All Forum Posts by: Michael D.

Yep - That's all bad. A couple of thoughts though:

- You don't really need an LLC for this. Insurance probably gives you the liability coverage that you need. Make sure you have an umbrella policy.

- Regardless whether you borrow the money for the refi or the LLC does - it's still going to be personally guaranteed by you anyway.

- Depending on how many units the multi-family is, you most likely shouldn't be paying a premium to use the LLC anyway. You pay a premium for a "commercial" loan, which applies to 5 or more units, regardless whether you buy it personally or with an LLC.

Your mortgage payment isn't an expense. Keep that separate, between NOI and cash flow:

income - expenses = NOI

NOI - mortgage = cash flow

You left out insurance, property management and repairs. There may also be utilities that you need to pay.

Capital expense seems awfully high. I think you can bring that down to $100 or so.

You are wasting your time. He wasn't trying to sell it - you called him. Of course, as he said/implied, anything is for sale for the right price. "Make me an offer" means "If you want it badly enough to pay a big premium, then please let me know." - that's all. I'd say the same thing if you walked up and asked to buy my house - and I wouldn't waste my time or privacy letting you inside it either. Why bother?

@Brice Hall, I think you're actually misunderstanding something fundamental about capital expenses. Whether the roof is 30 years old or brand new, it's losing the same amount of value over time, and (should) be accounted for in long run cash flow projections the same way. The only difference is in the current depleted value, which you need to consider in the price paid for the property.

For example, suppose that on a given house the roof costs $12,000 to replace, and is expect to last for 240 months. I therefore need to account for $50/mo in capital reserves for the roof. Similar for other major mechanical systems. These should show up in my long-run cash-flow expectations. The current age doesn't matter from a cash-flow projection standpoint.

Of course, when I buy any property, I need to consider how much depleted value the roof and other major items have, and set aside (or at least plan for) that expense right now, as part of what I consider my purchase-price to be.

I've a number of these old/cheap properties and I believe I'll come out fine - but time will tell. I just bought another one for $30k, spent another $15k to fix everything on it including new roof, and I'll be able to rent for $800 or so, expecting $400/mo NOI. That's a good deal in my book, but I'm sure others do better.

I might lose an entire year of what I can "net income" when one of these systems needs to be replaced, but that's okay. There's only one of that system in that house, and it won't break again for another 20 years.

I think it's the people buying NEW houses that are at greatest risk of misunderstanding. If a person buys a house with a new roof, is that person still deducting $50/mo out of cash flow expectations to replace it, as I've shown above? How about on the furnace?

I'm going to side with @Mike H.'s minority opinion on this one: Take the money. In fact I'd take anything north of maybe 1.5 months rent. Why not? If she's late again, immediately file paperwork again. Keep adding court and eviction costs to what she owes. You really don't lose anything by taking her money, as long as you take enough of it so she can't win by stringing you along again.They can pay you at any point up to when the sheriff is at the door.

I've done this numerous times with several tenants, and in the end they either finally can't pay and get evicted, or get better at paying on time. Either way is fine with me.

The key is to always follow the steps toward eviction as soon as legally allowed.

@Jack B. - You are donating $400/mo to this very nice person with two nice kids. How about the fact that $5k/yr at 7% cap rate is $72,000 of value lost on the market value of the property!! If she paid market rent, would you give away $400/mo otherwise? From your comment about the roof, I doubt it. In fact you may be falling afoul of gift laws and income tax evasion. You are required by tax law to charge market rents and to pay tax on that income. By failing to do so you're cheating the govt out of their money. No joke!

A $50/mo increase is dumb.

You really need to person-up on this issue.

@William T Carey - Yes, I overlooked your negotiated $240k price. Also yes, 8% is making me feel better about it. Particularly considering the other advantages of living there.

Actually I have a question for you: Would you be able to write off all expenses and mortgage interest, while only declaring income from the other 3 tenants? Or do you need to partition out part of the expenses for yourself and not write that off (because it's your primary residence)?

@William T Carey, @Thomas S. is using the 50% rule to estimate your net income as half of the gross. He's also assuming all units are rented, which is the right way to consider the property. You have to imagine that you are your own tenant, paying $1000/mo for the 2-bed.

So assuming that you actually net $1800/mo on the property (before the mortgage), that's $21,600/yr. Assuming all-in cost of $300k, that's a 7% cap rate. Acceptable, but not awesome. The fact that you can live there might make it a little better if it's the type of place you'd live anyway.

@Kourtney Post - A lot of advice in this thread about financing - but I really think your best bet is finding a partner (rare for me to suggest that) with a lot of experience. You go find a good deal on something that costs ~$100k. That's your contribution to the partnership, along with your $12k. The partner brings experience, plus his $12k. You do the deal together.

As a bonus, this acts like a check on your sanity. If the experienced investor isn't interested in the "deal" you found, maybe it's not that good a deal anyway.

@Chris C. - The issues you're finding around LLCs/Trusts are because you're talking to residential lenders about Fannie Mae loans. Fannie Mae and Freddie Mac make only residential loans. If you want to hold your property in an LLC or Trust, you must get a commercial loan. You can find commercial lenders if you call around and talk to some smaller/regional banks. Note that you will still be required to personally guarantee the loan, but it won't necessarily show up on your credit report.

Not sure your goal on this though - I've got an LLC and have done a couple of commercial loans, and honestly I still wonder why I bother.

Be careful about buying the property and financing it in your personal name, and then transferring it into the entity. This would trigger a due-on-sale clause requiring the whole loan amount to be repaid immediately on any transfer of title. They aren't often enforced, but it's something that I would stay away from as a matter of principal.