All Forum Posts by: Justin K.

@Alan G. is correct.  I believe the PA law says that the Landlord must pay the tenant any interest they earn on the money minus a fee (1% maximum) starting after the first year.  To my knowledge, the law doesnt require escrow accounts to be in an interest bearing account, but if it is, the interest cant all be kept by the Landlord.  In my opinion its a dumb law.  I dont know of a single Landlord that is collecting a Security Deposit for the sole purpose of collecting interest off the tenants money.  Remember we collect Security Deposits to protect ourselves from damages to the assets that we own.  My security deposits (like Alans) are all in one checking account titled "Business Name LLC Escrow Account".  It makes no interest so I pay no interest.  

@Kristen T. 

I have gone to several sheriff sales, but have never purchased a property there.  I have never found anything with enough equity to make me want to pull the trigger.

These are my experiences: Each bank probably does it a little differently but this my experience has been that the bank representative will bid up to the sale price to the outstanding mortgage balance of the property.  If someone outbids that amount they will stop bidding and the winner gets the property (and any unpaid debt/taxes/judgments/liens/etc above and beyond the winning bid price).  In this situation it doesnt sound like you will buy at the sale.  Your question about buying directly from the bank is good.  These institutions are incredibly stupid, but thats ok.  If you are patient you will get a good deal.  After they foreclose on it, they will eventually list the property for sale at some ungodly high price.  I have seen them sit on properties for up to a year before they ever hit the market.  Their price will come down over time or they will put it up for auction.  I own a property now that I looked at when they first put it on the market.  It needed a big rehab, so I offered them $25k cash for the property.  They countered me at just above $100k.  I countered back with $25k because thats where my numbers worked at. It sat like 9 months and then they put it up for online auction.  I bought it for $20k cash from the auction.  Its only $5k, but when the bank owns it you are negotiating with the banks software program and likely a person that has never and will never see the property.  Their software told them that the amount of the loan that they had prior to foreclosure was $125k.  Now somebody offers them $25k cash and their software program spits out that the lowest they will accept is $100k based on that value and the time on the market.  So thats what they countered me with.  

A friend of mine buys a lot of these houses.  If he finds a bank owned house that he wants to add to his portfolio, he determines his maximum purchase price, subtracts $5,000 and then makes his offer.  Every week he puts another offer in on the house but for $100 more than the previous week.  Eventually his offer is above whatever formula the bank is using to determine value and they accept it.  That takes a lot of work though and if he wasnt his own agent I am sure an agent would quit before anything got accepted.

My 2 cents.  Good luck on landing the deal, but be patient.  Banks dont move very fast.

Check the details of the law. If he has an LLC or corporation he may be able to hire you as an employee and then you can manage as the 'owner'. He could also sell you 1% of the business for $1 and have a written agreement that at any time he can buy the 1% back from you for $1. Now this would have tax implications because you would be owed 1% of the business profit every year, but all I am saying is that their are ways that you could be an owner and therefore not need a license. I would consult the law and even an attorney familiar with CA real estate law before proceeding. You dont want to be dragged into court for practicing real estate without a license!

I will play devils advocate.  Buying with all cash has some very tangible benefits.  

The argument that buying without leverage creates returns that arent worth pursuing is neglecting a VERY important factor with any form of investing.  RISK!  Buying with all cash eliminates virtually all cashflow risk.  If you dont have a mortgage you need to ensure you can pay the taxes and that should be VERY easy to do without the weight of a mortgage weighing down the property.  Cash will build up very quickly and you can buy another one with all cash in a year or two.  With virtually no cashflow risk your only other risks are liability for negligence, fire, tornado, etc.  All of which can be mitigated with insurance.  The argument that investing with all cash creates a return that is so poor or substandard ignores the risk in the equation.  

Ask yourself this question, if I could invest in the stock market and earn 12% per year with risk of principal lose OR invest in the stock market for 8% with 100% guarantee that I wont lose my principal which would I chose?

The answer will be different for everyone and it is a personal answer.  But ignoring risk in any investment is a recipe for disaster.  Quantify the risk levels for varying strategies and determine your level of risk tolerance.  

Furthermore, investing with all cash allows you to move more quickly on deals which could allow you to get better deals to begin with.  Its not a cut and dry answer.  Determining the pros and cons of each strategy and coupling those strategies with your individual tolerances and skill set will determine your success more than anything. Good question, but nobody can provide you with your answer.  Keep seeking information and keep tweaking the strategy to find your sweet spot.

Best of luck!  Real Estate is a great investment tool!

I would ask for 5+ years on the terms.  Figure out the difference in the interest you would pay over the longer term compared to the shorter term he offered.  I would point out the extra $$$ he would make with the longer term and see if you can entice him with that.  If he is stuck on the 3 years see if you can get the interest rate dropped some.  I can get 7% on a 15 year term from a local bank.  The shorter term should reduce his risk and thus correspond to a reduced interest rate.  But the term will have the best impact on your monthly cashflow.  Remember to include vacancy and all the costs.  It feels to me like you might be missing something, but every property is different.  Possibly some deferred maintenance things need done?

If the first deal is a good deal the other ones will start to come pretty quickly.  If it is a bad deal it could take you years to recover and get back into things.  Remember, when you are starting out you will only have a few units in your portfolio and since then you are subject to large differences in cashflow when a unit goes vacant.  I currently have 11 units.  When one goes vacant you dont miss the income as much.  I would also suggest keeping large cash reserves if possible.

I have looked at these before.  I agree with @Andrew Johnson.  I own a building that has several 2 bedroom/1 bath apartments and then 2 very small 1 bedroom/1 bath apartments.  The small units are typically hardest to rent.  The typical tenant I have found for those units is in a stage of life transition (divorcing, moving out of parents, etc).  Usually once they 'land' on their feet they move quickly into something larger.  I think that the difficulty to rent and keep rented these units it would be complicated by the fact that with the typical hotel room layout (bathroom by the door and 'bedroom' beyond) the most logical place for the kitchen or more than likely 'kitchenette' is in the bedroom area. Based on my experiences with the 1bed/1bath's that I currently own and the difficulty that I have getting them rented and keeping them rented I would pull my hair out trying to find 25 to 50 of these typically transient tenants.  So I switched how I was analyzing these properties. I began analyzing them as 2 bedroom/1bath units.  With a more expensive remodel I could merge 2 hotel rooms into 1 by removing a bath and since the plumbing is there already I could place the kitchen there.  By putting a cased opening in the wall between the units I could create a hallway and a few more non-load bearing walls and I could create 2 separate bedrooms.  Close off the motel room door nearest to the bathroom that will not be removed and you have a pretty decent 2 bedroom apartment.  This solved my layout problems but gave me two other problems.  1) Remodeling costs skyrocketed on me.  2) Now I went from 50 - 1 bedrooms renting for $600 each per month to 25 - 2 bedrooms renting for $850 each per month.  My maximum (not allowing for vacancy) income went from $30,000 to $21,250.  My gross income dropped by 30% and my initial upfront (remodeling) costs almost tripled.  Long story short, when I have analyzed properties in this manner, I cant get the numbers to work in a manner that makes me want to deploy capital to undertake such a project.  I will keep looking at them as leads.  Has anybody else been able to look at these from a different angle or perspective and find a lucrative deal?

I own quite a few properties just north of Pittsburgh. Your CapEx and Maintenance percentage seems a little high to me, but if the subject property you are looking at is very old and/or outdated and if you are not planning on doing any of the maintenance yourself then those might be realistic. I do all my own maintenance and most of my own capital expense projects. If you do that you can cut the price in half usually.

Real estate is super local (as you know), but I wont deploy capital or spend the time managing a property unless I can get $200/door.  My experience has been that I can do that easily on 30 year (owner occupied) mortgages for 4 units or less.  I also use a commercial lender for some of my properties and they require 15 year mortgages.  Now I know that if I can make the cash flow of $200/door (or close) work on a 15 year mortgage then I have a deal worth pursuing.  

One thing most investors (myself included) runs into is a limited amount of capital.  So my recommendation is to weigh the amount of capital you would need to invest versus the return.  Personally I want to see my returns at 12% or higher.  I can get 7 or 8% (based on historic returns) in the stock market over a long period of time, so why put the work into managing a property with tenants for the same return as the market can bring you with no work?

Ok.  I dont wholesale, but I was intrigued by this thread and read the article @Chris K. posted.  

I know you are not an estate planning attorney, but in theory based on that article, I could structure my will to gift my heirs 89% of my real estate company at my death and then after 3 years and 1 day I could transfer them the final 11% and not be subject to realty transfer taxes.  Although I am assuming it would still be subject to inheritance tax at each distribution.

Deposit the money and explain to the bank you reserved that cash as a cash emergency fund. They will want an explanation, but that should be sufficient. I will say that you may need more funds to close on that deal. Not sure what your closing costs will be, but $2500 may not be enough. Talk to the bank and they should be able to give you an estimate of the closing costs. Welcome to the REI world! BEST OF LUCK!

@Jan B. If you treat people respectfully you likely wont have any issues with being sued. Millions of 'mom and pop' real estate investors live their entire lives running properties and never see a lawsuit. I love buying their properties! Although I will say that in my area a lawyer has been running commercials asking people if they have fallen while walking down the street and showing pictures of uneven or snow covered sidewalks explaining that it is the property owners responsibility to maintain their sidewalks and if you happen to fall on their sidewalk you can sue them and of course he will help you get the most for your 'injuries'. My opinion is this might encourage people to fake falls and injuries to get a judgement brought against them. I prefer to hold the equity in my properties like you seem to. I am currently looking at buying some notes because managing the properties (mowing grass, fixing things, etc.) is becoming pretty taxing with my full time job. Once my Note Investing LLC owns a few notes I will write a note for the properties my Property Investment LLC owns. Keeping the property highly leveraged, possibly even 'under water', and then if heaven forbid I ever get sued by someone who has a legitimate case they might take my properties and sell them, but once they are sold by the plaintiff the debt would have to be paid off to my Note Investing LLC. And while I still own them I will never pay the Note Investing LLC an actual mortgage payment, thus keeping my cash flow high. The Note Investing LLC will never foreclose on my Property Investing LLC because the owner of both companies are good friends! This strategy was outlined in the book 'Asset Protection for Real Estate Investors' by Clint Coons. He explains that the first thing most attorneys with injury victims do is they look at the assets the owner owns and how much equity is there, because the filing attorney is only getting paid based on that equity. When the attorney cant make money odds are they wont bring a frivolous lawsuit. If they bring a legitimate suit you are still protected. Clint is an attorney. I am not and this is certainly not legal or tax advice. This is simply a glimpse at a strategy that I am considering in my future.