All Forum Posts by: Kelly Byrd

There are two things here, IMO:
* Where should the LLC "live"?
Every state is different, has different rules, etc. I'm not enough of an expert here to give you advice. But! I did find that most folks I dealt with (lender, insurance, etc) in South Dakota (where the properties were) expected that we were a South Dakota entity. We were doing commercial loans with local banks and I got the impression the banks may not have been happy to deal with a non-South Dakota LLC. I'm not sure of this, it is just an impression from my situation where lender, insurance, and other services where all from local companies. 

* What is your tax liability in California?
My personal interpretation of the CA rules based on the advice I got was that I was liable for this $800/yr minimum tax.  I know there are mechanisms for hiding or avoiding this, but I chose to not go this route and just put the $800/year per entity into my budget. This is very much an individual decision about risk vs complexity of the entity. There is no single right answer for all people here. 

Originally posted by @Keith Knobloch:

I would encourage you to reach out to Eric Kerkvliet.

He is on Bigger Pockets:
https://www.biggerpockets.com/users/EricK197

Did you discuss the payment process as part of signing the lease? 

In the future, decide on one (or maybe a few, your choice but don't make it too many) payment options. Write those down in a "new tenant guide" or maybe in the lease. Make sure the prospective tenant understands and agrees to use one of those and it is written down. Then be strict about it. Train your tenants how to treat you.

As for what to do now, do two things:

1) Get the now past due payment however you can. If it's beyond 5-days, serve the 3-day notice to start the eviction process. You don't have to evict, but starting the process starts the clock so you can if the tenant doesn't cooperate. 

2) Figure out how you're going to get paid in the future. Pick one method, get the tenant to agree, get it in writing. Hold them to that. You could run a trial of the system before rent is due. Have the tenant pay you online something like $5 then hand them a $5 bill just to prove they can make it work without the pressure of overdue rent. 

In general it is the tenant's responsibility to get you payment, but it is your responsibility to be clear with your expectations, since you weren't clear from the beginning, I would give them a bit of a pass, but you need to be clear from now on.

Originally posted by :

I would start and complete the eviction process. It is fairly inexpensive to file and have a process server give them notice. That avoids a situation where the tenant claims they didn't receive notice. 

I can tell you from experience that once a tenant goes dark and is unresponsive, it is all down hill. Most likely once they are served notice to quit, they will just leave on their own. 

+1 to this advice here. You tried to engage and be nice, I probably would have done the same. But that didn't work in this case.

Getting the 3-day notice served isn't that expensive work with a law firm that has done this before.  If you end up having to go to court, costs go up, but it may not come to that. In my limited experience, the most expensive part of an eviction is the lack of rent until I get another tenant in the unit.

My wife and I have done a couple of deals Michael Martin at NAI and have worked with Aaron Rietsema at Hegg. We'll definitely work with them again.

I've had good experiences with Aaron Rietsema at Hegg Realty, and Michael Martin at NAI. Aaron started out with just an email filter, but after a few rounds of feedback from us, dialed in what he sends us. We have made offers on several properties with both and purchased two multi-family. Micheal Martin ended up representing us in both of those purchases. 

PM me for contact details if you want them. 

Thanks for the reply. My main concern right now isn't being able to predict the rates from deal to deal or over several years, when I could shop around. Pre-offer, I use a guesstimate for yearly insurance. During due diligence, I  get quotes and in could back out of the deal if I somehow discovered all the insurance quotes came in high enough to make the deal not worth it. My concern is that it based on my limited experience, the insurers are regularly going to "change the numbers" on me right after I have closed on the property and written the insurer my first check. To be a bit of a Star Wars nerd for a second, it feels very much like "I am altering the deal. Pray I do not alter it further." 

Is this just how the commercial residential insurance works? If so, how do folks account for it? Or, am I the sucker at the table and I just need to work harder to find a better insurer or broker?

I'm new to REI, with just two smaller multi-family deals, a 12-unit and a 24-unit. In both cases, I went thru an insurance broker and the process went like this:

Quotes came back, we accepted one. After closing and after the policy is bound, within the first month or two, the insurance company did a loss control inspection and came back with items they wanted addressed or changes to the policy based on what they found.  The specifics were different each time. In the first case, they wanted repairs we planned to do in the Summer/Fall of this year. On the most recent one (the 24-plex), I got "required recommendations" that I don't think are reasonable for the area and type of building, AND the premium went up a bit based on them changing the construction type on one of the buildings. This happened with two different carriers.

What I'm wondering is how others deal with this. Right now, it feels like my expense for insurance isn't very predictable. There's a risk they're going to come in after closing and insist on repairs or upgrades, or leave me scrambling for another carrier (who may wonder why my last carrier dropped me?) or raising the premium by $100-$200 a year after the deal has closed.

To be clear, $100-$200/year on a 24-unit place isn't making the difference between positive cash flow or not, but I'd like my numbers to be predictable before I enter into a deal and present it to my partners. Should I just be saying: "here's the insurance quote. I've added  on $300/yr and $1000 in one-time capex as because that's may be what happens?"

Part of me wonders if I'm the sucker that the table and I just don't know it.  Is this just common in commercial multi-family?

Huh. So I live close to both Fremont (#1) and San Jose (#3). I wouldn't call either of those particularly "happy" and while either of those could easily have been my farm area for REI, I chose Sioux Falls to invest.

Originally posted by @Ryan Scott Isacksen:

I am not a legal expert, but I looked up the California LLC code.

Owning an LLC for out of state property looks like it is clearly a foreign LLC. Simply owning or being a member of an LLC is not considered doing business in the state.

Entering into contracts that must be accepted out of state, maintaining property, maintaining a bank account for a foreign LLC company are all clearly excluded in the code.

As it was explained to me, there is a difference between what the CA corporations code and what the CA Franchise Tax Board consider "doing business in California". The CA FTB takes a very broad view compared to other states. The FTB considers "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit" (From R&TC 23101) to mean that if a member of an LLC that is managing the LLC (making decisions, talking to property managers, real estate agents, sellers, tenants, loan officers, etc) from inside CA. There was a court case in 2014 to exclude purely passive investors in LLCs like a private placement fund, but active management is still considered subject to the $800 franchise tax fee.