All Forum Posts by: John Mireles

Why are you not using Homepath? You're more likely to get your offer accepted if you use their financing.

John

I think you're on the right track. Picking out color is not easy! But nailing the right colors will absolutely help sell your house. In my most recent remodel I used:

- off-white for bathroom
- different off-white for ceiling
- white trim
- soft yellow/tan for master bedroom
- gray for bedroom
- lighter gray for darker middle bedroom
- gray/green for living room, kitchen and hallway

The net effect is that the house "pops." The colors are subdued and neutral so they go with pretty much everything. Yes it is more work but when the time comes for me to sell, the payoff will be there. Besides, paint all costs the same regardless of what color you use. Don't go crazy. Paint lots of swatches to make sure the colors will work in the space that you intend to use them.

I purchased a property five years ago that's in an "up and coming" neighborhood. Close to downtown, the ballpark, trolley line one block away etc. Right now though, it's still a long way from becoming the hip place I expect it will be in the next five to ten years. My building unfortunately has no parking.

But the way I keep it filled is by offering a premium space. The same apartment a mile away would go for $500 to $700 more per month. I get good tenants who either want a more urban experience or don't want to spend the extra money.

My suggestion to you is to make the units as high-end and middle class as possible. The only way the area is going to increase in value is if you bring the yuppie crowd in. You should be a part of that change. If you appeal to a poor demographic, then you're shooting yourself in the foot.

And by the way, appreciation can happen. My building was recently appraised by the bank for $500k over the purchase price. I won't really believe any of that until I actually sell it - that day is a long way off still - but it's nice to know that my bet is paying off.

Originally posted by Joe Bertolino:

Who owns the property, you or the LLC? Only the owner has an insurable interest.

Yes - but if the policy is in the name of the LLC, the individual should be able to be named as an additional insured. And if the property is owned by the LLC and the insurance is in the LLC's name, I'd still want some sort of umbrella or other coverage to protect me personally in the event that there was some exposure above, beyond or around the LLC policy.

Both you and the LLC need to be insured. If your current insurer won't do both, then either find a separate insurer for each entity or find an insurance company who will do both. Going without should not be an option - ever.

Two ways to look at this:

If you get the rents to $2,000 per month, you're looking at an 8% Cap rate - which isn't too bad for Southern California. Depending on the property and the location, you may want a higher (or be willing to settle for a lower) Cap than that. The question I'd be asking myself is how hard is going to be to fill a vacancy. If the church goes, will anyone else be interested in it?

The other thing you need to look at is the income. If you are going to resell the property to someone who will finance the property, the rents, less expenses, must support 120% of the debt service.

Start with your rent, then subtract out 10% for management, 10% for maintenance, 5% for reserve, taxes etc. After all that, the Net Operating Income should still exceed 120% of the mortgage. This may not matter to you but it will if you sell this to to someone who needs to finance the property. So to figure where the rents should be, just work backwards by adding in all the expenses and see where the 120% mark lies.

Finally, the commercial rental market is pretty soft right now. If you go raising rents, your tenants may be out before you know it since there's a lot of property available out there. Don't get too optimistic on raising the rents.

I'm not liking this deal. You're putting in all of the money - and thus taking all of the risk - and you're getting a 20% return. You're coming in as an equity partner, not a lender, so if the deal is unprofitable, you don't make a dime. If I were to partner with someone on a deal like this, I'd expect at least 50% of the profit plus interest.

That and I think your margin is too thin. Unless you've got a lot of experience in this business, I'll bet that your expenses are 50% to 100% higher than your original estimate. Optimism is your enemy here.

I'm no financial accounting guru, but if you're using a Cash Basis form of accounting, you have nothing to deduct because you never counted the amount due as income. You can't deduct that which you never earned.

On the other hand, if you're using the Accrual form of accounting and you counted the lease as income at the time the lease was signed, then yes you should be able to deduct the lost income. The key here is that you had to have originally booked the lease as income.

If you're not sure of how you're doing your accounting, you're doing Cash Basis which means that it's definitely not deductible. (Cash Basis is the most common form of accounting among small businesses.)

I'd say there's two ways to look at it. First run the numbers on the property as though you were renting it out. If the numbers look good, it's a good deal. Second, when it comes to owner occupant properties, other factors come into play besides just profit and loss. Do you love the location? The house itself? Is the school system good for your kids? Will you receive enough satisfaction from the property to make it worth the price? The answers to these questions can't easily be quantified in a spread sheet so it's really just a judgment call on your part.

Also, what's your goal with this property? Is it to live in it for a year and then rent it and move into another property? If so, you want to make sure that you can generate positive cash flow with it. If it's someplace that you plan on calling home for awhile, then the cash flow issue isn't so important.

Originally posted by Michael Galloway:

CON: ? ...can't think of any

Wow. That's some very tunnel-focused thinking.

Money is made by taking a risk. With no risk, there is little to no reward. Sorry but if someone can't think of what the risks are, they're not someone I would ever entrust my money to.

My perspective on this is what happens if the investment doesn't work out? What happens if the nascent housing recovery drops off a cliff and values plummet? What happens if you lose your job? You get significantly injured and can't do the things you used to?

I contemplated going this route with my house during the height of the bubble. Of course, at the time, no one new that a massive crash was around the corner - as obvious as it seems now. I ended up just sitting on a couple $100k of equity (and watched it disappear in the crash). But two years ago when my wife and I separated, we were able to sell our house quickly and put money in our (actually her) pockets. Had we leveraged the house, we would have likely had to declare bankruptcy or do a short sale - which would have had killed my ability to invest as I rebuild my net worth.

My business mentor once told me that the last thing a business wants is an optimistic CFO. I always have that in the back of my mind as I'm making a business decision. What's the worst that can happen? Can I live with it?