All Forum Posts by: Mitch Provost

@Nick McCandless, Fundrise is a great alternative if you are not an accredited investor and want the most passive investment available. Remember that this is a fund (portfolio of properties) which means that your investment is in a pool of real estate, similar to a REIT, and your returns are a balance of all properties in the portfolio. Returns will be much lower than other alternatives, but purely passive and likely less risk than the stock market. Even if you have property managers, etc. to manage directly owned SFHs, you still have areas that can cause you headaches. Some don't consider this truly passive.

if you are an accredited investor, you have many other options to choose from for passive investing, including crowdfunding and direct investments in multifamily apartments. These investments are typically direct into the property, meaning that your name is on the LLC that owns the property and you realize all the benefits as a direct real estate owner (tax benefits, much higher returns, etc.). They are also completely passive because your are a limited partner in the deal while the general partners do all the work.

Either way you go, you want to understand the risks associated with each as you make your decisions. The key to managing risk is knowledge so do your homework and keep asking questions on BP. We are all here to help and share.

@Mario Palacios Regardless of the route you choose (insurance or LLC) for protection, remember that an ounce of prevention is worth a pound of cure. Insurance policies and LLCs are designed to help after an incident has taken place and both should be considered, but a thorough assessment of risks and a plan to mitigate those risks will help prevent an incident in the first place making both you and the potential victim better off.

I think the choice of insurance or LLC is a personal decision based on your appetite for risk (which is why I try to gain more control and focus strongly on mitigation strategies). Insurance policies have limits and conditions, so may not cover every possible incident. Also, LLCs are subject to law interpretation by lawyers and unpredictable judges. If you choose LLC, you may also want to consider an LLC (or the cheaper Series LLC for multiple LLCs) from a different state than CA for taxes.

@Dan Crenshaw You're right about loans to LLCs, they are considered commercial loans which carry different risk and associated costs. However, one common method is to take the loan individually, then transfer title to the LLC. There are tons of posts on BP about this subject and I can say from my own experience that even though my bank has a due-on-sale clause in my loan (basically saying that I may be subject to the loan being called if I transfer title), they had no issues with my transfer as long as my name was still on the insurance policy and I own the LLC. So now I have both protection of insurance and the LLC without the higher loan costs of a commercial loan.

@Matthew Powell, (I'm also not an attorney or CPA) but I can tell you my recent experience with this. I have several properties that were purchased under my name to get the good financing that an LLC can't. I also have a Texas Series LLC that allows me to add additional series LLCs by simply filing a new assumed name in Texas. As long as I follow the Texas property code and keep all the books separate as @Costin I. mentions, the code should provide protection for those new LLCs. This saves the cost of filing a new LLC (only cost is $30 for assumed name filing fee), but I had fees to transfer title of my property to the LLC since I purchased it under my name (mostly lawyer fees since the county has no online service).

One thing that caused a bit of back-and-forth was that when I told the insurance company to change the named insured on the policy to the series LLC, they didn't keep my name on it. When the bank caught wind of this, they sent me a kind letter saying that the insurance policy and the loan did not match and I need to fix that. Concerned that the bank would execute the dreaded DOS (due-on-sale) clause, I called them and told them what I was doing (full disclosure). Despite the clear DOS clause on my loan, they said as long as my name was somewhere on the policy, they would be okay. I kept the named insured of the policy with my series LLC (advised by my attorney), but added my name as an additional insured (along with the bank for the loan). I got another letter from the bank after that, but when I called they said it was a mistake and all was good with the policy and title (again despite the DOS clause).

Note that my loan DOS clause says I have 30 days to remedy the issue before they can actually call the loan. If the bank wants to call the loan after that, it will cost them and take time, both of which they don't want to spend. So I didn't see the risk unacceptable to change the name on the title (could always change it back to prevent the loan call or work something out with the bank).

Note that this is a bit of buyer beware. Theoretically, I should have protection since I have the title under the LLC and the named insured is the LLC. However, I understand that when it comes down to a law suit, plaintiff attorneys may still try to go after you personally even if it is under the LLC. It surely helps to deter the attempt (kinda like a burglar alarm deterring a burglar, but the really good ones will by-pass it if the prize is worth it), but no guarantees and who knows what will happen in court. Even so, this is still a good option to mitigate personal protection risk in real estate.

You may want to consider a series LLC under one of the States that does them. The state codes currently have some differences, but there is work on legislation that would unify the code across the country. If passed, it should provide us much better protection since it should have more standing in the courts.

What is the process to perform a reverse condo conversion? If all condo owners are willing to sell to one buyer, does the HOA now have only one member (the buyer) that can then dissolve the HOA? How is the property then re-zoned for tax purposes?

Does this also mean that less down does improve the deal? What if I used a heloc to pay all out of pocket cost where all cost is financed and the rent payments cover all those costs plus a positive cash flow?

I've always considered cash-on-cash to only mean cash, not value. This way, the calculation is straight forward, i.e. cash flow / invested cash. The invested cash for me includes all cash out of pocket, i.e. down payment, rehab cost, closing cost, etc. Cash flow would be income after rehab, if applicable, less PITI and maintenance/repair/fees.

For internal return on investment, I consider principal buy down converting to equity. However, am I missing something with cash-on cash? To get 12% and a reasonable cash flow of say around $200/mo, I need to include principal buy down in cash flow (i.e. if no principal is paid, I get the cash instead). Otherwise, cash flow needs to almost double to get to the 12% range.

Either way, all return on investment, even appreciation, should be used when comparing with market investments. If dividends from a market investment is reinvested in the calculation, so too should any returns on property. The analogy to me is that stock value equates to property equity and dividends equates to cash flow. Stock appreciation is considered in the return when buying the stock, so too should property appreciation.

I'm working with a very friendly realtor, but they just don't seem to understand what an investor looks for. Instead, leading me to homes that a home buyer might want to purchase instead of looking good deals.

@Andrew Johnson It appears to be a mixed bag. This is middle income 3/2s. There are 10+ homes in the area listed for rent and most have some level of rehab. The area is vintage late 1970's early 1980's. I'm looking to buy/hold.

I'm monitoring a target area that sold 20+ homes in the last 6  months and is currently listing around 20 more. It is an area with expected sustained growth over the next 5+ years due to nearby major retail, office space and food anchor construction. It is possible that local inflation is setting in and prices will continue to rise (meaning, get in while the gettin' is good). Is it wise to buy in an area like this and anticipate rising rents will cover marginal returns at face value (i.e accept near break even noi for the first year)?

Is it better to have many low cost single family home rentals or fewer high cost single family home rentals (assuming you invest the same amount) and why?