All Forum Posts by: Jack P.

@Brian Burke, Thanks! That answered a lot of my questions. 

I'll stop worrying about building corporate credit for now, since it doesn't sound like it makes much of a difference. As for the LLC/corp, I'll explore that a little more in the future. As it stands, I may need the equity from all three properties to reinvest into a larger property in the future. If commercial loans continue to have 5-year terms at high rates, it might make sense to wait to roll all 3 properties into the corp until as late as possible. Either way, I have a while to figure that out.

That's again for your insight and clearing up my misunderstanding of corporate credit.  It sounds like my personal credit is more than sufficient for my goals.  

I have an older home that I eliminated the gas heat and wen't all electric.  It's in the south, so I thought I could get away from it, but the home is so drafty that it's really hard to heat up.  I've probably chased off a couple tenants because of the high electric bills they generated during the colder months ($500).  I've regretted that decision for a while, and am finally caving in and looking at reinstalling gas heating.  Really wish I would have done it when we reno'd the house to begin with.

As for the AC, definitely go with the window units and offset that cost to them.  You shouldn't be paying their electric bill!

I've seen a number of people here on BP mention charging "utility" fees to their tenants.  It doesn't show up as the advertised rent price, but it's included in a second bill every month.  It's a way to get around the sticker shock of higher-priced rents, but I always thought of that as a shady way to charge tenants more money.  

Either way, spending $4k/year on utilities would make me cringe.  For upgrades, I use a 2 year rule for recovery, meaning that in two years, the improvement has to pay for itself.  Some people use other rules, but that works for me and my long-term plan.  By that metric, I would invest up to $8k to reduce or eliminate the utility expenses.  

Hope that helps.

I think some type of goodwill gesture is appropriate, but it really depends on how much you like the tenants and want them to renew the lease in the future.  However, living without water is pretty inconvenient.  I'd agree with Carrie W., but say that 20% off the next month's rent is probably appropriate.  I wouldn't, however, go any further than that unless they've been great tenants for a long time.  As far as their efforts in calling contractors, etc, that is included in the 20% discount. They still received some type of service for the time they were living there.  Bottom line, sh@# happens and stuff breaks.  

BPers,

I'm laying out my long-term strategy and need some advice/guidance.  My portfolio currently has a trio of 4-plex properties in the same neighborhood, for which I use a professional manager and oversee things from afar.  One of those are in my name, and the other two in both my wife and I.  Total value for those 3 properties is about $700k.  

We plan on entering active retirement in about 10 years, and would like to reinvest those properties into something bigger.

Here's my plan:

-In a couple years (once the dust has settled from the new purchases and rehab), form a LLC or S-corp (not sure which one), and group those three properties into a single commercial-type loan. Continue to operate the properties as an LLC or S-corp for a period of time (~5 years) to build some type of record and credit for the company.

-When we retire, 1031 exchange that portfolio to a larger property, probably in the $1.5-2M range, still run by the LLC/S-corp, but located wherever we decide to live, so I can self-manage.

My questions:

-Does the above sound feasible? Can I lump my current properties into a LLC/S-corp and get commercial financing for them if I have several years of tax records showing profit?

-Can you 1031 exchange a S-corp held property?  Or do I need to keep them in our names?

-As I understand 1031 exchanges, the names for the exchange need to be the same, so the two properties that have my wife's name on them can't be combined with the one with just my name on it for the new property, right? 

-Does the strategy work well to establish experience for purchasing the larger property with commercial lenders? Would they care if my experience is gained in passive management in a property in my name, or would they prefer to see tax returns for a LLC/S-corp?

Basically, my assumption is I need to build a paper trail (tax-returns, rent roll, etc) of my current portfolio for a couple years to shift things out of my name, and into a company.  My credit score is in the 800 range, but I'd like to start building credit for a company.  

Any advice helps.

Thanks.

Zoning.  Most municipalities are specifically zoned for certain residences.  Once you move to 5 units, it becomes a commercial property, and needs to be in an area zoned for commercial properties.  Check with your local municipality to see the restrictions.

If you have the cash, you can buy one with the FHA, and the other traditional (25% down). Otherwise, if they are separate properties, you can still put in an offer for one...the worst the seller can say is no. Depending on how long they've been on the market, desire to sell, etc, the seller may consider your offer.

Your financing sounds solid.  Everything else...not so much.

For reference, my last reno of ~1200 sf cost $25k in materials alone, using low-priced products from Lowes.

I'm also confused on the layout of the property. This is 4 units? And total rent is $750? It sounds like you bought a property that definitely isn't up to code, and not suitable for renters (dirt floor?). I wouldn't be surprised that if an inspector catches this, you'd be susceptible to huge fines. Good that you bought it as an LLC, because it sounds like a law suit waiting to happen.

If I'm reading this correctly, my recommendation would be to encourage the tenants to move, then start over with a new design, making sure to incorporate someone who knows a little about building codes.  Chalk it up as a learning experience that costs you a little money.  

One caveat from the above comments. It's NOT always cheaper to rent than own. It really depends on the market. In your case, SoCal prices make it harder to own investment properties at a profit. At the same time, buying the home you live in offers some unbeatable financing options (FHA), but the math has to work out right. My advice, if you decide to buy your own home, use the same math considerations as you would when purchasing a rental (1% rule, etc). If you can't meet those gates in SoCal, then investing out of state and continuing to rent may be the best option.

Look more into the requirements of a FHA loan. If you already own the home you live in, then you can only use a FHA loan for a new property if you:

1. are moving because of a work-related transfer

2. an increase in family size requires a larger home

direct quote:

"FHA will not insure more than one Property as a Principal Residence for any Borrower, except as noted below. FHA will not insure a Mortgage if it is determined that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining Investment Properties, even if the Property to be insured will be the only one owned using FHA mortgage insurance."

What are the exceptions for the “single property” rule?

Relocations

According to HUD 4000.1, "A Borrower may be eligible to obtain another FHA-insured Mortgage without being required to sell an existing Property covered by an FHA-insured Mortgage if the Borrower is...relocating or has relocated for an employment-related reason; and establishing or has established a new Principal Residence in an area more than 100 miles from the Borrower's current Principal Residence. If the Borrower moves back to the original area, the Borrower is not required to live in the original house and may obtain a new FHA-insured Mortgage on a new Principal Residence, provided the relocation meets the two requirements above."

Increase In Family Size

An exception may be approved include increases in family size, or a borrower who is vacating a jointly owned property. In all circumstances that qualify, the application for the new FHA loan is processed on a case-by-case basis, so a borrower will need to work with his or her participating FHA lender to see what is possible. There’s nothing wrong with running your circumstances past a loan officer to see what that financial institution might be willing to do.

Something to look into:

What would be the cost of having the units independently metered?  $35k/year? That's massive!  If you can eliminate or cut that cost in half, it may be a much more appealing deal.  It might be worth spending up to $50k to get that done.