All Forum Posts by: Randall Alan

@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

@James Jefferson

Hi James,

To buy out the property you need to probably apply for a loan through any lender.  I wouldn't think it would take a private lender (which is much higher priced) than a typical mortgage broker's rates.

Is there a reason you think you need a private lender? You will need money to put down on the property. If you can qualify for an FHA mortgage that amount can be as little as 3.5% of the loan value.

In short, the previous owner made a deal and sold the house while they were still living for monthly cash payments until they died.  While I understand you want to buy the house, you are at the mercy of those that your relative sold the property to.  I don't know where you live, but it is likely that the reverse mortgage company (or whomever owns it) will file for eviction so that they can recoup the money they invested in the deal.  I would think their loan documents give them the right to control the property after the original owner dies - regardless of who is living there (although I have no direct knowledge of the laws where you live).

There are details we don't know here... like if you want the house for sentimental reasons, or because you see the value between what it's worth on the market today and what the reverse mortgage company wants for it?  It sounds like the reverse mortgage company is offering a path for you to buy it - which is more than they have to do.  Hopefully you can find a solution that works for you!

All the best!

Randy  

Quote from @Ryan Broschard:

Hey everyone,

Quick backstory. I purchased a townhome in Fort Mill, SC (Lancaster County) in July 2023. This is an investment property. The first year my property taxes were $1,619. I have just received an escrow analysis statement, and it indicates that's my property taxes for the year will now be $6,839. This is making my mortgage payment go from $2,293 to $3,308 per month. 

A few questions for those who have experience with this:

1. Does this kind of increase seem reasonable?

2. Have the property taxes increased because this is an investment property and not a primary residence?

3. Is there any way I can lower the property taxes to the original amount?

Any insights or advice would be greatly appreciated. Thanks in advance!

I have attached a photo of my original property taxes along with the new projected property taxes.

@Ryan Broschard

Hi Ryan,

You have hit a common issue many new investors fail to anticipate.  It comes down to how each county handles property tax valuation.

To put it in generic terms - a title company & lender will base your initial mortgage payment on the property taxes of the previous owner.  In short, you ride the 'coattails' of the previous owner's taxes for the first year.  Usually in the year following your purchase, the property appraiser will reevaluate the house based on the new sales price.  In addition, if this was originally an owner occupied house, there are often homestead exemptions where the first  $XX,XXX. of the value of the home aren't taxed.  In Florida where I live that amount is the first $50,000 for a married couple are exempt.

So to put all that into action, let's say the previous owner paid $100,000 for the property 20 years ago and lived in the property.  You came along last year and bought the property for $300,000 as an investment property.

So in year one, your taxes were based off the previous owner's purchase price of the $100,000 plus any annual tax increases since they owned it.  In addition, in Florida there is a cap on property tax increases each year of about 3.5% increase... but big caveat... UNTIL YOU SELL THE PROPERTY... then the cap goes away and you are taxed on the fair market value of the house which is usually the new sales price less maybe 15%.  I don't know if South Carolina has those or not... but the rest of this explanation should still be valid.  

So back to the example... So if you paid 3x the price of the previous owner, and lost the homestead exemption due to using it as an investment property, it is entirely feasible for taxes to double or triple.  It's really not that they double o tripled them, it's just that you paid way more for the property, and so now you are paying the taxes on that higher amount - where the previous owner was paying taxes based on a much lower amount.  But if you aren't expecting that, it can be a shock when you first see it.  It's a beginner's oversight.  One that you will only make once.  lol!  If you go to the property appraiser's website, you can probably  look at the year over year change in the taxable value of the property.  Everything you describe though is just the normal process of how taxes are reassessed when a property is sold.  So you didn't do anything wrong, you just didn't know.

As for alternatives, most counties have an appeals process... but you will likely lose if you go that way.  Why?  Because counties usually set the fair market value of properties  about 15% below the actual sales value.  So for you to lower your taxes, you have to show where similarly valued houses that are selling at the same time you purchased your house sold for MORE than 15% below what you paid.  In other words, you have to argue that you over-paid for the house you bought by a significant amount.  So if you found examples of houses that sold for 20% below what you paid, they might lower your taxable value by 5% after taking that 15% cushion they give you into account.  You can likely see where a 5% reduction in your taxes isn't going to do much to reduce your bill.

 Hopefully it helps to understand what happened and why.

All the best!

Randy

Quote from @Brendan Connolly:

I’m new to deal analysis and would really appreciate it if some experienced users could take a look at this property to help determine if it’s a good deal. Based on my calculations, it seems promising, but I’m still building confidence in my analysis since this is a new process for me. I’m currently using a deal analysis spreadsheet from the BiggerPockets downloads section to run the numbers.

House: https://www.zillow.com/homedetails/2115-W-105th-St-Cleveland...
Rental Type: Long Term
Location: Cleveland
Location Grade: C

Below are the totals that I was calculating from the analysis: 

If some users that are more experienced in deal analysis would please take a look and let me know if my approach to this looks good that would be greatly appreciated!

@Brendan Connolly

Hi Brendan,

Well, for starters I don't where you accounted for yearly real estate taxes or property insurance.  Did I miss that somewhere?  You will also have a repairs and maintenance expense (for small things), as well as a capital expenditure expense (for big things like the roof and AC.  If you are going to have property management, that is usually 8-10% off your monthly rent on the property.  Many property managers charge the first month's rent when placing a new tenant.

Also, keep in mind that your property taxes that you can look up on the local property appraiser's website (usually), are the current property taxes where the current owner is often grandfathered in.  I don't know the Ohio rules... but in Florida where I'm at you can expect the property to be reevaluated the year following your purchase and your property taxes will typically increase based on your purchase price, versus what the previous owner paid.

We budget about $125/month for repairs/maintenance.  Roofs vary by geography... I just had a 2100sf house quoted and it was $23,000 for a new roof.  So you definitely want to pay attention to the age of those big items to see how far out it might be before you have to start replacing them.  On ACs I've had some last over 25 years... and others fail 10 days after their first anniversary... so ACs are more of a crap shoot.  

Hope it helps!

Randy

 @Olga Daisel

I think we are lacking some key details of your plan. The numbers you mention in your post are confusing - like $150k annual income from a rental property.  The typical income from a free and clear rental would probably be $800-1500/month - and on a financed rental probably $300/month on a good day in today’s market.  Even at $1500/month that is $18,000/year… so I’m having trouble understanding $150,000/year unless you are building 10 free and clear rentals?

Likewise the $600-800k income by building a house.  Maybe that is gross profit when you sell it, but what about the cost to build it?  Flipping a brand new home likely wouldn’t bring much profit - especially after having to close twice when you first buy it, and later sell it.

Maybe you have millions to spend and I’m just missing the big picture… but when I think of “income” I’m usually thinking “net income” after you factor in expenses, like purchase price or building costs?  

As for holding a home and building another one - be sure to include carrying costs of the first home while building the second.  Also know that building a home seldom goes as expected - I have relatives that just built a nicer house… they thought it would take 9 months… it literally took 18-24 months between delays in permitting and the builder just not being able to get it done in a timely manner - often due to sub-contractor issues.  Custom building a home is a slow and painful process.  So if you started today you would probably be looking at 2026 before it was completed if I had to hazard a guess.

Can you clarify how much you plan to invest in real estate?  Lots of us are happy to offer suggestions but I think we need to understand your situation better.

All the best!

Randy

Quote from @Edgar Duarte:

hi all

I would love to get some perspective from your expertise, we have a property that we would have to sell in 2025 to avoid paying taxes on the capital gains, we believe we rcan sell it for $700K and get an equity of almost $500K after paying the mortgage balance, if we invest all of it option in index funds at 7% rate (standard com growth calculator), or in more rental properties as we are all here for, I can get the equity of around $900K.

option B would be keep paying the house at 2.3% int rate while we have it in AirBnB and maybe sell it in 10 years for $900K, knowing that we would be paying taxes but it is not that bad still. or we can 1031 at that point?

What would you do? am I missing something? thanks everyone

 @Edgar Duarte

I would suggest you research “return on equity”.  I’m a long term rental guy, so make less than an Airbnb type operation on cash-flow .  But let’s say you selling it would net $500,000.  

For me, if I make $1500 net per month on a free and clear property I would make $18,000 / year.  But if I sell it and put that money in the stock market and earn let’s say 8% I would make $40,000 on the same money.  Even if I take the 15% tax hit I would make $32,000/ year on the remaining $400,000.    So return on equity would suggest it’s much more advantageous for me to sell it.  

You can run the same scenario accounting for the tax hit if you kept it past the 2 of 5 year time frame I presume you are referencing. 

The other option for you would be to borrow against the equity in the property.  You avoid the tax hit, and still get the use of 75% of the equity if you do a cash out refi - (but high interest rates sort of play against that to some degree presently… but you could alway refi again down the line if rates dropped.  

Randy 

@Adam M.

Who has time to do that, much less the time to wait for a container to come in etc?  And you better do it before the anticipated tariffs kick in!  Lol!  

We are all about saving money on flips and renovation efforts.  I bought a brand new in the box $285 microwave off Facebook marketplace today for $35.  We will shop for used appliances where we can when we need one… or pick up used cabinets if we can, or search eBay for something smaller,  but going to the extreme of personally shipping something big in internationally for one-off renovation needs seems like a stretch of reasonable.

Just like you mention, the number of unknowns would not seem to be worth it to me.

Just my 2 cents.

Randy 

@Huong Luu

In my opinion, presuming you need the money - it is better to cash-out refi the property.  It avoids having to pay the capital gains and lets the property keep appreciating while you still own it and reap those future rewards and more cash-flow from the property in the meantime.  Bonus - the interest on the loan is tax deductible!

You would not want to over-leverage the property though.  The bank will make you leave 25% equity in the property - but you also still want the property to at least cash flow some - so be careful how much equity you pull out / new debt you take on.

I would do a cost benefit analysis of what your actual gain is in cash-flow on buying a new property with a (currently) higher interest rate (if financing), versus just holding on to the current appreciated property and enjoying that cash flow.

All the best!

Randy