All Forum Posts by: John Lee

Thanks for all of the great replies. I have a business account for my primary business (non real estate) through Chase. They are OK right now, but when I opened the account 16 months ago, they had way too many restrictions. I also have personal accounts through USAA (great service, no fees) and Capital One 360 (great rates).

We ended up using Farmers and Merchants Bank. They are not a big bank (BofA, Chase, Wells), but not small either. Policies seemed pretty typical, we'll see how it goes. We have one property and another one closing this week. Will likely add two more properties within a month or so, and two after that before the end of the year.

We decided that it probably does not matter too much which bank we use for our business account. If our strategy pans out, if we have 2-5 years of strong financials (high cash-flow properties), I don't think we'll have any issues getting a portfolio loan from any bank that offers them. With the number of properties that we look to purchase, we may end up needing a second account in the future.

@Pandu Chimata, I have been looking in the same area for the past few months (Palm Desert, Rancho Mirage, La Quinta, and Cathedral City). I am looking mostly for SFH with a pool (2/2 or 3/2). The reasoning behind not going the condo route is this:
-- HOA fees tend to be high in these areas
-- Although all of these communites seem to be STR (short-term rental) friendly and have laws in place to regulate, some HOAs may not like STR's being in their community and you would be at the mercy of their CC&R's and at any time the HOA may decide to ban STR's
-- the amenities are nice, but the area has all of those amenities in general in most neighborhoods (if you get a SFH with a pool in a nice neighborhood, you get security, pool, there are plenty of gyms, parks, and golf courses).
-- the rental market is more seasonal here (Late Oct-April/May) seems to be the peak season and it gets slow in the summer heat, so you may be paying HOA fees, utilities, mortgage for half the year with no income

We have a couple properties in escrow right now in other areas of SoCal, and we have a couple others that we are actively negotiating and may go into contract soon, so we are holding off on Palm Springs area for now (my partner does not know this area well, so is initially a little hesitant).

If you might be interested in doing something together, I have a few properties I am watching in those areas. I also am considering a multi-family property (10+ units). Have an REO that I am looking to BRRR into a short-term rental (maybe BR-STR-R?). Also, have a few SFH's I am watching on MLS (DOM are high) that I may offer on eventually (200k-350k range). Multi-family is in the 1MM-2MM range.

@Tyion Bridgeman and @Brandon Battle, we will be negotiating with the sellers the payment of the added loan fees. My partner (who went to law school and has a J.D.) knows we would likely win a legal battle, but the sellers are new real estate investors themselves and we have developed a rapport with them over this long closing. We might even be able to use them or their resources in future deals / property management. So we want to keep a good relationship. They initially agreed to pay any costs we incur due to their inability to perform and close. When they found out how much it could potentially cost, they balked at the cost (most likely an emotional reaction due to the amount). They are also facing unexpected expenses in permit fees and an unwanted delay. They need the funds for another investment deal.

We know we have the upper hand but do not want to play hardball for the sake of the relationship. If it comes down to and we have to pull out because they can't close or refuse to pay any portion, then we might at that point. On Monday we find out how much of a delay we could be looking at -- there is a chance that we could close mid to late next week. We have not yet decided whether we would split 50% with the sellers the added fees (more likely to go this route if it ends up being $2k-$3k, or ask them to pay 100% (likely will do this if it is around $1k).

I'll keep updating this thread as this develops. Appreciate the input!

The sellers are doing all they can to try to clear up the permit issues. It's possible that they will be able to clear the lien early next week, which would be around 10 days for the rate lock penalty (less than $1000). Our lender told us there is a 0.25% cancellation penalty whether we choose to go with another lender, or just cancel and reapply with the same lender. Looking around online, this does not seem to be out of the norm as lenders often "charge" this fee and refund it back at closing -- but they will charge you the full amount if you cancel.

At the very least, this can be an educational lesson for others -- I don't have a lot of experience with real estate, but having done a half dozen home loans, this is the first time experiencing this. Also, permit issues (even for a "minor" fence issue) can be a big deal. The city placed the lien sometime between opening escrow (after the initial title search) and the day of closing (before the final title search on the day before/day of closing).

Appreciate all the help and input from others. @Matthew Carducci @Wayne Brooks @Charlie Fitzgerald -- your input plus some online research helped me to understand this issue better. If all goes well, we will close early next week -- sellers seem to be coming around to covering part or all of the rate lock extensions costs. If it goes beyond next week, we might just cancel and eat the cost.

Need some help and advice from anyone who might have faced a similar situation: We came to the day of closing and got notified from the escrow office that the city had placed a lien on the title due to an inspection issue (minor fencing issue). We financed a conventional loan and it had funded, but since we were unable to close and obtain title, the loan was sent back. Sellers admitted it was their fault and are working quickly to resolve this. They were very apologetic (we had known about the fence issue but did not think it would be that big of a deal). Now our lender is saying we have to pay close to $100 per day for a rate lock (since the fed meets soon and could raise rates, we think it's a good idea). The sellers initially were willing to pay any costs we might have, but now don't want to pay this high amount since the permitting process for the fence could take anywhere from 1-4 weeks. We could cancel the loan and reapply but we would be subject to a 0.25% cancellation penalty (since we are in SoCal, this is a significant amount). The sellers think this is unusual and don't want to pay it. Since the loan initially funded, I think the penalty makes sense. Any thoughts? Any lenders or someone with experience in this situation have any input?

Looking to open a business checking account in Southern California (Orange County, CA). We have our LLC set up and close on our first rental property tomorrow.

Looking to establish a relationship with a smaller bank to be able to do portfolio lending (or creative commercial financing) in 2-5 years based on building a portfolio of high cash-flowing rental properties.

Who do you use for your LLC checking account, and how has your experience been?

Looking to open a business checking account in Southern California (Orange County, CA). We have our LLC set up and close on our first rental property tomorrow.

Looking to establish a relationship with a smaller bank to be able to do portfolio lending (or creative commercial financing) in 2-5 years based on building a portfolio of high cash-flowing rental properties.

Who do you use for your LLC checking account, and how has your experience been.

@Ryan Dalton, you are not alone in thinking that just paying off properties results in greater cash flow, so why wouldn't people do that instead of leverage (I get this question a lot).

If you talk to most REI's, they will talk about leveraging your money as one benefit of REI vs. other investment vehicles. I always try to break it down this way: remember the 5 ways to make money in real estate, understand how leveraging your money can help you make more money, and understand how holding a mortgage lets you pay off a loan with money from the future (which, due to inflation, is worth less).

5 Ways to make money in REI
1. Equity capture at time of purchase (buy low, buy distressed and value-add, etc.)
2. Equity appreciation (year by year, your property value may go up in value)
3. Cash Flow (so far, the bulk of this thread is only talking about this)
4. Tax benefits (interest is deductible, depreciation is deductible = many investments can net you income but you end up paying $0 in taxes due to the many deductions available)
5. Principal pay down.

So let's go back to the illustration of buying a $100k house and paying it off, cash flow of $10k per year (your example said $1k/mo which equals $12k/year, but let's go with $10k for ease of calculation). You already did some calculations, I'll go with your numbers and you already admit that if you can leverage and pay only 10% on 10 properties, your cash flow is greater than the single, paid-off property even when factoring in property management.

But the story doesn't end there. Let's say you buy your properties well, and capture at least $2k in equity per property by negotiating the price down (very conservative # and you can easily do better than this). 10 leveraged properties = $20k extra earned equity vs. $2k earned for 1 paid-off property.

Let's also say the average yearly appreciation is 2% (again, pretty conservative #). 10 leveraged properties = $20k extra equity per year vs. only $2k for 1 paid-off property.

You will likely be paying taxes on 1 paid-off property because you are no longer deducting interest, which is a pretty big expense. If you had 10 properties, you could easily be getting a net tax deduction (instead of paying taxes) due to the multitude of tax benefits (besides interest and depreciation, you have flexibility to value-add to properties gain additional tax deductions).

Finally, you will have 10 people paying off your mortgage vs. 0 people (your 1 property is paid-off already, remember? And who paid for that property? You did. Who is paying for the 10 leveraged properties? Your tenants.).

That is the power of leveraging. You are easily looking at an additional $50k or so in the first year.

One final note, Brandon or Jay mentioned in another thread (or podcast?) about the power of leveraging (taking out a mortgage) which allows you to use future money to pay for your mortgage. Let's say you took out a $100k mortgage today and paid $10k down. You will pay off the $90k over the next 30 years on a 30-year fixed. In 2045, your mortgage payment will remain the same, but due to inflation, how much do you think everything else costs? In 1986, you could get a Honda Accord for around $9k. Today, 30 years later, a new Honda Accord costs $24k. Yet, if you took out a mortgage in 1986, you would be paying it off in 2016 with the exact same payment using 1986 dollars. No matter how much inflation the economy undergoes, on a traditional, fixed mortgage, your payment never changes. You are using future (devalued) money to allow you to buy a property in the present.

Just came back from checking out a few properties in Palm Springs area. Do not currently own anything, but am interested in the area like you. Talked to a resident about the city council meeting about short-term rentals (STRs) in Palm Springs. It was brought to the council due to a petition and several complaints about STRs, with a vote pending on issuing a moratorium (suspension of new licenses, but currently licensed STRs could continue to operate). The mayor decided to suspend a vote on the matter, issuing a statement that the vacation rental market has always been a strong driver of the local economy, so more information is needed (from both sides) before taking the vote on a moratorium to the council. So new licenses will continue to be given out for now.

Think that's a good sign. As far as I know, Palm Springs itself is the only city to bring this up, Rancho Mirage, Palm Desert, Desert Hot Springs, La Quinta, Coachella, etc. -- they all regulate STRs and charge a TOT (Transient Occupancy Tax) from around 8%-12%.

Talking to some store owners, high season starts after November, slows down around New Year's week, then picks up quickly all the way through April as all the snow-birds come in to vacation (strong Canadian market). Summer is slow, due to the 100+ degree weather. You get some seasonal events: tennis tournaments, golf tournaments, Coachella, Stagecoach, various festivals. I estimate vacancy on the properties I am interested in to be at 50% - 67%, with the potential to value-add and decrease that number.

Would appreciate input from anyone currently doing STRs in the area. Just did a bunch of research, but have no personal experience there.

@Steven Sierra, as everyone has already stated, it starts with learning and gaining knowledge. There are plenty of resources here on Biggerpockets to get you started.

Work hard at your job, cut your expenses, save your money, and spend at least 2 hours every night reading and learning. Then start analyzing properties for practice, checking out properties to learn what you should be looking for, and go to REI meetups and talk to people in your area that do REI.

Brandon Turner has a book on different strategies for no (or low) money-down real estate investing. One of the main strategies Brandon espouses in his book is partnering with people. If you know about real estate and are able to explain it in easy terms that a potential partner can understand, showing them the benefits of real estate and then presenting deals to them that make sense -- both for you and for them -- you will be able to find partners.

Links from this website that you may find helpful:

Good article to read first:

https://www.biggerpockets.com/renewsblog/2014/11/01/investing-with-no-money-down-are-you-ready-for-the-terrible-truth/

Podcast from Brandon Turner:

https://www.biggerpockets.com/renewsblog/2014/10/16/no-money-down-brandon-turner/

Ultimate Beginner's Guide:

https://www.biggerpockets.com/real-estate-investing

Good luck!