a month. Invest your money wisely.

Call me anytime

both

you will have to do two loans because there are two seperare tax bills and property plats. For conventional lending that is the best way. Some bank look at this differently. We do. We do many investor loans in GA

I'm not sure where you got your information, but you can still put 3.5% down on an FHA owner-occupied up to 4 units. Conventional loans will penalize you on the owner-occupied side. They still require at least 20% down for a 2 - 4 unit property . If you're going to live in it, FHA is your best route

That is correct. To get your best pricing you would have to go Fannie Mae or Freddie Mac and they do not allow for enitity vesting. 

The Advantages and Disadvantages of titling your Rental Properties into anything other than your personal names

The main reason investors prefer to have their rental properties in an LLC is for asset protection. For many years, lawyers, financial advisors, and tax accountants have been teaching asset protection to rental property owners. The more novice investors are worried about losing everything if a tenant or someone gets injured on their rental property. Other investors like to think of their rental properties as a business, therefore putting it into an LLC legitimizes a business entity. In most cases rental properties will create a passive income. This income can be funneled through to your 1040 tax returns on schedule E as personal investment property or through the LLC that you set up. Both ways have tax advantages.

The primary reason to form an LLC is for legal protection. Legal counsel generally has a tough time breaking through the LLC wall. Should any tenets, their guest, or anyone on the property sustain any injuries and the property is owned in the investors name only; their personal assets are at risk.

From a tax perspective, and LLC formed with two or more members is classified as a “Pass-Through Company”. A “Pass-through” means the income is passed through to its owners and claimed on those owner’s individual tax returns. The LLC is subject only to capital gain rates on the ownership shares of the member, and not to the corporate capital gains taxes, therefore no double taxation. LLC’s with just one owned-member however, are taxed as a sole proprietor and no separate tax return is required. Actually tax dollars from holding real estate in an LLC opposed to personal holding the properties is zero. As of 2011, if you own income property and actively participate in the management of the property in your adjusted gross and less than $150,000, you can write off up to $25,000 of rent losses. The amount of the rent losses that you can write off is proportionately phased out between 100,000 and 150,000. Also remember that although the loss is disallowed for that particular tax year it is not completely lost. When you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

When setting up an LLC there are costs involved that are generally charged by an attorney or tax accountant for the preparation of your LLC charter. Those fees can vary depending on the source, but is highly recommended versus doing it yourself online. Depending on what state you reside in even if your LLC is set up in another state, there could potentially be an annual fee that is paid to the state. Another fee would be the cost of filing separate tax returns for the LLC if you use an account, which I absolutely recommend if you're dealing with rental properties. In addition, the state franchise fees would also be another cost incurred depending on the gross profit of the LLC. The IRS has certain thresholds that they use for these franchise fees. Many investors starting off do not realize the reality of the impact of any fees against their bottom line until it's too late.

To me this is the biggest hurdle for most lenders to overcome. Many investors “Miss the forest for the trees” and don’t realize that owning properties in an LLC can create problems for future financing. Most 1 to 4 residential loans are delivered to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac’s guidelines do not support “Entity Vesting”. Entity Vesting is when the rental property is titled in anything other than the individual borrower’s names i.e. LLC’s, S-Corps, or Partnership. First-time investors that have been educated to set up an LLC for their new real estate business do not realize that this can be a problem. In addition, the same investors will set up individual asset accounts in their LLC names to support future purchase transactions. These funds cannot be honored as personal assets because they are in a business. There are special circumstances that these funds can be honored, but this requires a complete 12 month analysis of the LLC’s profit and loss. This is totally up to an underwriter’s discretion.

I highly encourage any investor that is looking real estate investing to keep the bulk of their assets in their personal account for underwriting purposes.

Most Fannie Mae and Freddie Mac notes originated today will have a “Due on Sale” clause. Most “Due on Sale” clauses prohibits you from transferring the title of your property. What does that mean to the investor? It means that if the loan servicer has knowledge of the property being retitled into an LLC, they could potentially call the note due. At that point the investor would have to pay the loan off immediately or refinance it with another lender. Many investors will take the risk of retitling their properties into an LLC. The chances servicer finding this information out are quite small, but still possible. Please consider this before retitling your property into your personal LLC.

This will strictly depend on your situation and what you want accomplished by forming an LLC. Some investors will title their rental properties into their family trust. This is acceptable by all Fannie Mae and Freddie Mac lenders as long as the trust is a revocable trust. Typically the trust will have to be reviewed by each lender and their legal counsel to be able to finance the loan into a family trust. In addition to the trust, they will simply protect their assets by getting an umbrella insurance policy. These policies are very inexpensive and have a great coverage in case of any occurrences that happen on your property.

The Advantages and Disadvantages of titling your Rental Properties into anything other than your personal names

The main reason investors prefer to have their rental properties in an LLC is for asset protection. For many years, lawyers, financial advisors, and tax accountants have been teaching asset protection to rental property owners. The more novice investors are worried about losing everything if a tenant or someone gets injured on their rental property. Other investors like to think of their rental properties as a business, therefore putting it into an LLC legitimizes a business entity. In most cases rental properties will create a passive income. This income can be funneled through to your 1040 tax returns on schedule E as personal investment property or through the LLC that you set up. Both ways have tax advantages.

The primary reason to form an LLC is for legal protection. Legal counsel generally has a tough time breaking through the LLC wall. Should any tenets, their guest, or anyone on the property sustain any injuries and the property is owned in the investors name only; their personal assets are at risk.

From a tax perspective, and LLC formed with two or more members is classified as a "Pass-Through Company". A "Pass-through" means the income is passed through to its owners and claimed on those owner's individual tax returns. The LLC is subject only to capital gain rates on the ownership shares of the member, and not to the corporate capital gains taxes, therefore no double taxation. LLC's with just one owned-member however, are taxed as a sole proprietor and no separate tax return is required. Actually tax dollars from holding real estate in an LLC opposed to personal holding the properties is zero. As of 2011, if you own income property and actively participate in the management of the property in your adjusted gross and less than $150,000, you can write off up to $25,000 of rent losses. The amount of the rent losses that you can write off is proportionately phased out between 100,000 and 150,000. Also remember that although the loss is disallowed for that particular tax year it is not completely lost. When you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

When setting up an LLC there are costs involved that are generally charged by an attorney or tax accountant for the preparation of your LLC charter. Those fees can vary depending on the source, but is highly recommended versus doing it yourself online. Depending on what state you reside in even if your LLC is set up in another state, there could potentially be an annual fee that is paid to the state. Another fee would be the cost of filing separate tax returns for the LLC if you use an account, which I absolutely recommend if you're dealing with rental properties. In addition, the state franchise fees would also be another cost incurred depending on the gross profit of the LLC. The IRS has certain thresholds that they use for these franchise fees. Many investors starting off do not realize the reality of the impact of any fees against their bottom line until it's too late.

To me this is the biggest hurdle for most lenders to overcome. Many investors "Miss the forest for the trees" and don't realize that owning properties in an LLC can create problems for future financing. Most 1 to 4 residential loans are delivered to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac's guidelines do not support "Entity Vesting". Entity Vesting is when the rental property is titled in anything other than the individual borrower's names i.e. LLC's, S-Corps, or Partnership. First-time investors that have been educated to set up an LLC for their new real estate business do not realize that this can be a problem. In addition, the same investors will set up individual asset accounts in their LLC names to support future purchase transactions. These funds cannot be honored as personal assets because they are in a business. There are special circumstances that these funds can be honored, but this requires a complete 12 month analysis of the LLC's profit and loss. This is totally up to an underwriter's discretion.

I highly encourage any investor that is looking real estate investing to keep the bulk of their assets in their personal account for underwriting purposes.

Most Fannie Mae and Freddie Mac notes originated today will have a "Due on Sale" clause. Most "Due on Sale" clauses prohibits you from transferring the title of your property. What does that mean to the investor? It means that if the loan servicer has knowledge of the property being retitled into an LLC, they could potentially call the note due. At that point the investor would have to pay the loan off immediately or refinance it with another lender. Many investors will take the risk of retitling their properties into an LLC. The chances servicer finding this information out are quite small, but still possible. Please consider this before retitling your property into your personal LLC.

This will strictly depend on your situation and what you want accomplished by forming an LLC. Some investors will title their rental properties into their family trust. This is acceptable by all Fannie Mae and Freddie Mac lenders as long as the trust is a revocable trust. Typically the trust will have to be reviewed by each lender and their legal counsel to be able to finance the loan into a family trust. In addition to the trust, they will simply protect their assets by getting an umbrella insurance policy. These policies are very inexpensive and have a great coverage in case of any occurrences that happen on your property.

Ronnie,it is all about number. It is simple math. If you income supports you math. Both can exist as long and you income supports the debt.

I am an investor myself in Texas and Houston is a great market. I can share a few tips with you about Paying cash or use leverage and also using LLC's.

I’ve been working with investors for over 17 years and have been fortunate enough to be an investor for the last 10 years. I personally feel that real estate investing is always the best way to go regardless of the economic environment. I love having discussions with some of my very seasoned landlords that have been vesting since the early 80s. To hear them talk about the difficulties of finding loans over the years and also accepting rates that today a lot of new investors would not even think about doing. Most of the investors that I work with have the same strategy that I do. Buy-and-hold. Because of that the sweet spot for down payment typically is 20% down. The main reason for 20% down is they don’t want to have private mortgage insurance and they want the options to escrow their tax and insurance payments. Most pro-formas that you will be presented when purchasing investment property will typically have a 20% down and 80% loan to value scenario.

Can you put less down the 20%? Yes, we do have a 15% down payment option available, but keep in mind it does require private mortgage insurance and your cash flow will not be as good.

An example of the benefits of putting a full 20% down versus 15%.

As you can see in the chart that for a measly $7500 more in a down payment, you would eliminate having to pay PMI for the next 44 months (44 X $71.00 = $3,124) as well as the cost of money is 0.250% better with 20% down ($7,500 @ .250% over 44 months is $951.57). You do the Math!The next example will show the benefits of using 20% down leveraging for properties versus buying one property and paying cash.

By paying cash for one property for a $150,000, your net cash flow is $1245. By putting 20% down with an 80% loan to value in a 5% interest rate your net cash flow is reduced to $600.81. Let’s not stop there. Keep in mind that 20% down payment on the hundred and $150,000 home was only $30,000. If you bought FOUR $150,000 homes and put 20% down on each with the same loan terms and monthly rents you could increase your return on investment $1158.24 a month. Invest your money wisely.

The Advantages and Disadvantages of titling your Rental Properties into an LLC.

Advantages

The main reason investors prefer to have their rental properties in an LLC is for asset protection. For many years, lawyers, financial advisors, and tax accountants have been teaching asset protection to rental property owners. The more novice investors are worried about losing everything if a tenant or someone gets injured on their rental property. Other investors like to think of their rental properties as a business, therefore putting it into an LLC legitimizes a business entity. In most cases rental properties do create a passive income. This income can be funneled through to your 1040 tax returns on schedule E as personal investment properties or through the LLC that set up. Both ways have tax advantages. I

Legal Benefits – The primary reason to form an LLC is for legal protection. Legal counsel generally has a tough time breaking through the LLC wall. Should any tenets, their guest or anyone on the property to sustain any injuries and the property is owned in the investors name only, their personal assets are at risk.

Tax Benefits – From a tax perspective, any LLC formed with two or more members is classified as a "Pass-Through Company". A "Pass-through" means its income is passed through to its owners and claimed on those owners' individual tax returns. The LLC is subject only to capital gain rates on the ownership shares of the member, and not to the corporate capital gains taxes, therefore is no double taxation. LLC's with just one owned-member, however, are taxed as a sole proprietor and no separate tax return is required. Actually tax dollars say's from holding real estate in an LLC opposed to personal holding the properties is zero. As of 2011, if you own income property and actively participate in the management of the property in your adjusted gross is less than $150,000, you can write off up to $25,000 of rent losses. The amount of the rent losses that you can write off is proportionately phased out between 100,000 and 150,000. Also remember that although the loss is disallowed for that particular tax year it is not completely lost. When you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

Disadvantages

Expense – when setting up an LLC there are costs involved that are generally charged by an attorney or tax accountant for the preparation of your LLC business. Those fees can vary depending on the source but is highly recommended versus doing it yourself online. Depending on which state you live in even if your LLC is set up in Texas, there could potentially be an annual fee that are paid to the state. Another fee would be the cost of filing separate tax returns for the LLC if you use an account, which I absolutely recommend if you're dealing with rental properties. In addition, the state franchise fees would also be another cost incurred depending on the gross profit of the LLC. The IRS has certain thresholds that they use for these franchise fees. Many investors starting off, don't realize the reality of the impact of any fees against their bottom line until it's too late.

Financing – To me, this is the biggest hurdle for most lenders to overcome. Many investors "Miss the Forest for the Trees" and don't realize that owning properties in an LLC can create problems for future financing. Most 1 to 4 residential loans are delivered to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac's guidelines does not support "Entity Vesting". Entity vesting is when the rental property is titled in anything other than the individual borrower's names i.e. LLC's, S-Corps, or Partnership. First-time investors that have been educated to set up an LLC for their new real estate business don't realize that this can be a problem. In addition, the same investors will set up individual asset accounts in their LLC names to support future purchase transactions. These funds cannot be honored as personal assets because they are in a business. There are special circumstances that these funds can be honored, but requires a complete 2 year analysis of the LLC's profit and loss. This is totally an underwriter discretion.

I highly encourage any investor that’s looking real estate investing to keep the bulk of their assets in their personal account for underwriting purposes.

Due on Sale Clause – Most every Fannie Mae and Freddie Mac loans originated today will have a "Due on Sale Clause". Most due on sale clauses prohibit the note holder to change the entitlement of the real estate property. What does that mean to the investor? It means that if the loan servicer has knowledge of the property being retitled into an LLC, they could potentially call the note do which means you would have to pay the remainder of the loan immediately. Many investors will take the risk of retitling their properties into an LLC. The chances of the servers are finding this information out is quite small but still possible. Please consider this before retitling your property into your personal LLC.

What are my choices if I don’t establish an LLC for my rental properties?

This will strictly depend on your situation and what you want accomplished by forming an LLC. Some investors will title their rental properties into their family trust. This is totally acceptable by all Fannie Mae and Freddie Mac lenders as long as the trust is a revocable trust. Typically the trust will have to be reviewed by each lender and their legal counsel to be able to finance the loan into a family trust. In addition to the normal hazard insurance on the property in addition to the liability insurance, many investors that choose not to put their properties into an LLC will simply protect their assets by getting an umbrella insurance policy. These policies are very inexpensive and have a great coverage in case of any occurrences happen on your property.

No. Relook at the Chart. The rate on a 15% is worse than the 20% down. 

$2403.24 - $1245.00 = $1158.24 more cash flow a month