All Forum Posts by: Randall Alan

 @Kyle McAdams

I probably have less of an answer for you and more of a suggestion.  From an experience perspective we’ve done 6 flips, and own 37 rentals - so take that for what it’s worth….

Our approach has always been to do the minimum amount of work to maximize our return.  As soon as you say “remove the roof”, it necessarily means having to put one back on.  It’s the most expensive part of capital expenses you run into.  Then it’s not just the roof, it’s every system… extend the plumbing, put in a new AC for the increased space, run new electrical,  and so on down the line.  Then there is the thought of the engineering it takes to support a 2nd floor.  It takes floor trusses that aren’t in your one story house.  And, as is the case with anything like what you are talking about, trying to adapt something old to a new purpose is likely more expensive than building it from scratch in the first place. 

In my opinion it’s almost always going to be more cost efficient to start with a (different) 2 story building than to try and adapt an existing one story structure to be 2 story.  The only time I might think that would be different would be based on an exclusive location where being in that ‘exact spot’ somehow provides an oversized return (think 5th Avenue in NYC), or some tourist / resort location where the location demands way above average rent.  Or when there is literally no other available spot to build on.  Then, maybe, I could see the extra expense somehow being justified.  But otherwise it’s just way easier to find the 2 story that is already there than to try and invent it out of a 1 story house.  It might even make more sense to tear down the 1 story to build a new 2 story if I had to guess!

The kicker is this:  any existing 2 story house requires no additional investment.  You are necessarily going to pay above market per square foot to try to add square footage to a 1 story building that isn’t designed for a 2nd story.  At that point, most likely your house just went upside down in value versus cost if you are talking about paying an average price for it up front in the first place.   If the house was free to you (like inherited) maybe something like that could make sense, but in the regular world (outside of those location specific places above) I wouldn’t think it would hardly ever make sense.  

My suffix is that I have never done it, just applying the basics of math, finances,  and building knowledge to offer the suggestion.

all the best!
Randy 

@Christian Dove

There are some assumed premises here… that you want to get into real estate (being this is bigger pockets) being probably the biggest.

We really don’t know enough about your situation to answer this thoroughly.  I find my self asking, “How old are you?” “why no job?”, and “Why school just part time if no job?”; and   “Are you having to support yourself?”  And “where are you living” and “who is paying for that?”  All of these things and more factor into any answer, as well as , “what is your objective for yourself and for the money?”

$20,000 is probably not enough money to buy a typical investment property, but it is probably enough to buy your own home if you got an FHA or other loan only requiring 3.5% down…but to qualify you probably need a job.

You need to get YOU in order before you go out and try to utilize that money for real estate.  Finish school, get a job, start saving towards your first real estate purchase if that is where your heart is.  The job will qualify you for a loan, and the money you have acquired will go a long ways towards purchasing an investment property or a property for you to live in , or perhaps a duplex for you to live in where you could rent out the other side.

I would say put the money for the short term in a high yield savings account.  One could argue to put it in the stock market, but there are a lot of mixed signals coming from the market, the president, and the economy as a whole right now.  Just a lot of upheaval given tariffs, and the whiplash going on with the executive branch changing policy on a near daily basis.  The market hates uncertainty, and that’s all it’s really being fed right now. 

Most financial gurus also suggest establishing an emergency fund in case something in your life goes sideways… car breaks down, or unexpected medical expense, or what-have-you.  So by putting that money in savings you effectively create an emergency fund for yourself which is one more step towards putting your personal life in order.  Real estate is a long term ‘game’… it will be there ready for you when you are ready to get in.  Until then, work on your situation… learn about real estate, attend local real estate meet ups to help determine the best path for you.

Hope some of it helps!

Randy 

 @Mike Smith

The best answer to your question revolves around opportunity costs… ie.  what else could you do with the money you would spend to pay off the mortgage.

in a savings account it will earn 4.x% per year.  The stock market - usually 8-10% per year (but who knows with what is happening these days.)  Run some calculations on other investments… be them real estate or what have you.  Let that be your guide. 

My thought is that with a lower mortgage rate you will find a better place to put your money than paying off the house.

All the best 

Randy 

@Jose Alonsoo

I would think you would go to your bank you want to do a DSCR loan with and discuss your situation with them. They would be able to provide you with a pre-qualification letter based on the specific property you are looking at. You would need to provide them the income analysis for the property (what it would rent for, etc), likely based on other comps in the area. They would then be able to tell you what they would be willing to lend on the property. They will of course expect you to be able to put 20-30% down just depending on their lending policies and your credit worthiness, etc.

While DSCR loans are primarily based on the cash flow of the property, YOU do still figure into that equation, just like with a regular loan. They just look at the property MORE than you… but they don't JUST look at the property.

Randy

Quote from @Phyu Phyu han:

@Phyu Phyu han

Do you mean you opened an LLC?

Check here:

https://www.taxslayer.com/blog/living-in-one-state-working-i....

From that website:

“If you earn income in one state while living in another, you should expect to file a tax return for the state where you are living (your “resident” state). You may also be required to file a state tax return where your employer is located or any state where you have a source of income”

Hope it helps!

Randy

 @Gage Perkins

Hi Gage,

It sounds like you are on the right track… reading books to build both your knowledge and motivation.  Being on Bigger Pockets is also a great start too.

My first suggestion is to search out a local real estate meetup.   I know you say there aren’t many.  Searching google I found this one that looked legit:

https://vtrem.com/

I’m sure there are others… even if maybe in a close by neighboring state.  But I think you will definitely find them in Vermont if you search them up.  While I’m in Florida, I know there have to be groups in Vermont.  The nice thing about hooking into a group is that you meet real people where you can ask lots of questions and just absorb a lot of knowledge.  Once you find one, find the people that are doing what you want to do in that group (be it rentals, or flips, or whatever)… and ask them if you could meet up with them for coffee some time to discuss things… like how they got started, etc.  It seems like such a trivial thing, but what you will find is that is the first step in making connections, that will grow both your knowledge, as well as opportunities as you learn more.

As an FYI, I got into real estate when I was 47 (now 55).  So mid 30’s is the proverbial ‘spring chicken’ compared to me!  My advice to you is two fold.  First, it usually takes some money to jump into the ‘game’ of real estate.  So getting your own house in order there is important.  It’s not a problem to have debt.  But at the end of the day you need some disposable income you can throw at a purchase.  So you have to look inside yourself and figure out how to get there.  I went to a seminar a long time ago (I was in college) and the speaker said to the audience “You are where you are because you choose to be there.”  It was a profound thought that caused me to go quit my job the next day!  The seminar had nothing to do with real estate by the way.  But the point was YOU are the limiting factor on your situation.  You can do a career pivot way easier than your think.  At age 37 I went into a completely different field than what I was in (photography at the time) and went to work for a bank doing Anti-Money Laundering.  I knew nothing about the profession, and they expected that, frankly. They put us through an 8 week course to teach us how to do it.  I doubled my income in a matter 2 years doing that career pivot.  In my opinion it would be hard to get into real estate making CNA pay (from what I know of it).  So I would encourage you to look for a way to increase your income - and that might include a career pivot.  Perhaps the pivot to Building trades was just that!  So if so, good job!

Keep in mind that real estate is a get rich slowly proposition.  Sure, you could do a flip and make a chunk of cash.  But not if you can’t buy the flip and afford to do it.  As a beginner flips are not only daunting, but somewhat dangerous, in the sense that you don’t know what you don’t know.  Little mistakes can be expensive if you miss them.  So personally I would not recommend flips - especially with someone who has limited funds, and even less experience doing them.

As for what to do, my suggestion to you would be to buy a duplex and live in one side, while renting out the other.  You already likely pay rent to live someplace… so it’s really money you are already spending every month.  When you buy a duplex, you usually can make your entire rent payment from the money your renter is paying you.  So in essence you get to live rent free.  You then take the money saved and start saving it towards a down payment on (another) new house for yourself.  Once you have that down payment saved up, you move out of the duplex, and rent both sides… and just like that you have 2 doors in your budding portfolio.  It’s about the cheapest way into real estate.  You can get a loan with 3.5% down as long as you live in the property for a year.  It’s about as good as it gets.  Yes, you need the 3.5% down.  If you don’t have it you have to figure out how to get it.  Maybe its work overtime, or partner with a family member, or ‘whatever’.  Real estate isn’t magic… it takes skill, dedication, and effort.  You can start out excited about it from reading things like Rich Dad Poor Dad… and that is awesome.  But there is the ‘reality’ that you have to put yourself in a position to be able to make the next move to start down that path, and realistically it’s going to take either luck (like you inherit some money or something like that) or hard work and dedication where you force yourself to save money to be able to make a purchase.

There are a lot of options.  Some might suggest wholesaling, where you go out and find deals and sell them to another investor, etc.  While it’s possible to do this, competition is fierce (I get 3-5 calls a day from wholesalers looking to buy my properties).  It can be done… but in my opinion its a lot of spinning your wheels and dealing with a lot of bad situations (desperate people who you are somewhat exploiting to cut yourself in on their bad fortune).  It can be ‘spun’ to say you are helping them out.  But from my experience the seller would have almost always been better off just listing the house ‘as is’ and getting what they can get for it, versus both the wholesaler and another real estate investor profiting off the deal.  Going and getting involved with a local group will give you exposure to a lot of ways others got started.  It’s another benefit of finding that group!

I wish you the very best as you look to enter the profession

Randy

@Steve Smith

Those are two very different things (trustee versus  beneficiary).  The trustee “runs the show” as to managing your trust, while the beneficiaries are the recipients of what the trustee is managing.  While the trustee can be a beneficiary - it’s more a matter of trust.  Do you trust that person to carry out your wishes.  Making them a trustee doesn’t add to their ability to receive the items that they are the beneficiary of.   Put someone you think is business minded and smart and you trust as a trustee.  If the beneficiary is a close friend (and not the trustee) it might be worth sharing the trust document with them (or if you have a complex trust just sharing with them the portion that speaks to what you are making them the beneficiary of) so that if / when you pass they will know it should be coming to them.  It really goes back to “do you trust your trustee?”  

I can tell you I have witnessed years after the fact  a trustee with the best intentions not do the distributions correctly where a family member sort of got ripped off.  we were taking over the trust due to the age of the trustee.   I don’t think it was  intentional… but people have a limit as to their own ability to carry out instructions (ie. they have to understand the document, their role, the trust, taxes,  etc.  and trusts being written in somewhat legal-eze, it isn’t too hard to imagine someone screwing it up!  Usually a person can turn to an attorney if they need help… but that’s not to say that they won’t think they have the situation under control when they might have misread the document and don’t.

I imagine you are the grantor and initial beneficiary, and as you said your friend is the successor beneficiary.  That makes logical sense and should be fine as far as in understand it.  FYI, I’m not a lawyer, but manage 8 trusts for my family (all the grandkids from their grandparents)
 

Hope some of it helps!

Randy 

@Sami Gren

Hi Sami,

 You haven’t  provided much info as to the nature of the house, so my information will be a bit generic… but essentially the way you get rid of a rat / mouse problem is to eliminate their access points into the area.  We usually have more issues with this at crawl space houses (where there is not a concrete foundation.). They crawl under the house and find a way in.

The way to mitigate this is to use 1/4 inch screen that you can buy at Home Depot, etc and screw it into the bottom of the frame of the house and run it down to the ground and possibly even out away from the house a bit(think L shaped pattern).  If you leave any access points uncovered they can find it! 

The same goes for roof access and through any vents in the house, etc.  if you try to hire it out they may try to charge you thousands (the quote we got was $3,400 for a 1,200sf house).  We bought the screen for about $150 and spent a day or two installing it ourselves.  We used tin snips to cut the screen.  It came in 2 foot tall runs, but we usually were cutting this down to 1 foot or so.  Just depends as on the height of the gap  you are trying to cover.   Rat problem went away!

As for the ones there now, you can use traps or poison bait, etc.  But if you use poison you run the risk of some dying in the walls, etc where they will smell for a month and be annoying to the tenants.  We have used commercial pest control services for the clean out where they will come back and service the traps, etc. Of course this does no good unless you did the screening first!

all the best!

Randy 

@Jim Carey

Hi Jim,

I have a word or two of caution for you.  I'll start out by saying I'm from Florida -so don't know Tennessee's specific rules -but would encourage you to consider / check out the following possibilities that impacted us when considering the switch to LLCs:

1. Understand that the LLC you want to switch to is basically considered 'another person' when it comes to taxes. This means it's not really a "transfer" from yourself to yourself... it's essentially a sale of the property to the LLC (which is not you). That means that all the regular fees associated with the sale of a property will likely apply to each "transfer". So whatever the transfer taxes are for the sale of a property, they will likely apply to you in the transfer to the LLC. For us, this would have worked out to be thousands of dollars per property.

2.  In Florida, there is basically a form of 'grandfathering' when it comes to valuation of a property for tax purposes.  In short, the legislature said Municipalities can't raise taxes by more than some percentage per year... think it's around 3-4%.  But effectively this created a cap on what municipalities could raise taxes by.  So when the value of a property went up by 10%-20% in a year, they could only raise the taxes by the 3-4%.  This created a grandfathering where there was what was called a "cap differential".  For our personal house, as an example, this differential is in the hundreds of thousands of dollars where the municipality was not allowed to raise our taxes more than that 3-4% amount each year.  It applies to all forms of real estate though (here in Florida)... not just homesteads.  The catch is - as soon as you sell / transfer the property - the cap is removed and they can tax at the present value, not the purchased value that may be hundreds of thousands of dollars less.  So that sort of froze us in our tracks as to transferring to LLCs.  Had we done the transfers immediately when purchasing the properties, this would not have been as much of a concern.  But if you are like us, and have owned them for 5+ years where we all saw the run-up in values between 2020-2023(ish) - this could be of substantial impact if Tennessee is similarly positioned. 

The alternative for us was to consider an umbrella policy for our properties.  This worked out in the short term until the insurance companies came back and said, "You have too much risk to insure" (via an umbrella policy).  At the moment we are left exposed, so to say... but there is probably a commercial option for us - if we can afford it.  (We presently have 39 doors across 27 properties).

As to how to continue to finance properties - this is what we did:

We went to our local bank - which happens to be a portfolio lender (meaning they don't sell their commercial loans - they hold them in house).  Because of this, we were able to refi 5 of our smaller Fannie Mae loans into 1 commercial loan -and at the time - lower our interest rate from the 5's to 4.1% (This was in 2020 in case you are wondering about that rate).  The advantage was that this freed up 5 Fannie Mae loan slots for us to continue to buy properties through our own name.  The downside was that commercial loans only 'lock' for 5 years typically.  So we are now facing a loan reset in a few weeks where it will be based on the 5 year continuous maturity note rate from the Fed, plus a margin of 2.25%.  Probably looking at going from that 4.1% to about 6.25 or so, depending on if the financial world implodes in the next 2 weeks! (lol!)

One other consideration - which will depend on if you are married or not...  We made sure to put each property just in one of our names.  This has the advantage of giving you 20 Fannie Mae loans available to a married couple - although it drops by at least 1 each, because Fannie Mae makes you be joint on your personal house if you own it.

Hope some of it helps!

Randy

@Pavan K.

Risks?  Let me count the ways!

First - if there is a bank loan - they will insist on being in first position.  So now if anything goes wrong, you are not at all guaranteed to get your money back - or put another way the bank gets first dibs.  Lots can go wrong... It could be anything... a mistake in estimating, a cost overrun, or something like the place burns down and the insurance wasn't properly taken out, or theft (of the money outright) or theft of materials along the way.    

My buddy just got burned by someone borrowing from multiple people where the others weren't aware of each other and they thought they were the only one lending, etc.

It all comes down to how well you REALLY know each person in the deal, and then, "do you REALLY know them?"  It is hard to even know where the problem could come from.  The fewer people involved, the better.   I would be asking, "If there is a bank loan involved, why do they need MY money?  I'm guessing for the down payment?  Which translates to, "I can't afford to really do this, let me spread the risk."

My friend who got burned would say, "Don't lend any money that you can't afford to lose."  I would say, "Deals like this go fine all the time... until they don't!"

All the best!

Randy