All Forum Posts by: James Mc Ree

@Taylor Cook

Be sure to get an estoppel letter signed by the tenants and seller stating the current amount of the security deposit and any other pertinent facts not recorded in the lease. This will protect you from a tenant claim that they really had $2,000 security deposit, but the lease only said $1,000. It can also capture damage to the property for which the tenant will be responsible so they don't claim it was in that condition when they moved in. Pictures are very helpful for that proof too.

Google "ada compliance inspections in NJ". Google again and replace "inspections" with "survey".

The property does not need to be ADA compliant unless you have a disabled tenant. It will likely be more difficult to rent to a able-bodied tenants and much easier to rent to disabled tenants, possibly at a premium since it is (almost) ready to go.

Call the municipality and inquire about the property. They can tell you the process to get it properly inspected and the deed updated as a multi-family. Costs and any inspections, work, etc that are needed can be part of your offer to the seller or covered during due diligence if you don't buy it "as is".

I wouldn't fire the agent just because the property hasn't sold yet. That's not necessarily the agent's fault. If you do, you need to find a new one and relist with new pictures, so you may push yourself off the market a week or two.

Ask your agent what feedback he is getting on the showings. The agent should be following-up on showings to learn what the prospects think. Your property probably doesn't look as nice as it could with the tenants there. That is may be one of the turnoffs which may come across as the price is too high.

Get the tenants out in two weeks, spiff it up, clean and you will probably have more interest.

@Elizabeth Rose

I have rentals in Delaware County, just outside Philadelphia. A tenant accidentally started a fire that resulted in an insurance claim of around $41,000. Insurance paid it and my premium went up about $50 for a couple years. The tenant was destitute and the insurance company could not recover anything from them.

I look at insurance as you have it for a reason. I set my deductibles at 5% as i only intend to use insurance for large losses. I consider this a large loss.You may find there is mold in there too. My recommendation is to talk with your insurance company to see if it would be covered and what impact there might be to you. You didn't cause the problem which is a major factor in the premium impact. There is no cost for the conversation though they may require you to fix it to stay insured even if you don't file a claim.

My initial impression is you are making this way more complicated than it should be and none of the complexity gives you a tax benefit. Complexity = overhead, time, cost and risk. You have a small business. Try to keep complexity and expenses low for your small business or you will spend a lot of time and cash feeding the monster. Your description reads like you are creating a dozen variations of you. It might be different if others were involved.

Consider an umbrella insurance policy instead of the web of LLCs and corps. The insurance policy is likely to provide you with far more protection.

Be careful you don't create a self-dealing situation with you and your management company, which is really you. The IRS doesn't allow tax breaks for self-dealing and I don't see how you would benefit.

For example, rent comes to you for $1,000. You pay your bills and end up with X cash flow. Alternatively, you transfer the $1,000 rent to mgt company which records it as revenue, just like you would. The company pays bills, just like you, and ends up with the same X profit.

If the company is a pass-through LLC, then it just flows right through to you as income as if you and the LLC are one, which you are in the eyes of the IRS, and you have no tax benefit for the LLC.

Alternatively, if it is truly a separate company, the company pays tax on the income and you pay tax on distributions from the company. It's double taxation. The company also pays employment taxes, fees, etc most of which you would not pay as an individual.

I have 13 rentals and a little over $250,000 in annual revenue. It's also a small business. I manage them all myself as me. Each are separately insured and covered together by an umbrella. I manage it all with linked Excel spreadsheets and do my own taxes with TurboTax.

Keep it simple and use the time and expense saved to get away from your desk and acquire more properties.

Regarding raising the rents, those are large increases on the tenants' side. Think about what happens if the tenants can't afford it and leave or don't leave. Each option presents its challenges.

A tenant who leaves may force you into a unit renovation. That's going to cost more in year 1 than your rent increase benefit, but could be good long term. Then tenant who stays and refuses to pay the new rent leads you down a likely eviction path, then into a turnover. Either way, you can get the higher rents, but you might have to pay a lot more than you are planning to get them.

You have a very detailed plan. It doesn't have enough details to fully evaluate it here, but I don't see anything that is radically wrong or can't work. There appear to be a lot of assumptions that could affect your timing, so you may have some delayed gratification depending on how long each step takes. Good job.

Rather than respond point-by-point, I will give you thoughts on one topic and maybe later posters can take on different topics.

Step 1 is pay off your primary's mortgage. You create your emergency fund, then step 3 is pull out the equity which is creating a new mortgage on the same property. Since you plan to pay off the mortgage within a year, you might do best with skipping step 1 and just do your refinance in step 3 first or second. Such a short timeline doesn't give you any real margin of safety since you get out of debt, then right back into debt shortly thereafter.

This depends on your current interest rate though. It makes no sense to pay off a 3% mortgage, if you have something like that, then incur a 6% or so larger mortgage if your goal is to get out of debt. Consider banking your $170k that would pay off the mortgage and apply for a HELOC for the remainder of your equity to 75%. That will allow you to keep your low rate on $170k if you have a low rate, then have a line of credit that is only the size you need and easy to pay down.

This approach keeps your $170k liquid, sets up a $0 balance HELOC for the additional principal you can get and you don't pay for the additional principal loan in the HELOC until you use it, and only for what you use.

@Sylvia Castellanos

I think you are asking too broad of a question to answer. No one has done a survey or has hands-on experience with all of the HOAs in Wayne County, PA for a meaningful comparison. Investors can say their HOA has various rules, but your sample size is going to be much too small to be meaningful.

Instead, I recommend picking some listings you are interested in and researching the HOA rules and fees yourself. Talk with the developer there and let them pitch you. For land, you are primarily going to run into monthly/annual fees. Nearly everything else will impact your future buyer who will build a structure. You can read the rules for any problematic conditions.

I've evaluated a few of those properties but have not bought them. I was looking at developed properties for STR opportunities. I opted not to buy because they are a little far from me and I was concerned about making timely repairs. I also didn't want the HOA monthly fee. Taxes were low though.

I have experience flipping land in NJ, but not PA. My NJ experience is you are looking for someone to buy your newly purchased land for a lot more in the near future, regardless of where you buy. You have to ask yourself why someone would do that. Why aren't they buying the property you are considering right now at a cheaper price? What changes after you buy it? It didn't work out for me. My developer buyer just said he could buy land elsewhere for a better deal if I didn't want to sell.

In my evaluations, I could buy land for $20k, for example, but there were lots of lots in the $20-40K range. The $20k lots were near or in flood zones, steep slopes, rocky, woody and had limited or no utilities. The higher priced lots were less encumbered. I think these are the things that are more worth your attention than surveying HOAs.

In this example, the $20k property may become worth $40k, but not until the other similarly priced and encumbered properties rise to around there or it's one of only a few undeveloped properties left. It's not going to just snap to $40k and a buyer appears. Consider how long this might take, then double your estimate if you really have no idea. That will be an optimistic guess. Keep in mind there are other owners with your same idea.

Just some questions to think about....

Rent increases are based loosely on FMR and on what the tenant can afford. Your $1,200 ask may be fair for your market and property, especially if supported by comps, but they might not approve it if the tenant cannot afford it. HUD won't approve something their model says can't work. They aren't always initially forthcoming on the limits though. Sometimes you have to probe a bit.

You should ask the case worker for how their approval is being modeled. Knowing that you are hitting either the FMR rules or affordability rules helps you know which steps to take next. FMR takes you down a path of justifying your ask with comps. Affordability is tougher since it's based on any other income your tenant has. For that, I've asked what is the max they will approve for the tenant, then deciding if I would rather have that or a turnover.