All Forum Posts by: Nathan Milholin

I think there is an important emotional and mental wellness component to choosing where to live. This is going to be your home. I don't know you personally, but I have doctors in my family and know that it's not a cake walk. You have a grueling job. Where you live needs to be a place you walk into and immediately feel like a load has been lifted. Whether a place is a rental or a purchase shouldn't be predeterminative of where you live. Decide what you're comfortable with as a monthly payment (if a home, think of it as an investment--mortgage payment + taxes + insurance + maintenance + management {your time} + reserves {sh*t happens}) and base your search for both houses and rentals on that, perhaps allowing a slight premium for the rental for the convenience factor. Just my two cents.

This is unsolicited, but as a Philly area resident, I'm skeptical that keeping the Philly home as a rental is worth it. If you're absolutely sure that rent will cover the payment and all expenses, I get it. You have no money in the home other than whatever equity you've built. Someone else paying the mortgage is free money in the form of equity. But if it's sitting vacant for two months, or you can't get it rented at a price that covers everything, it feels more like a liability than an asset to me. If it's possible to sell with a gain after closing costs, that would be the more attractive option to me.

Just one more consideration--The DC area is a pretty expensive market, as I understand it. Those areas are prone to greater swings in value as the market rises and dips. Sure, the values are increasing right now, but given that we're in one of the highest boom cycles ever, perhaps waiting for a dip would be wise. On the other hand, that kind of thing is impossible to predict. Kevin is quite right that the rental premium may well be worth it for the ability to cut and run at the end of the lease.

Best of luck with the housing search and move!

@Jason Sinclair @Kristin Feerst

Welcome to BP! I also live in South Jersey and am looking to build a portfolio in the area.

As someone who is not yet ready to pull the trigger, I spend a lot of time analyzing deals and looking at properties in Philadelphia and the surrounding counties and would be happy to take a look at anything you are considering and throw in my two cents.

Hi Alyse,

This sounds like a very frustrating situation. In your position, I might be inclined to ask for forgiveness rather than permission also. Your contractor may not be willing to run that risk though.

Did you receive a denial of the building permit in writing? If so, you can appeal to the Board of License and Inspection Review. These people are more likely to actually know what the law requires. Mind you, I doubt this process is timely. In the interest of time, you may want to just get the rental permit. My guess is that you will have to get the change of use permit--it could be that the standard interpretation is that "vacancy" is a different use than "occupancy," and thus it is a change of use to go from being vacant to again being used as a 3-family building. (I would argue that vacany is non-use rather than a change of use, but that's neither here nor there). In any case, if it's simply a change in the order of operations, it doesn't really matter in the end, you have to do all the steps no matter what order you do them in.

If there's no inspection before the end of construction, you might ask your contractor if he'd be willing to begin the work while you finish going through the permitting maze. It could help your overall timeline.

A 4000 sf RM-1 property sounds like a great find! What neighborhood is it in?

Hi Christopher,

I believe the best option is going to depend on your personal income and your current mortgage situation. 

I think there is some crucial information missing here. You said you have no equity. That would mean you were able to get financing at 100% of the purchase price. The only way I know of that happening is through a VA loan.

I'm hoping that by "closed" you mean "got under contract"... If so, meaning you do not yet own the property and do not yet have a mortgage, your options are very different. An FHA 203(k) loan can cover purchase and renovation base on ARV of the property. Additional info would probably help people be better able to assist you.

Hi Benjamin,

This is all going to be rather dense, so take it one sentence at a time. It takes time to wrap one's head around. I think the concepts of creating equity and pulling out your original equity contribution are central here. Also important is the type of mortgage loan you're getting. If we're talking single family rentals, or up to a quadplex, my understanding is that most people who continue to leverage their properties do so by finding and forming a relationship with a small regional bank or credit union that is willing to lend based solely on the value of the underlying asset(s) and/or the income from the properties. This is often done with a portfolio (or "blanket") loan, which includes several properties. Personal debt-to-income ratio is not a consideration for underwriting these loans.

In the alternative, some people go to private lenders (in simplistic terms, groups of wealthy people who have pooled together to form a mortgage company) who are willing to lend on investment properties that banks are not willing to underwrite. The trade-off is that these usually come with a higher interest rate.

With regard to the equity/capital--equity is created in the BRRRR process, which usually allows one to pull out their initial investment and reuse it as the equity contribution to their next deal. There needn't be a 'ton' of equity, simply enough to support an appraisal of the asset that allows one to refinance their entire investment out. This is why everyone says that you make your money when you buy.

My first version of response to this included an overly long explanation of the deal math that goes into creating equity. If that's unclear, I can try to explain.

Hi Jason,

Disclaimer: you should talk to a lawyer and/or accountant in North Carolina if you are looking for advice that can be relied on. They carry malpractice insurance that covers your losses if their advice turns out to be wrong.

The information you are looking for regarding setting up the LLCs is available on the NC Secretary of State website:

https://www.sosnc.gov/Guides/l...

I have also heard that it can be advisable to hold each property in the name of a separate LLC, so that liability is limited to strictly that asset. If you hold all your property in one LLC, then all of that property can be used to settle the LLC's debts. Granted, many lenders will want you to personally guarantee a loan in any case. Nevertheless, for more general liability matters (e.g. slip and fall injury that your umbrella insurance doesn't fully cover) it is nice to have liability limited to each property separately.

Hi Vic,

The only advice I can/will give is to talk to a lawyer in your local jurisdiction. An accountant would also be a good idea, as there are many tax rules for the treatment of passive income and partnership income.

The following is all intended to be read hypothetically and not as advice to you specifically:

In a general legal sense (again, not specific to your situation) this is usually a slightly more complicated situation than it might seem. Being added to the title does more to hurt you than protect you. It makes you jointly and severally liable as a property owner. In all likelihood, you are also forming a general partnership with the co-owners of the property, giving you all fiduciary duties to one another. The purpose of the LLC is to avoid this liability.

Also, where I am at least, you frequently have to pay transfer tax on the value of the property being transferred, depending on the circumstances. For example, if property were in your name, and you transferred the deed to an LLC that you wholly own, you would still have to pay transfer taxes on the value (not price) of the transfer. All that is to say--I would form the LLC first, and add the LLC to the title, not my name, personally.

Hi Jose, welcome to the community!

At the start, I think some relevant questions are: 

1. Do you live near your brother, or are you trying to convince him to invest with you long distance?

2. Have you looked into the logistics of rolling over a 401k into a self-directed IRA, and do you understand how to partner with an IRA without violating the prohibited transaction rules?

3. What is your experience level with real estate investing? Real estate in general?

As a side note, it sounds like the main concern should be sounding sane, since your brothers think you are crazy! ;)

Putting the 401k aside for the moment, I think the first task you have is to show your brother(s) that you are serious and you have done your homework. I don't know your experience level, but if you haven't done any deals yet, it could be difficult to convince someone that you know what you are doing. 

You may also have to help a new investor understand the basics of real estate investing if they don't already. Perhaps you could pick out the episodes of the BP podcast that you found most informative and inspirational to have your brother listen to.

Another important point is to show what you are bringing to the table that adds value. Are you contributing money also? Are you an experienced construction worker who is going to be doing the renovation work yourself, and thus cut down on labor costs? Are you already a licensed sales agent with experience marketing property? Do you have great credit and enough income to help qualify for a bank loan? Perhaps the value you add is simply enthusiasm and the depth of knowledge you have based on your research. If so, you have to show a potential investor why that will be a good enough reason to trust you with their money instead of a regular stock market index fund (especially since the market is performing well right now). 

You can never convince someone to do something they don't want to do. You have to make them want to do it.

With no more details there's nothing to tell you but that you're just going to have to do the math to figure out the best cash flow. Three properties that cost the same to you may be vastly under or overvalued. So for cash flow exclusively, what matters is the best deal, not the property type. 

A triple-net lease (commercial) is probably going to be the least work/headache, but it also usually locks you into 5, 10, 15, etc. years at the same rate.

Getting a multi-unit (over a 4-plex) may be harder to get a high LTV, which is a consideration if you trying to do a value-add cash-out refinance.

Do you have specific properties that you're eyeing?

Echoing @Michele B. 

It's my understanding that commercial loan eligibility is assessed based on the debt service coverage ratio, LTV, and your previous experience investing in/managing similar properties. If the LLC in question has property development/management experience, then it should absolutely help in obtaining a commercial loan in combination with your ability to provide equity.

Perhaps there are commercial mortgage brokers in the forum that could weigh in on this?