All Forum Posts by: Dan H.

CA has rules about CA residents using LLCs in other states to avoid "taxes" in CA. Do your research before setting up an out of state (OOS) LLC while being a CA resident.

LLC in CA has a minimum $800/year cost/tax.

You did not specify why you are looking at LLC but if it is asset protection an umbrella insurance coverage is another option and typically is less error prone. We have an CA LLC that is for a name and looks only (at a cost of $800/year) but rely on the umbrella coverage for our asset protection. If our LLC saves one law suit based on appearance then that is bonus as our LLC is not structured to provide real asset protection.

In summary, do your research on what is required to have the LLC provide asset protection (such as having the properties owned by the LLC and issues purchasing non-commercial in an LLC and risk to loan in transferring a property to an LLC) as well as the CA requirements limits on the use of OOS LLCs.

Good luck

You are correct that the initial cash flow will not be good but 1) you will be living there.  If your payment after collecting one unit of rent is less than renting the equivalent unit then all is good because see item 2.  2) You get to write off the interest related to your living unit.  3) Markets fluctuate in value but San Diego historically has always risen over enough time.  However, there are short durations of depreciation.  I do not make a strong argument on the property not being top of market but I do make strong arguments on the rents having further appreciation: a) rents lag property values, property values have gone up a lot more than the significant increase to the rents.  b) cost to build additional units is outrageous.  c) Not much room for further construction.  We are constrained on the West, South and North and East quickly becomes harsh.  d) related to building cost and lack of land is supply and demand: vacancies are very low.  All studies are forecasting increasing rents.  e) rising minimum wage and wages in general.  CA already has a minimum wage scale increase in place guaranteeing a continuing increase in minimum wage.   The rising rents will make a cash neutral property positive in a couple of years or a cash flowing property more cash flowing.   4) Historically San Diego RE has always increased over any significant duration.  This implies even if there is a short cycle of depreciation the property will recover and appreciate faster than inflation and faster than most other areas.  How do I know?  Because it has for over 60 years.  Look at the San Diego RE prices.   You will see that there are short periods of depreciation (typically less than 5 years) but in general the chart will show ever increasing RE prices.  5) Do not fully discount equity pay down.  It is not as easy to access as cash flow but it does increase net worth and can be accessed via refinance, etc.  6) Local presents an opportunity for forced appreciation where you can do some of the work (versus out of state (OOS) forced appreciation often is more limited due to requiring the use of contractors because OOS).

2 of 5 years occupancy is required to not owe taxes on the gain from selling the property.  So house hacking works for this but OOS does not (must be owner occupied). 

Non owner occupied you pay taxes on the profit of a sale unless you 1031 exchange.  1031 has some challenges but there are experts that can help.

@Joseph Parker I have not seen where you have consulted with an RE attorney.   Ideally that would have been done prior to the meeting but it should still be done prior to you signing anything as the Realtor and broker have made clear where their allegiances lie.  You need someone, with better knowledge than the typical BP poster, looking after your interests.  I admit it may be throwing good money at an unsolvable problem but just hearing from an expert that this is the case could be worth the attorney fee.  Protect your interest, consult a good RE attorney.  Do it prior to signing anything or making any significant decisions.  Do it today!

I hate seeing people screwed over and hope that realtor and broker have issues getting customers due to how they have treated you.

Years ago I had a significant issue with a purchase (very large non-disclosure).  My realtor and her broker where useless and did not provide the support I expected.  I had to hire my own attorney and still got screwed but instead of really screwed just screwed.

Well I never used that real estate company again.  I have bought properties every year except 2016.  They lost a lot of commission due to them not willing to fight my fight; I pay commission mostly for if there is an issue.  If you get no support on an issue the realtor/broker are useless as we typically find our own properties.

Hire the RE attorney!!!!!

Good luck

I think when you are starting out you may have time to deal with finding used items and any associated repairs (and tenants will over load the machine).  However, as you scale or have significant cash flow it the following happens: 1) you realize that there are better returns for your time 2) that the savings is often not that great because often you are buying a problem 3) dealing with repairs is a hassle and has a financial cost so even if the used machine resulted in some savings was it worth it?

If you have spare time I do believe that you can save money with used washing machines but it will not be as great as the difference between the cost of new versus the cost of old.  Tenants ae rough on machines and if they are common area machines you cannot even blame someone for the trash bag that clogged the exit drain or the overloading that was significant enough to bend the shaft.

We recently have moved all new rental washing machine purchases to Speed Queen and so far they have lived up to their reputation (not one service call yet) but I will have a more long term view in 5 or 10 years from now.  For now I recommend them.

 Talk to an RE lawyer prior to the meeting.  Regardless what the RE lawyer indicates your rights are make sure the agent knows that you are up satisfied with his representation of you and that you plan on submitting a complaint to the realtor association.   Nothing will likely result from it but if it can provide a little angst that may be the best that could happen.  

Heed the advice of the RE lawyer.  Definitely consult one. 

Good luck

If you provide washers/dryers and want reliable, long lasting washers/dryers that may not be the quietest or use the least amount of water but are built to last the choice is Speed Queen.  Their price is a little higher but built to last.  In rentals or commercial that is quite important.  For your home use, you can better regulate the size of loads, etc. so the need for a Speed Queen is less.  I do not have Speed Queen for our house; We have LG at home.  Tenants will over load the machines as they are not stuck with the repair bills.  Plastic bags clog most commercial machines' drains but Speed Queen seems to have less draining issues than the other commercial washers that we have used.  Our Speed Queen washers are newer than our other washers but so far they have 0 issues.

Dryers have less issues but I still suggest Speed Queen.  Read the reviews about the quality of the Speed Queen components.

I have no association with Speed Queen other than being a consumer for our units' small Laundromats.  As our washers and dryers die they are being replaced with Speed Queen (replacing one this week that we wish we replaced earlier as the machine needed servicing I believe 4 times in the last year).

I admit at $1.50/load it will take a while to pay for the new washer but it is a real convenience factor for the tenants.

Good luck

I have lost out on deals a few times over minor things such as yours; I lost a deal once in negotiations over a estoppel because I did not accept contract without Estoppel and a cash buyer made offer.  That is just one example of losing big over something small; unfortunately I have a few of these examples of losing large over something small.  

I like your mindset that it could be a learning opportunity but before you conclude that make sure that you in fact did miss your EM window.  It seems terrible to have missed the EM window because the business was closed.  Maybe even pay for a real estate attorney to get their view.

Good luck

I knew an investor in San Diego (have not communicated with him in over a year) that purchased a duplex that was zoned for up to 4 units.  He had planned on placing 4 units on the property but the parking requirements (2 per unit) and setbacks limited him to 3 units and raised the cost of the 3 units.   He needed to sell at top dollar not to lose money.   He eventually sold the property but it took longer than he hoped for (in part because he needed to get top dollar) and therefore had higher holding costs than anticipated.

I suspect he suffered a small loss on this investment (maybe he broke even) in terms of financial but when you add in all the effort exerted and lost opportunities the loss was more substantial.

So determine early what limits there are due to other regulations (setbacks, parking, etc.) before investing significant time and money.

Good luck

I agree with what @Nick Kravchuk indicated but would add that I would start with a VA financed detached duplex that has value add opportunity.  So look for thrashed but VA financeable (VA loans have requirements on livability).  Live in the more thrashed unit while renting the "better" unit.  Once the unit you live in has been rehabbed then rent the rehabbed unit (at a rent that reflects that the unit is rehabbed) and move into the not rehabbed unit and start rehabbing it.  Once you finish remodeling it you can decide if you want to repeat the process but I will assume you decide to repeat the process.

Prior to moving out and repeating this process refinance it (not using the VA/FHA loan). The reason for refinancing it prior to moving out is you want owner occupied LTV and rates. The reason not to use the VA is you want to 1) move out 2) re-use the VA loan on the next purchase. Ideally the refinance will net you out all of your initial investment if you have done much work yourself. I use contractors and I usually get all of my initial purchase money and a subset of the rehab costs.

The most important thing is to learn a lot on this first property as you want the next property to be an even greater success.

Good luck

There are statistics on RE ROI by major cities. I do not know if Wichita is large enough to be on those lists. However, for any duration more than a few years San Diego beats every Midwestern city for RE ROI for any duration. 100% verifiable.

So of your two concerns one is historically inaccurate.  That leaves one concern, the cost or RE. 

I agree it is high but assuming you are house hacking a detached duplex you can qualify with a 5% FHA loan (95% LTV). Versus OOS maybe a 20% investor loan (80% LTV); note my last investor loan was at 75% LTV so required even more capital to purchase than the scenario I present to you. This implies you can purchase a property in San Diego for ~4 times the cost of the OOS property for about the same purchase capital. To put example numbers to these values, if you purchase a $500K owner occupied detached duplex in San Diego at 95% LTV the purchase cost not including closing and purchasing costs (inspections, etc.) is $25K. This same $25k at 80% LV will purchase a $125K property (a fine property in a fine area) in the Midwest (again not including closing costs and purchasing costs).

Now why do you think the property in the Midwest is able to be purchased at $125K?  Do you think it has experienced appreciation significantly faster than inflation?  Do you think it has a historical appreciation like San Diego?  If there has not been significant property appreciation what sort of rent appreciation do you think the Midwest properties have had? 

Historically San Diego is almost a sure thing at producing outstanding ROI. If you purchased via financing 5 years ago, 15 years ago, 20 years ago, 30 years ago, 40 years ago, 50 years ago one of the worst over priced San Diego RE you still would have netted a very good ROI. Again not opinion, you can verify this statement.

Good luck.