All Forum Posts by: Account Closed

@Jonathan Johnson We quite a few large property owners as well as third party property management firms that are hired to manage these large properties. In my experience it is not so much the size of the property but the type of investor that dictates the type of management. 

Owners who are investing as a full time job and plan to be deeply involved in the property tend to hire their own staff who are trained to come to them with any large problems or questions. 

Owners who are making a passive investment tend to hire third party firms who are trained to contact their company management for large issues. If you plan to be heavily involved then hiring a third party manager will create all sorts of communication issues and probably not work for you. A large part of the expense of a 3rd party firm is the upper level management who has the skill and knowledge to make high level decisions. An involved owner does not need this service and would be wasting money with a 3rd party firm. 

That being said I have never seen a property with 100 units that does not have on-site management one way or the other. 

Jeremy H. You can only deduct expenses that you actually incurred. If the premium was refunded you did not end up paying it and therefore can not deduct. Real estate provides so many tax deductible expenses like depreciation, interest, taxes, etc. that you would have a hard time showing a taxable profit for most rental properties. I wouldn't spend too much time trying to scheme an extra dollar or two from the IRS.

@Joe Duhamel I would agree with @Anthony Thompson that you need to take in all of the information and make the best business decision for you. Requiring all of your contractors carry workers compensation, liability and auto insurance, provide you with a certificate of insurance and sign a contract requiring the proper risk transfer is certainly the safest way to go. However, as an insurance agent I think it is our job to provide you with all of the various options and including the safest route and let you make the business decision. I would note a few things based on other comments I have seen on this thread.

1. The size of the job is completely irrelevant when determining insurance and risk transfer requirements. We see just as many large claims resulting from a $2,500 job as we do a $100,000+ job. In fact, the guys doing the smaller jobs tend not to be as professionally trained and tend to carry lower amounts of insurance. This can actually make the small jobs more risky in some circumstances. 

2. Carrying your own work comp insurance can result in large additional premiums during an annual audit. If you are in fact purchasing property in order to remodel and resell you are likely going to be considered a contractor under workers compensation law and could absolutely be found liable just as @John Lapointe suggested. In this circumstance I agree with John that a policy is necessary to provide proper protection. That being said, you need to be aware that your work comp carrier will audit your books at the end of every year and you will be charged for every $ of insured subcontractor payroll (a relatively lower rate) and for every uninsured subcontractor (at the rate for that contractors trade). If you are not aware of this fact you may end up paying much more in premiums than you calculated ahead of time. 

3. Practically speaking you will almost certainly run into contractors that do not carry work comp insurance when you are bidding small residential jobs. Work Comp insurance is much more expensive than general liability insurance in most cases and sole proprietors can legally not purchase work comp insurance when they are the only employee in most states. It is not realistic to think that you can demand all of the requirements above without getting push back from some contractors. I would recommend that you talk with your insurance agent and attorney about how you want to handle this situation as soon as possible and determine what your stance is going to be on this issue. When it inevitably comes up stick to whatever policy you determine is best for your business in the long run. 

I think @David Zheng is correct about property values not being an issue when it comes to being recession proof as long as your rental rates cover your expenses.  During a the real estate boom. During large real estate booms the prices tend to increase significantly more than rents. If you are analyzing deals based on the cash flow of a rental you would likely just not buy new properties during a boom since they would not cash flow. The graph below from The two graphs below from The Economist Magazine website show that home prices and the ratio prices to annual rents goes up in unison. 

@Chris Coleman If you know the St. Louis market well there are tons of great cash flow opportunities for buy and hold rentals around SLU and WashU. The charts above illustrate that even in peak times there was almost no appreciation in the market so in my opinion your analysis needs to take into account 0% appreciation and be based solely on cash flow potential. Since you went to SLU you should know the area somewhat well and should be able to tell by walking around the property if you are on a good or bad block. That being said I prefer investing in the relatively more stable suburbs for a smaller profit. That however is just my personal preference and I am probably in the minority of investors in the area. 

@Toris Diggs i think your observations are exactly correct and the fact that most small residential property investors do not understand the numbers is what makes it such a great opportunity.  Google stock has 1,000s of well educated analysts running numbers on its value, large commercial or residential properties are looked at by dozens if not more institutional investors with entire divisions dedicated to determining the value of an investment while 4-plex or smaller is full of inexperienced or uneducated investors.  Real estate come with substantial risk no matter what but a lot of that risk can be mitigated by understanding the numbers. 

@Thomas Franklin's formula is perfect but does not account for the two costs that vary the most ARV and cost of repairs. The reason for this is that there is not one good formula to determine these factors. ARV can be found using comps. However, comps can be very misleading if you do not know the area super well.

For that reason, I think a discounted cash flow model is the only safe way to value a property. A more detailed version of rental rate - expenses - mortgage = annual cash flow. Annual Cash flow / discount rate (5% for example) = property value. You still have to estimate the rental rate but it is much harder to miss a rental rate by 20%+ then it is to miss an ARV by 20%+ using comps.

You should be able to get a general sense from talking to contractors in the area what the cost per square foot will be to renovate the property.  Many small remodeling contractors will come out and look at the property before you have purchased it and give a conservative estimate based on the renovations you want to make. Finding a trustworthy contractor whose bid will end up lower or at the initial conservative bid is a big part of your success. 

@Phuong Uyen N. It is normal for insurance policies to be bound with an effective date of closing or date of auction win and then take a few days or weeks for the actual full policies to be processed and issued. If you requested the policy be issued effective the date of the auction and the insurance company confirmed they would bind coverage that date you should be covered in most scenarios. 

If on the other hand you planned to request coverage the next day and had already found out the property was damaged at the time of requesting coverage you will potentially be out of luck. 

Whether or not you have coverage is very situational and you should be on the line with your agent as quickly as possible to get this figure out. 

@Isiah Ferguson I am with @Thomas S. on this one. The numbers may work out a bit differently dependiing on your area but you will earn around 2-5% return on a 100% cash purchase which is similar to a mutual fund.  Putting everything into the performance of one property is actually riskier than buying multiple properties with mortgages in many ways. Multiple properties diversify your portfolio and cash flow from performing properties can pay for under performing properties.

@Ray Bartle I will not even waste my time looking at a condo if I can not get confirmation that they allow rentals and my offer is always contingent on the association having no restriction on the number of rental units and restricting short term rentals. Condos that sell for sub $150k prices tend to be made up of at least 20% rental units.  Steering investors away from condos due to the fact that the Board could change their rental policy out of the blue is something I have seen pretty regularly on BP.  This change can actually not be done at the board level but must be done through a vote of 65% of the unit owners. 

It is theoretically possible that a super majority of unit owners could purposefully force a large portion of owners into assessment default, decrease the market for their condo when they wants to sell and have no flexibility in the event that they can no longer afford to live in the association (think 2008).  However, practically this this would never happen in the sub $150k price range. 

Up until a few months ago to be an FHA eligible condo association renters had to make up less than 30% of the units and no one owner could own more than 10%. This made having an investor friendly and FHA friendly association almost impossible. Restrictions have since loosened but the jury is out on what effect it will have. In A neighborhoods with a significant young professional population I think the ability to rent is much more important than the ability to finance with FHA. That being said, I invest assuming 0% appreciation and am not really worried about selling for a profit.

@Michael Washington The first step in this process is taking an honest look at whether or not the appraised value reflects the true market value. If so you could sell the property for a $46,000 gain giving you double the cash you could get from an 80% LTV loan.

Switching the title from an LLC to your personal name does not effect the terms of a commercial loan that you have personally guaranteed in most situations. However, it does open the door to the possibility of getting a personal loan. Personal loans are almost entirely based off of the income you generate in your day job and your net worth. If you have income from your day job to support the debt service you wont have a problem. If you don't then your probably better off with a commercial loan where the economics of the deal are more strongly considered.

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A good family friend of mine owns significantly more properties than I do and has a maintenance man who is on call for all of his properties.  He was willing to let me use his name as a reference when asking for similar services and was able to cut a deal that I am sure he would not have been interested in otherwise. If you know anyone with alot of properties I am sure they would be willing to let you have their maintenance man on call during your vacation (knowing you will be serviced second if both of your properties have a problem at the same time)