All Forum Posts by: Randall Alan

@Christian Licata

First, start off deciding what your objective is.  Most of what you mention is flipping, which can give you big chunks of cash when you sell, but comes with inherent risks and challenges… not the least of which is you being out of state trying to do them.  They also come with a 15-20+% tax bill when you sell them.  
In today's market you need a GREAT spread between your purchase and ARV values and that isn't the easiest thing to find in a high market.

Being brand new you may not know all the ins and outs of flips… but it’s easy to get exploited in a number of ways by people you hire to do the work. Flips literally come with thousands of small decisions, and if the decision maker isn’t on site to oversee those, you will likely show up and have a lot of “that’s not the way I wanted it” type of results.  Just getting contractors to show up can be a challenge, and if no one is looking over them they take ‘creative freedoms’ on how and when your job gets done. 

While slightly more “boring”, with the amount of money you have to work with you could probably finance 4-6 $200,000 rentals and generate monthly income that could go a long way towards replacing / supplementing  a descent portion of your W2 income.  If you cleared $300/month per rental that’s $14,400-21,600 / year in cash flow.  You also have 4-6 properties appreciating at market rate.  Even if that was only 3% - that is $24-36k of equity you are building YEARLY on $800,000 - $1,200,000 worth of real estate… so in 10 years that would be $240k - $360k of additional profit you would make if you sold then.  Plus, you get to depreciate the properties by 3.3% a year on your taxes - saving you $26k-40k of taxable income as well… all while your tenants pay down your mortgage with their money.  
The amount of effort versus a flip is so much less, and your taxes are WAY better.
There is a lot less risk as well.  Flips - especially your first few - can be somewhat dangerous if you misjudge your expenses or run into unexpected expenses.  It’s easy to go over budget or not realize all the items you need to account for until you start ripping into things and suddenly your ‘profitable’ flip is upside down.  You also have to close twice on flips… once to buy it, and then to sell it… so closing costs should not be ignored.  There are also holding costs to consider including insurance, utilities, and potentially financing costs if you didn’t buy the property outright. 
The thing about flips is that they are ‘one trick ponies”… you only make money once - when you sell them - then you have to start over and find a new one, whereas rentals deliver their income month after month, year after year.

We have done 6 flips and own 37 rentals.  They both have their good and bad aspects… but rentals are far easier day in and day out.   Flips in today’s market are more challenging and take a lot more effort.

Hope it helps!

Randy 

@Jitao Niu

Being that it is a local bank - I would make an appointment with a real estate loan officer at the bank and go in and speak with them.  So it sounds like they wanted to see you maintain deposit accounts with the bank and now they have possibly removed a discount they had given you when you took out the loans?  

I would review my loan agreement - as the bank must abide by the terms within that.  If it is a fixed rate loan, I don't see how they can increase the rate if you are not defaulting - but your mortgage / loan agreement should spell things out for you.   

Make an appointment, be civil, and talk it out with them.  Worst case try pleading ignorance and ask them to rescind the increase now that you understand the situation and you will be sure to do whatever it is they are wanting.  Smaller banks have more leeway than bigger banks.  Realistically most banks would send you a warning letter if you were doing something they didn't like.  

Depending on what your current interest rate is, it may be worth looking at refinancing the loan to get a lower rate?  You've got 40,000 reasons to try and figure / work it out!

Hope you do!

Randy 

@Chelsea Schaefer

I'm not an expert...just another investor... I also don't know all your circumstances ... but I provide the source for you to dig into it deeper down below.  

The current document you probably want to look at is this:

https://www.irs.gov/publications/p925#en_US_2023_publink1000...

Generally, the passive activity loss for the tax year isn’t allowed. However, there is a special allowance under which some or all of your passive activity loss may be allowed. See , Special $25,000 Allowance.

Phaseout rule.

The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that’s more than $100,000 ($50,000 if you’re married filing separately). If your modified adjusted gross income is $150,000 or more ($75,000 or more if you’re married filing separately), you generally can’t use the special allowance. This is because the special allowance is reduced to $0 since the modified adjusted gross income is over the $100,000 amount.

There are several examples with different limitations in this publication - so I would read it to make sure which one applies to your situation..

My guess is that your CPA is on point... but will let you be the judge.

All the best!

Randy

@Chris Doucette

If it sounds to good to be true....

It's possible they are just quoting you their P&I payment, when you are thinking they are quoting you principle, interest, taxes, and insurance.  That would be my first guess.  Interest rates are in the 6-7% range... so it doesn't take a rocket scientist to figure out if you are increasing your loan amount by ~$50k, and at a higher interest rate,  your payment has to go up or your terms have to extend.  Maybe they are doing a 40 year mortgage, or a balloon payment where you still have a big payoff at the end of the term,  or something like that?  But at the end of the day, the numbers don't lie.  You would have to see all their terms to figure out where they are 'squeezing the balloon' in one place to make it sound attractive and be able to quote something like that.

Buyer beware!

All the best!

Randy

@Joan Liu

What you describe is often the pitch of someone doing rental arbitrage.  In essence they want to lease your house, and then re-lease it to someone else for more money than you are leasing it to them for - keeping the difference for themselves.  This can be done on a long term or a short term basis.   

The short term basis of this would be to AirBnB or VRBO your house - where they rent it as a long term rental from you, then lease it out on a nightly basis for the same purpose - to keep the difference for themselves. 

Either way, you will have no idea who is in your property at any given time.  

They will usually never own up to these facts - instead they will use the cover of "our corporate clients", etc - it's a big tell!  

As a landlord who likes to have control - this doesn't work for me personally.  You will have to decide for yourself.  If I were you and I was going to consider the 'opportunity'... I would want some major security deposit on file - maybe 6 months rent (personally), and / or possibly have them carry an insurance policy with you as the named insured for a descent value for any damages, etc - with the policy specifically written for the type of business they are actually running. (I'm not even sure what type of insurance that would be... commercial liability, perhaps?  I would ask an insurance agent and even they may scratch their heads!)  These extra expenses will probably scare them away.  They will move on and look for the next person who isn't smart enough to figure out what they are up to.

It's highly likely that if there was a claim on your own policy it may not be covered if it was being sublet for a separate commercial purpose (AirBnB, etc)... so I would be really careful about making sure you are covered insurance-wise.

Proceed at your own risk, and all the best!

Randy

Quote from @Tommy Ray:

Please define wealth.  What is wealth to you?  It is important before you start and get to far that you have an aim point...  A goal to work backwards from to today so you can make a specific plan and take deliberate action daily towards YOUR goal.  The longer the perspective the better.  

Imagine whatever the specific goal is-- maybe 100 rental units paid off for instance.  Now how to get there?  Realize at the outset that real estate will involve all different types to service, maintain, repair, improve, insure, manage and eventually sell.  Be in your future mind and realize how important it is to identify the range of specialist that you will need for the life of those assets.  Before you buy you 1st build you awareness of real estate investing, potential team members that you will need over the journey that will likely last the rest of your life and commence recruiting people and investing time seeking out knowledge and WISDOM.

Wisdom would say buy in the down cycles of the market and refi cheap when rates are low but investors often have ants in their pants.  Can you build a team local and in an away market--yes.  Do you need unique checks and balances in your away market so someone is representing your interests in the away market--yes.

Slow and steady wins the race.  Seek out mentors, seek out a greater understanding of the connected whole.  Over the years I picked business degrees, real estate license, tax preparation training, loan officer licensing and training, investment / CFP training and it is all tied together in one big connected body of knowledge that emphasizes appreciation, debt pay down, cash flow, and tax write-offs...  Invest--do not save.  Delayed gratification is good.  Learning is earning. Holla if you need help fleshing out your dream.  Get'r done

 @Tommy Ray

I think there can be some challenges to your power-point slide.  Margin calls in a market downturn potentially being one.  The cash-out refi necessarily means thousands of dollars in additional expenses - likely setting you back further than you went forward in mortgage pay down during the same time period if refinancing in 1-2 years - but hopefully earning more equity in the meantime (fingers crossed).  Your plan probably works fine in an up market - but we never know where we are heading.    

Just for fun I looked up the rate to borrow against your portfolio... 7.8 - 10.88% VARIABLE interest at ETrade from Morgan Stanley (see pic).  It would seem to me that would be more expensive than getting a traditional loan these days.  While margin borrowing is doable - I think it opens you up to potential pitfalls that could be avoided going a more traditional route.  If you have $100,000 in your brokerage account to borrow against, why not just use the money and secure a traditional loan, versus gambling with an unknown and variable future rate?

Just my 2 cents.

Randy

@Srinath Gopinathan

I don't have an exact answer for you - but would guess that it is because the the covenants and bylaws spell out what the separations are between what the HOA is responsible for, as well as what the condo owner is responsible for. So think about a roof leak in your condo. It is likely the HOA is responsible just for fixing the roof - not damage to your unit itself. So any damage to your unit is YOUR / your insurance company's responsibility. The insurance company wants to understand the limit of their liability and those documents spell out what the HOA says they will pay for and what they will not. It probably helps them price out their policy to you so that they make sure you have the right coverages in place.

All the best!

Randy

@Linda Roberts

You can charge whatever your tenant agreed to in your lease - whether they pay it or not is another story;  or you can try and work with your tenant.

Like you say - the basic goal is not to have any rental gap.  We try and split the difference between what our lease says, which is like yours - "two months rent".   But depending on the nature of your tenant they may just opt to stop paying rent, walk,  and see if you chase after them - to which the usual answer is: it probably isn't worth it.

So what we do is say, "Look - the lease says 2 months -but really we just don't want to be out any rent.  You will remain responsible for the rent for up to 2 months - but what we will do is turn on our marketing, find a new tenant, and as soon as we get them in the unit, you will be off the hook for the balance of the 2 months owed.  

If we are given a proper 30 day notice - we can usually have a tenant ready to move in within 2 weeks of the exiting tenant moving out.  So it ends up being a win-win for everyone... we have no rental gap, and the tenant still gets part of the deposits back.  We have gotten good enough at it that it is often just a few days between the move out and move in.

Hope it helps!

Randy 

@Brian Gerwe

We have financed about 25 properties in the past 5-7 years.  It was a frequent occurrence that something they would ask for was not available.  

What you need to know is that they are trying to "check some box" on a due diligence form.  Often what they ask for is not what is always required... it likely says something like "Verify the duration the entity has been in business" and someone decided "A letter from a CPA would be acceptable and easy".  But usually, so would a number of other items.  

Option 1 is to go back to your lender / broker and just say, "I can't get that, what else will work?"  They are use to this response, trust me!...  and they will offer up a different suggestion on what you can provide.

Option 2 is to think about what else proves your existence... in my mind, previous tax returns certainly do that.  Also - your current registration with the Secretary of State would show you were also in business.  In addition - checking account statements showing deposit income going back X number of months would also do that as well.  Also leases from tenants for the property, hell, just showing them the loan for the previous property where it was financed as an income property should also do the trick perhaps!  

In a pinch, my broker has had me write an LOX (Letter of Explanation) anytime something weird needed to be attested to - but probably not for the specific items you mention.  But they might ask you to write an LOX explaining that you are unable to procure a letter from a CPA - and then offer up something else that checks the box.

Hope it helps!

Randy

@Raj Singh

When you inherit tenants there really isn’t screening… they are already there… you are the new person… not them.  

With that said, your ‘screening’ comes in the form of observing how they perform (and have performed) paying their rent and taking care of the property.  

You can sign a new lease with your new tenants, but I would say you should honor the lease rate of your tenant still under lease… but definitely have them sign your lease because without it you have no agreement with them between you and them.  For the month to month tenant you can change their lease rate as you see fit… but if you are changing it significantly you should phase it in to help them have time to adjust and prepare for it (in my opinion)… maybe across 2-3 months.

It’s likely that your tenants are use to each other having already lived next to each other.  Presumably you inherit most situations figured out… utilities, who mows the lawn, etc.  

Your concerns will likely be less with the tenants and more about learning things the previous landlord didn’t handle (deferred maintenance, whether the tenants pay on time consistently, etc)

all the best!

Randy