All Forum Posts by: Joe Splitrock

Option 1: Why would you pay off a rental property instead of paying of your primary residence first? Interest on a rental property is deductible as a business expense and it is reducing your tax liability. 

Option 2: Selling both of your investment properties cuts off your investment income. It is a one time windfall. You are better off to hold the properties and profit from cash flow. You can still sell the properties in the future. Repurchasing later means buying at a higher price. You also have sunk costs when you sell, like the original loan costs  and selling costs. The longer you hold the property, the longer time line these expenses are spread out. For example, if you had $7000 in closing costs, held a property for 2 years and sold with $24,000 in sales expenses, that works out to $15,500 per year in expenses. If you held that same property for 20 years, those expenses are $1550 per year. Holding investments for shorter time periods burdens them with higher costs during that time. No problem if you are getting out of rentals, but if you just plan to buy again in the near future, it makes no sense to sell.

Paying off your mortgage to be debt free is an emotional decision, not a mathematical or financial decision in most cases. I don't have all your numbers, but based on what you provided, it seems by far the best mathematical and financial decision is not selling the properties. I can't answer whether emotional or financial is more important to you. It is a personal choice.

If you consider 2016 new, then yes this is new. I have told a couple hundred people in the BP forums about this change over the last six years. Unfortunately people keep repeating old information. Check your specific mortgage agreement but yes most likely any mortgage backed by Fannie Mae in the last few years can be transferred to an LLC.

Transferring the title doesn't transfer the loan, so you still have a personal mortgage. You also need to make sure your insurance recognizes you and the LLC as covered individuals. Also be aware that since you still hold a personal mortgage on the property, there could be an argument that this pierces the corporate veil. In other words, your perceived LLC protection may be less than your actual protection in the end.

 So you want to be protected, but don't want to offer them any reassurance that their employees or company is protected? Business is a two way street. Call your agent and explain what they are asking for. Your agent can handle this. Getting your insurance information gives them no greater or lesser rights to file a claim. I would also make sure your insurance is applicable for short term leasing. Many policies don't cover this.

Inquire if anything needs repair. Do an physical inspection of the property. Take photos of all appliances to gather model and part numbers. Take photos of paint cans to determine what paint brand/sheen and color is used in each property. 

Some of this could be survivorship bias. I would argue that the majority of rental property owners use property management and are relatively happy. They are just not posting their experiences here on BP. This site is frequented by self managing landlords and the value add rehab crowd. Nothing wrong with that, but people building new construction and hiring property managers are not on a website trying to solve problems. They have less problems or at least less interest in dealing with that aspect of investing. It would be like going to a stock investor forum and expecting to find mutual fund investors there. Two different strategies.

I self manage, but 75% of the houses listed for rent in my market have a property management company listed. In small multifamily, it is an even higher percentage. Large multifamily is almost 100% property managers or in house property management. They are at least happy enough to not fire their property managers. 

I do think that Property Managers get a bad rap on BiggerPockets. Even PM seem to bash other PM. I heard 50% are incompetent or crooks, haha. Seriously, there are plenty of great PM out there. People just like to complain more than sharing good experiences. 

 Predatory is subjective. Some people believe whatever they can get a seller to agree to is fair. Predatory generally involves deceit and offers that are exceptionally one sided towards the buyer. Buying under market to deal with title problems, fix a distressed property or close fast has value. The question is what margin is fair to compensate for the risk and value you provide? That is the subjective part. Is 20% fair, is 45% fair, is 65% fair, is 80% fair? I don't have that answer, but you have to face your family and sleep at night, so hopefully you have moral compass driving your business. 

I watched my elderly mother in law getting taken for a ride more than one time. I sat with her as she cried saying she tried to say no, but the person wouldn't take no for an answer. 

TLDR: Don't take advantage of people.

@Sylvia B. this is a numbers game. They send these letters to thousands of people on a repeat basis. Eventually they catch someone in a desperate situation or someone who is unaware of current market values. Desperate could be a situation where someone has divorce, bankruptcy, job loss or death of the owner. The people who are unaware of current values are often older or have diminished mental capacity. This is why companies like this can be seen as predatory in many cases. 

Yes they work, but they are shotgun marketing at best.

@Michael Baum thanks for the shout out. @Sam Hudacek I own both LTR and have one STR here in Sioux Falls. I was surprised by the various reasons that people travel to Sioux Falls, including the number of people coming to vacation. I have noticed on the STR front that there is a fair amount of churn on the listings. Lots of people getting in and getting out of the business. You have to be careful who your guests are, because there are people wanting to party, do drugs, etc. There have been a number of people short term traveling here for work, including construction on the new Amazon. Travel nurses are another market, but we have also seen contracts cancelled, so you have to be careful. The travel nurse agreements are usually 3 months, but they have a clause they can cancel at any time for any reason. We have seen this twice now. STR make more money than LTR overall, but have more expenses and take more time. Since our goal is passive investing, we overall prefer the LTR.

When analyzing numbers, be aware that expenses are a big concern. Property tax values are moving up fast here. Our recent assessments are 20% to 25% increase on all properties. Our insurance for properties we purchased last year was 25% higher than existing policies. Our agent said that an increase on existing policies is coming. Utilities are all going up. None of this is unmanageable, but plan in your numbers when analyzing deals. If you are using last years taxes, insurance or utilities, plan those numbers 15% higher to be safe.

Back to STR... Overall I think STR were slow to gain popularity in SD, but now I am seeing more saturation. It is pretty easy to stand out in the STR market, because most hosts do a horrible job running them. If you keep your place ridiculously clean and maintained, you will get good reviews. Good reviews mean higher nightly rate and lower vacancy. Our STR has been 97% occupied.

My only concern on STR is the effects that a recession would have on the travel and tourism. The economy cycles and in a recession, discretionary spending decreases, which includes vacations. This is not a reason to avoid STR, but another consideration to plan for when building your portfolio.

 Tell the seller to give you a better price on the property to support the lower rents. That is the only solution. Whether they sell to you or someone else, the higher sales price means anyone buying the property will have to raise rents. 

@Kate Jones I do both photos and video. As others said, look under sinks and in appliances. Make sure your video moves across the floors, walls and ceiling. I open and close all doors and drawers in the video to show proper operation. I move slowly across the front and back of door, because they get damaged. 

We also take listing photos, which can be used to list the property when the new tenants give notice. All the photos are stored on a hard drives and we have two sets of hard drives, one is a backup that goes to our safety deposit box. This is the same hard drive system used to backup personal family photos. You can also do cloud, but cost can be an issue. Even with cloud, I would want hard drive copies.

One other thing to make sure you do is a move in / move out checklist. This is a detailed checklist that asks if each item was cleaned and damage free. We use it to verify condition before move in and after move out. The new tenant has a chance to acknowledge condition and sign the document. Any damage is noted on the checklist and I invite tenants to add anything they notice. Then at move out, they can't say "that was damaged when we moved in" if it is not on the checklist.