All Forum Posts by: JD Gunter

We'll take it! Colorado is a beautiful place 

Good lesson to learn! Looks like a solid deal.

@Tanner Barnes - It matters a great deal. What you are referring to is if you structure your LLC as an S-Corp, the net profit of the organization flows through to your personal tax returns and is taxed at the personal income rates.

The liability of the organization is a different matter entirely. If you co-mingle funds or use the organization simply as a face for your personal activities, the "limited liability" part of LLC doesn't hold up. In a legal liability case, the judge or attorney will attempt to "pierce the corporate veil" of the LLC by arguing that it's just a front for your personal activity. If that occurs, you are personally liable for everything the LLC did.

Activities such as co-mingling funds or swapping assets back and forth without loan documentation are activities you would never do with an arms-length organization, and they are evidence that your LLC is not an arms-length organization, which means there is no corporate veil or liability separation.

For these reasons, many investors are ceasing to bother with an LLC for the purpose of personal investing, especially if they have to put the loans in their personal names anyway. They just get lots of liability insurance and invest in their personal names. An LLC is not a magic shield against liability unless you structure it properly and manage it carefully. If you don't treat it like a separate business, it isn't one.

Welcome to BP, Darren! Sounds like you're off to a good start. 

A HELOC is how I started and I still use it regularly. I have a similar deal to yours, so it's a good deal but totally believable. That's why it's so important to check around.

You could structure the LLC a couple of different ways. The biggest question is how you intend to hold your properties. If you are thinking of buying properties in your LLC with money from your HELOC, you are at risk of co-mingling funds which pierces the corporate veil provided by the LLC and renders it useless for liability protection.

The most straightforward way to solve this would be to ask the bank if you can put the HELOC in the LLC's name with the same collateral and a personal guarantee from you. You could set up the LLC's operating account at that bank to build your relationship with them and for convenience for you. If you can use the HELOC to pay for an entire property, you can put the properties in the name of your LLC and you're good to go.

Another option would be to set up the LLC and try to get a commercial line of credit with your home as collateral. When you are ready to buy a property, this makes it possible to put the property in the LLC's name. Some people try to buy the property in their personal name and quitclaim it to the LLC, and that's a bad idea, especially if they are using a HELOC that is also in their personal name.

The important thing with an LLC is to treat it like a completely separate business and document anything going into or out of the LLC, otherwise it's a thin corporate veil that won't offer you any protection. You don't want to have an LLC holding properties and a HELOC in your personal name that you use for the downpayment, or the LLC is a waste of time.

I hope this helps,

I had never heard of cost segregation until my accountant recommended it to me and I hired a firm to do it, now I've done several. I'm not aware of any books or resources on the topic, but I have been contacted by segregation analysis people here on BP. Maybe you could do a search and reach out to them.

I agree with these guys. Warren Buffett once said, "Nobody knows where the market is going, but you should know where it is." The way I interpret this is that I should know the intrinsic value of the property I'm purchasing. If I'm buying properties at a good price and adding value through my activities, I'm not as concerned about the broader market fluctuations. In fact, in a down market, residential rents have a tendency of going up.

Sure, sometimes "Mr. Market" (to use another Buffett/Graham term) will say my property is worth more or less than I paid, but I don't loose sleep over it. I've been through hot and cold markets and I've heard "the market is too hot" or "the market is too cold" to invest in just about every market. I can't predict the market and I don't try to. Instead, I focus on the fundamentals of the property itself and try to get a good enough value that I can ride out the inevitable storms.

That's actually a pretty insightful question. 

In commercial real estate, we do something called a cost segregation analysis that projects the life of different structural and mechanical elements of a building for the purpose of tax depreciation. That being said, I've referred to it on my commercial properties as a method of anticipating expenses. 

For your personal home, you could do a version of this with the intent of anticipating expenses. It would almost certainly be overkill to have a cost segregation done, but the exercise could be helpful and might be a good educational experience for understanding how properties break down. 

As far as your personal finances, unless there is something specific you are anticipating such as a hot water heater, furnace, or roof, you are probably okay just having the 6-8 months emergency fund. Once you have that, you'll likely have enough cushion and can put your other funds into investments. There is an "opportunity risk" that comes from holding too much cash and not utilizing it to its full potential. 

I hope this helps!

You've already made the correct first steps. Saving money and reading everything you can is a great start. Some of the other advice mentioned is also great. 

As far as which route to take, there isn't necessarily a right or wrong way, it's just a combination of what you are capable of, what you can finance, and what is available in your market. I've done all of the strategies you mentioned, including development, and buy and hold is where the money is. However, many people starting out don't have a lot of capital, and so they flip or wholesale so they can build capital with the goal of holding.

I would say look at your resources, capital, funding sources, and abilities and decide which route you need to take in the short term in order to meet your long term goals. If you aren't very handy, like me, you'll need a solid team of contractors. If you are handy, which it sounds like you are, that's a big advantage that you can capitalize on. If you have a lot of capital, maybe you can jump right into buy and hold and build your portfolio. 

Either way, you're off to a good start!

Great! On the top left, click on tools then calculators 

Good for you sticking your neck out and taking the first steps toward financial freedom. They aren't dumb questions at all. 

There's nothing wrong with buying properties for cash, but that doesn't necessarily reduce your risk. I would argue that investing in multiple properties with a downpayment diversifies your investment and reduces the chance any one property will go south. You also reduce your cashflow risk, vacancy risk, and market risk.

Additionally, many people will loosely equate risk with cap rate. There is usually a reason the cap rate is higher. Investing in a less desirable community with cheaper houses will usually result in a higher cap rate but the vacancy or market risk is likely higher. In an A+ neighborhood with high demand, the cap rate will be lower but the vacancies are also lower and the demand is higher. Everything is a trade-off. With the example you gave, investing out of state has its own risks that may or may not be worth the difference in cap rate. Real estate is much more than a numbers game.

As far as using leverage eating into your profits, I think if you look at the numbers, you will find that the opposite is true. You should research the difference between cash-on-cash return and cap rates. If you are paying cash, your cap rate and cash-on-cash return are the same. When you leverage, your cash-on-cash return will increase exponentially, returning far greater returns on the same cash out of pocket. 

Don't take my word for it. Use the BP calculator and run the numbers on buying a couple houses for cash vs. using the same cash to buy houses with 20% down. Factor your financing costs, etc and see which strategy comes out ahead. 

 Finally, if I could invest anywhere, I would still invest in a market I know. That being said, I live in Colorado Springs and I typically invest in a one-hour radius. I can still visit the properties if I want to or need to, but I can take advantage of opportunities in cheaper markets. 

Hopefully this is helpful. Best of luck to you in your investing journey.