All Forum Posts by: K. Mitchell

I am wanting some feedback about using a revolving credit line to buy SFRs. Here is the context: I own a few houses outright and have others with mortgages. I use a local bank for my mortgages. They are willing to extend a credit line secured by a few of my paid off rentals. The line would allow me to buy two additional rentals with cash--it would allow for some repairs as well. The bank is willing to finance properties off of the line on 5/1 arms at 80% LTV with no seasoning requirement. They are on board with doing up to 20 of these based on my income history etc. What I was thinking about doing was basically buying fixers and flipping them to myself or putting in low all cash offers with motivated sellers for properties that don't need much work, with the goal of not putting much into the deals. I recognize the risk in the 5/1s. Finding deals liket this is possible inmy market. Really I just want some confirmation that others have done this successfully or pointers if I am missing something in my thinking.

Sell your portfolio to them at a steep premium. Invest the proceeds into shorting their stock. When their stock goes down, buy your same portfolio back from them at a steep discount.

:)

In investment terms, I think many of the players in the real estate market simply are not rational. They are the the 'own one or two property and subsidize the loss with W-2 wages' type of investors. They buy with a 20-30+ year time horizon and look at the SFRs as retirement income once the mortgage is paid off.

I don't know for sure, but my guess is that these investors, just due to the large number of them (or should I say, "us"), hold the vast majority of SFR rentals in the U.S. (excepting some of the larger buyers like Ted Turner, etc.). If this is the case, I still don't see how any large fund can expect to compete in a market space dominated by this type of irrational investor.

Put another way, I don't think the economies of scale for a larger investor can add enough efficiency/savings for the larger investors to displace the irrational investors they are competing with--even over a short term (such as 3-5 years). Especially if they have to continually show profits to shareholders or boards of directors every month, quarter, year.

I also think that the larger investors economy of scale/savings can't even overcome the efficiency added by the local investors who know their local market and invest strategically in their market over a long time horizon (i.e., the guys that can wait a long period of time for bargains and wait out market swings). This competitive efficiency advantage for smaller landlords combined with their irrational investing seems insurmountable.

If I were betting, I would bet on the small landlords....

Institutional buyers really don't impact me or the small landlords I know. I just don't see them as competition and they certainly won't put me out of business. In fact, just the opposite will probably happen.

I own several of my units outright and could reduce rent just to the cost of tax and insurance if needed. If I had to, I could even operate at a loss for a few decades if need be.... My passion/interest in real estate would keep me going. What would keep them going in the face of years of losses?

In fact, many of the landlords I know are not making a profit. They try, but don't make it. Their time horizon is long, so they will eventually. Their passion/interest in real estate carries them through.

If institutions think they will put the small guys out of business, I don't think institutions realize that this is who they would be competing with. Also, I don't think they realize landlording real estate isn't that profitable in many markets and waiting for capital appreciation is iffy at best.

Attorney said it may be possible. Cited Repetto case. Haven't read it though.

"With all the negatives, most investors I know like to start new with a brand new clean LLC, rather than risk buying somebody else's trouble."

Could buy a target LLC with a LLC--making it a parent LLC owning the target LLC. Then when the target LLC has been around long enough for the statute of limitations to run on most claims, merge the target into the parent LLC. No?

The exception would cover C, E and F, the way it is worded.... There is additional language there that applies to 401ks, which seems to imply that the exception would work. I guess I should run it by an attorney. I was just wondering if anyone here had looked into it. Thanks for the replies.

Keith

Thanks Jon. I was referring to paying my IRA to manage my properties.

When I look at the prohibited transaction rules, I don't see any that seem to say that it can't happen. Here they are:

(A) sale or exchange, or leasing, of any property between a plan and a disqualified person;
(B) lending of money or other extension of credit between a plan and a disqualified person;
(C) furnishing of goods, services, or facilities between a plan and a disqualified person;
(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interests or for his own account; or
(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

For A, I wouldn't be selling, exchanging or leasing property. I would be managing property.
For B, I wouldn't be lending money or credit.
For C, I wouldn't be furnishing goods or services. I would be selling services on an arm's length basis.
For D, I wouldn't be transferring plan income.
For E, I wouldn't deal with the income or assets of the plan.
For F, there is an exception for "the prohibitions ... shall not apply to (2) any contract, or reasonable arrangement, made with a disqualified person for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor"--which would seem to apply.

Am I missing something or just reading it wrong?

Thanks again,

Keith

Anyone know if it is possible to run a property management company from inside a self-directed IRA? For example, say I roll over $1K to a separate self-directed IRA. Then I have it start a C corp property management co. Then I have the management co., which is operated by me, execute an agreement with me to manage the properties I own in my own name, for, say, 8% management fees. This would be the market rate. Is this possible?

And if it is possible, what if I did or didn't take a salary from the C corp?

Thanks,

Keith

Jeff, I meant 4-12%--typo. Was doing this too late last night. I have done complete remodels (including roofs, electrical and plumbing on most). That factors into why the vacancy made it all the way to 12%. Currently, absent the units vacant for repair, I have 100% occupancy.

Dave, the repairs are extensive (as described above). All houses in the area were built between 30s-50s or 60s-80s. There isn't really anything new there. It is one of the mid-sized, college-town, inexpensive cities here in Texas. Most of my SFRs built in the 80s--maybe 1 was built in the 50s. The SFRs are almost all the same in terms of design, features, and location--as throughout most of the city. The SFRs are in B neighborhoods and the duplexes are in a C-D neighborhood.

I would have added more than 8 years of data, but that is all I could muster in one day. I may add the rest, but, really, I had so few properties back then that I don't think it would add much.