All Forum Posts by: John Mireles

Originally posted by James W.:

Hi John, that is awesome I just noticed you are in San Diego also. Just wondering what do you do for all of your properties? Do you put each in a separate LLC or do you own them as a sole proprieter?

Maybe I will just do a hybrid and just put all my future properties into one single LLC.

Yeah, I figured since you're in San Diego I'd offer a referral. I don't bother with an LLC. Instead, I have all of my property under my name. As the equity begins to grow, I may begin using an LLC for individual properties. We'll see. For my business, I use an S Corp.

Serge:

I own two commercial properties and two residential properties. I've been trying to lease one of my commercial spaces for two years now with no luck. My residential units rarely go two weeks with a vacancy. Going forward, I'm sticking with residential.

Johjn

You'll need to pay to receive your credit score. They don't give that one away for free.

Well, at least you're buying at a good price. I don't know much about the AZ commercial real estate market, but $66 per sf in your market may not be such a great deal. I did a quick search on loopnet and saw that you're going to have a fair amount of competition in the medical office arena. I'd guess that you're going to have to hustle to fill this space. I don't think you can get around throwing in some serious TI money or doing a refurb/upgrade etc on your own.

Commercial spaces are not like residential. Everyone needs a roof over their head. No one needs a commercial space however. When times are good, the money in commercial is also good, but when times are bad, the dollars are few and far between.

I'd take a good real hard, pessimistic look at this place to make sure that your assumptions on rehand and rent are realistic.

I've been self-employed for 20 years now. My premiums in 1999 were under $100. The same policy now would be over $450. I can safely say that what I charge for my work has not similarly quadrupled over that time. I recently switched to a higher deductible plan to keep my payments lower - I think last year my policy was due to go up by 25% or so. Premiums may be going up under Obamacare, but, guess what? They have been sky rocketing for years now.

I have Kaiser insurance - which covers everything I need it to and is relatively affordable. One reason why I'm loath to move to another area is because I'd probably have to go to a much higher deductible and less affordable plan. Each state has different plans so what may work here in Southern California won't work elsewhere.

It will be interesting to see what happens once the state exchanges get set up. The idea is that you'll easily be able to compare policies online to get the best rate. We'll see how theory meets practice however.

James:

The problem with putting each property in a separate LLC is that you're then stuck paying $800 per year to the state for each and every LLC. THen you'll need a separate liability policy for each LLC plus one for yourself. The costs begin to add up so you need to decide if the cash out of pocket is worth the extra (often illusory) protection. My suggestion to you is to form a relationship with a knowledgable attorney now so that as issues come up and your wealth grows, you can pick up the phone for some guidance.

Keep in mind that attorneys tend to be conservative and like to recommend things like LLC's. It puts money in their pockets for doing the work and it protects them too. (If the worst case did happen and they advised you not to get an LLC, you might sue them for legal malpractice.) I use Joan Walsh at www.fosterwalsh.com in San Diego. She's good, straight to the point and specializes in small to medium sized businesses and their owners.

James:

Not trying to bust your chops, but there's a difference between being in the top income bracket and having a high net worth. Attorneys look for the big, easy money. Garnishing your wages, significant though they may be, is not something any plaintiff attorney is going to want to do.

Also, the property may be worth $1.5 million, but what kind of equity do you have in it? What kind of equity do you have in your home? What kind of cash and securities do you have on hand? If you're worth millions, then you should be having this conversation with your lawyer and not waste your time with advice from someone internet guy who may or may not know what he's talking about (even if I did handle claims for an insurance company in my previous career).

Having said that, you can bump your limits up by a million and then add an umbrella policy which would provide excess coverage to all of your policies (home, car, investment property). One more thing, before you go spending money on an LLC, you should bump your auto liability limits to the maximum (generally $500k) because that's where the real liability is. Hope that helps.

Actually, your basic liability policy won't cover you for any contract law disputes. However, what happens is that the plaintiff in a contract case will allege specific actions in their lawsuit so as to trigger insurance coverage. The plaintiff attorney has his eye on the big pot of insurance cash rather than trying to wring a few bucks from the owner's often rather slim pockets so he's going to add in claims for negligence and injury (doesn't always work but it never hurts to try).

Most of the big stuff is covered though. Negligence leading to a trip and fall and similar injury situations. The vast majority of all tenant claims are either partially or entirely covered. And as long as a claim is partially covered, it generally won't matter unless you go to trial and lose - which almost never happens (the going to trial part).

My suggestion is that every landlord should talk to their insurance agent to find out exactly what is and what isn't covered under their policy. Increase limits or change policies where necessary. That's generally a much better expense of resources than forming an LLC (for which you'll need insurance anyhow).

Originally posted by James W.:

So I finally closed on my first commercial property in San Diego on 12/31/12. The escrow placed the property under my name and my wife's name but I understand I need to move the property to a LLC for asset protection.

Just curious how you came to "understand" that you need to move the property to an LLC. Is it because you have a high net worth? Is it because you read it on the interwebs? Did your tax attorney tell you?

There's a lot of debate about whether you should or shouldn't so you may want to research this before you go spending $800 annually with the state of California to keep your LLC registered. Unless you have a high net worth and a significant amount of equity in the property, I would suggest making sure that you have a good insurance policy in place with high enough limits to protect you. I wouldn't worry so much about the LLC.

If you do want to transfer the property into the name of your LLC, you may want to approach your escrow company and see if they'll take care of it for you. You just paid them a bunch of money so they should do it as a courtesy.

I'm with Joel. I don't think there's any way you'll get 75% LTV financing through a standard financing sources. If had to guess, I'd say you'd be lucky to get 50%. If you're looking for a $2,000,000 loan, you'll need a net worth to match. Having a high credit score, while necessary, isn't going to be enough on its own. To make a deal like this work, you're going to need a lot of cash - including cash reserves above and beyond the loan.

You're far more likely to get financing on a commercial loan if the rents will support the payments. Doing something more speculative like this much harder to pull off.