All Forum Posts by: Pete Harper

Interesting question, one I've been pondering myself.  I started off our real estate journey four years ago.  My wife and I were recently retired and I set a goal of $100k a year within the first three years.  The idea was to diversify and supplement our retirement income.  We hit my $100k number the second year, four years in we are over triple that number. I have been astounded by how quickly real estate scales.  We started investing primarily in small multi-family properties; duplex and four-plex.  We would buy properties that needed mostly cosmetic updates and do most of the work ourselves.  Being retired I had the time and energy.  We like small multi-family so we can work on one unit at a time.  While we were doing renovations the other unit(s) would help pay expenses.  This quickly scaled to where we were not spending any out of pocket money on renovations.  Now four years in we have 38 total units and things have scaled to where our properties are buying new properties.  We've even been able to hire contractors for the major projects.  We just finished a full gut renovation on half a duplex bought with proceeds from our rental portfolio.  

Our retirement journey has been much different than expected.  Our living expenses are less than I had anticipated and the real estate side has been more successful.  My wife and I are currently debating "How Many is enough?"  I still really enjoy real estate and want to keep going.  

Quote from @Kris Wong:

You do not need separate bank accounts for each of your series cells in a series LLC. All you need to do is account for them separately in your bookkeeping software. You can also "transfer" money between Cell 1 -> Parent series -> Cell 2. I put transfer in quotes because it's all the same bank account. These are just accounting entries. This is essentially a distribution followed by an owner contribution.

You can choose to get a new EIN for a series if it's required for lending or some similar purpose. However, you still do not need a separate bank account. There's a lot of misinformation out there regarding series LLCs because they're relatively new, and there's not a lot of case law around the entity structure, specifically.

I was told differently by my attorney.  Each Series needs to maintain its own bank account otherwise you are co-mingling funds.  I have mine set up with Wells Fargo.  Each series has a savings account to receive funds.  The parent has a checking account.  To pay bills I transfer money from the child to the parent account.  Only the parent has a unique EIN number and files tax returns.

Duplex wins hands down! If you look at cost/sqrft a duplex will be cheaper.  If you intend to scale it is much easier to pay one insurance policy, one tax bill, one mortgage, etc.  The other advantage is you spread your risk.  If one side is empty you still have the other side paying the mortgage.  If you are buying a property that needs work you can renovate one side at a time while the other side remains rented.  Once the first side done you rent it at a higher price and use the income to renovate the second side.  We've used this strategy to self-fund all our renovations.

Quote from @Anjelica Allen:

Greetings everyone,

So I'm one week to closing on my first home. I'm purchasing a Duplex with a 203k FHA rehab loan (Property 275k).

1. The first unit needs repairs, nothing major (Estimate 27k). Second unit is occupied with tenants that are refusing to pay market value, they are paying 950, when the average rent is 1200+. I don’t like the idea of market value terms as rent prices and incomes haven’t matched in years. Seller claims they will give notice to vacate upon closing, which begs to questions does this fall on me now?

2. Another issue I'm having is that my lender requested me to pay the full year of home insurance before closing, even tho payments after closing will continue to go to escrow from mortgage payments for the year I just paid for. Lender stated that everything about my property is expensive, and 203k FHA loan doesn't allow/ or have grants available. Why not? Why do I have to pay this now, instead of paying it during closing with loan?

3. Lastly the biggest issue of it all is that the Loan Estimate had me closing at -8k, which was great, because I could keep my reserves to apply to the principle and or unexpected costs. But I received my Closing Disclosure document to sign and now its saying 18k to close, which wouldn’t leave me with a lot of cushion afterwards. 

With all the documents to sign, legalize language, and seller pressuring to close. Something just doesn’t sit right with me and I don’t know if it’s something I’m missing or I’m about to take on a problem. I’ve saved for so long to get to this point, that I’m worried after all this, I may have to walk away.

Make sure the seller has the tenant vacate prior to closing.  If need be the seller is going to have to evict.  Once you close the tenant becomes your problem.  Don't let the seller dump his problem tenant onto you.

That sound right on insurance.  You pay the first year up-front, escrow is for next years insurance.  The bank will always want you ahead on your escrow payments.  You will get a partial year credit from seller on taxes.  Don't be surprised if your bank wants taxes paid up front as well.  The Closing Disclosure Document is your closing costs.  

Sounds like you need a good real estate lawyer to walk you through the process.  

Quote from @Cynthia Martinez:

Looking to hear others' experience and insights -  

-How to quickly diligence outstanding liabilities (e.g. mortgages) that would not be wiped out by the sale?  

-Minimum red flag diligence to determine a max bid and cover major risks, while still being an efficient use of time?

-For residential property - expectations for the property while prior owner has redemption right - challenging to resell or lease during this period?  likely scenario to evict / lease-back property to prior (tax delinquent) owners?

-Specific to Harris County, TX -  is this sale too competitive to find a good deal? If so, which surrounding counties would you consider, if any?

-If you have pursued tax sales (especially if in the Harris county / surrounding county areas) - did you find success with this approach or did you abandon it?

Thank you! 

Texas tax sale are not for the faint of heart.  

I usually start out by a quick google/zillow search of the property.  Don't be surprised if the house is no longer there or the roof has fallen in etc.  You can screen out the really bad ones.  

Next I would do a search in the county appraisal district and county clerks office.  Any liens on the property will be recorded.  City fines are not cleared with sale. I purchased a vacant lot that had weed abatement fines greater than what I paid for the lot.  Fortunately I was able to argue with the city and get them removed.

Watch the redemption period.  For owner occupied the previous owner has up to two years to redeem.  As others have said you will not be able to sale until the redemption period is over.  You can't do cosmetic repairs during the redemption period.  The owner doesn't have to pay for cosmetic repairs should they decide to redeem.  You can make structural repairs to stabilize the property like a new roof that would be covered in redemption.  Check before you do anything. You can lease the property during the redemption period.  You can even lease back to the previous owner.  The Sheriff said they would fast-track evictions.

You can't go inside the property for inspections.  The best you can do is walk outside and ask the current resident if they will let you inside.  Don't assume just because a property is occupied "it can't be that bad". Learned that the hard way, after purchase we did inspection and could see daylight through the bedroom ceiling.  

Almost all the good properties get cleared off the auction list at the 11th hour.  The current owner comes up with some cash to make a payment.  You'll see the same property show up the next auction.  I've see the same property pulled three times this way.  At the auction you will see the pro-flippers show up.  They know what they are doing and gobble up the best properties.  Know your top price and don't get caught up in a bidding war with these guys.

I came up with a slightly different strategy.  With the tax sale list you have a great list of motivated buyers.  Start early enough and you can contact the current owner and offer to buy the house cheap.  For the owner they get something for the house rather than loosing it all to the auction.  You will need to pay the back taxes and avoid a bidding war with the pros.  I had one deal like this but decided to back out after I discovered the roof over the kitchen was falling in. The majority of what you will find are properties where the previous owner has passed away and there is no immediate family to pay taxes and take care of the place.  Frequently the property has many years of deferred maintained and neglect. 

I've purchased a couple tax sale properties but have decided the "juice is not worth the squeeze".  I've had better luck with traditional "yellow letter" campaigns on select properties found by driving for dollars.

Quote from @Jules Simon:

Thank you Karl. We are especially concerned with the insurance prices since they seem high to us.

Jules

Insurance rates are going to be very high on the coast.  More than double what they would be for a similar home inland. You need to carry a special flood policy in addition to your regular homeowners policy.  When we were flooded in a hurricane you have two separate claims.  FEMA flood insurance covers any water damage from ground flooding.  We had additional water damage from wind driven rain that was covered by homeowners.  Don't go cheap on insurance.  Remember it is not a matter of IF you will be hit by a hurricane or tropical storm but WHEN.  Galveston has the destination of being the site of the deadliest hurricane in US History.   

John, You arrived in Austin too late.  You should have seen it before all the hordes of Californians ruined it. (Ya, Just joking)

We first moved to Austin in the early 90s. This was right after the Saving and Loan bailout. Property was cheap, cheap, cheap. In our neighborhood there was a new HUD foreclosure every week. You could buy SFH for pennies on the dollar. Knowing what I know now I should have bought up a bunch of properties. Say la vie. The current pricing run up is just another market cycle. I think we will see prices moderate or even come down a little. Invest for the long term. Austin still has that cool vibe. Compared to the rest of Texas there is still a lot going on. 6th street live music, UT Sports, and Lakes. Strong Hi-Tech jobs market. There are still good opportunities to invest in the path of progress along I35; Temple, Waco and Killeen.

Personally I would not invest in Houston.  The weather is too unpredictable.  You never know when another Gulf Hurricane is going to move in and flood everything.  The flood maps are notoriously bad with very little predictability of what areas are high risk.  Insurance rates are sky high.  Jobs market is overly dependent on oil and gas. Further North is better along I45; Woodlands and Conroe.

This more recent data is counter to the article above.

https://www.biggerpockets.com/...

To put the 111,000 people into perspective.  There are over 40 million people living in California.  That represents less than 0.3% of the population.  Not exactly a "mass" exodus.

Whats always missing in these analysis is the difference in wage scale between TX and CA.  After 20 years in TX my wife and I moved from Collin County to Santa Clara county.  My wife worked for Collin County and found a similar job in Santa Clara county.  Her wages literally doubled, plus she earned a very good pension in CA vs nothing in TX.  I worked as an engineer in hi-tech and my wages doubled as well.  We enjoyed a very high standard of living in CA.  

What is also missing is property taxes.  Property taxes are outrageous in TX and go up every year.  Our property tax bill went down when moving to CA, plus with Prop 13 they don't go up.  Unlike TX, no fear of being taxed out of your home in CA.