All Forum Posts by: Nate R.

This is not financial advice, but...

You sound like you are stressed out and tired of the headaches of landlording.

You could look into rolling the money into a bigger deal using 1031 and hire a PM. But there is a conflict of interest between PM and owner, typically, as they have different incentives. Also, even with a PM it is not a completely passive option.

Another route is to go completely passive, into something like syndications as an LP, where you have no personal liability for the debt and can't be sued. In multifamily where there is bonus depreciation, you can get a big depreciation deduction in the first year, which offsets the capital gains you would have from a sale. There are also opportunity zone funds which offer deferral of capital gains, and this administration seems to favor this tax break. These completely passive options involve no time but you would lose control.

I would never let the taxes drive decision-making. Also, anytime you consider relative returns you have to look at the hassles and risks. Comparing returns if they're not apples-to-apples comparisons makes no sense.

Take the money and run.

Is anyone else dealing with this? 

I purchased a turnkey property in Jacksonville through a well-known company that has been discussed many times on BP and haven't received rent. It appears the tenant had enough to pay the first month rent and security deposit, then stopped making payments in April. There was a story about how they were shot and in the hospital (which happened after they were late), now they're claiming to be affected by Covid-19.

This company offers a rent guarantee. They wanted to see how it played out (could they work out a payment plan?), but it's becoming clear this tenant will continue to take advantage of the CDC eviction moratoriums as long as they are in place.

The eviction moratorium was just extended again, despite a federal judge ruling it unconstitutional. There seems to be no end in sight to this unfair situation.

Curious about this. If I understand correctly, the seller recently acquired and remodeled this home and *replaced* the water heater with an old model. The only reason I could think of for this is that the federal standards mandated a certain size and the new ones don't fit into the existing space (typically, an attic). I remember this was a big issue a few years ago and people were scrambling to figure out what to do.

$150/mo seems typical in San Antonio. Not taking into account vacancies and repairs if it is an old house.

We have a rental there that is professionally managed, financed in 2018 with 15% down. After all operating expenses and financing costs, I'd say it's basically break even, perhaps even negative cash flow.

I would give up on the idea of buying for cash flow and consider if you are OK with several years of very low or no cash flow in order to get the other benefits. If you just want cash flow there are better options like hard money lending.

I would ask for concessions and see if the deal still works. 

These seem like common issues. A flipper isn't necessarily going to replace everything to bring it up to current code (although they should). 

Regarding 1) Electrical panel. Our property in Texas (built in the 50's) was purchased in 2018. Two years later, tenant started reporting issues with the power. Utility came out and shut off power pending a replacement of the panel to bring it up to current code. This cost us about $1500.

When I looked at the inspection, I saw some minor electrical things - nothing that indicated replacing the panel. So, it's lucky that you found that.

This is an easy question to answer: You simply need to find a commercial lender who will underwrite your loan on the rental income that the property generates. The terms will be worse than a conventional loan: higher interest rate, higher fees, prepayment penalties, escrow requirements for 2-3 months rent if vacant, etc. I was recently quoted 5.75% 30 yr fixed, 3% origination fee, 5 year prepay penalty. Amazingly, the deal sort of worked, but the cash flow was pretty thin.

As you will be personally guaranteeing the loan, it doesn't matter whether you form the LLC first or put it in later. Of course, it avoids the need to transfer title if you just go ahead and form the LLC first and get the loan in the entity's name.

I had a similar experience on my first deal. I bought an old house that was purported to be "turnkey" - not through a turnkey provider but from a seller who performed some shoddy rehab work. We've had a few surprise big ticket repairs (electrical, plumbing) in the past couple years, and right now considering what to do about a tub that needs to be replaced.

Our cash flow is pretty thin (about $100/mo), and accounting for the repairs it is clearly negative cash flow. On the other hand, the property has appreciated since we bought it. 

A few of things to consider:

1) Cash flow is only one component of return. Appreciation and amortization are the big ones. 

2) Your loan is a dollar short position, and as the dollar loses value, the value of the debt does, too. Inflation-induced debt destruction, though, takes many years to play out.

3) Your tenant is paying down the loan for you.

4) Rents will rise with inflation, putting you in a better cash flow position over time.

As one of my mentors says "Most people feel foolish when buying rental properties" because in the short run, there is very little if any cash flow to justify the problems that come up. Your post is a great illustration of this.

Thanks @David M. Definitely want to follow the corporate formalities and maintain separate finances.