All Forum Posts by: Kerry M.

My choices are: a commercial 5/20 loan of 87,500 from a good, local bank with much experience who is lending 70% (assuming an appraisal value of $125k.)

Or, I was told last week that if we took it out of the LLC by myself, my husband (owners of the LLC) and put it in the name of my son (who lives there) and us, it would qualify for a FHA loan.

Questions:
1) Does a full-income commercial appraisal come to the same loan value as a residential appraisal?

2) Are there other downsides besides the loss of liability protection of not having an LLC own the property?

3) What is the actual side-by-side comparison of the numbers between one loan type and the other?

Other notes:
My son lives in one unit; we turned it from a SHF into a 4-plex. A renter is in another paying $605/month. Two units are not yet rented. There is no loan or lien on the home now. Our credit is good. The monthly rent is $1,940 and the appraisal value is a great unknown. The banker believes it could be valued at up to 190k based on rent income, but there are few properties to compare it to in that area. It is for sure worth more than 100k, says an experienced realtor.

Thank you!

Thank you, Bryan Hancock. So if it refers to the term, not amortization, then could I ask, what would be my numbers if the appraisal value is 130? Would they lend 70-80% of the value after repairs number of 130, on a 15-20 year period, with a due date at 3-7 years with a balloon payment? So I don't know what's normal, but could someone take the most likely scenario and tell me what the monthly repayment would be? I know how to use bankrate.com's calculator but not when the amortization and term are different.
Jon Holdman, thank you. I am using your list to assemble documents now. Even if they ask for something new, I'll have most of it ready.
I told the head guy at the county who issues permits about our plans and he said we don't need them. They have county-approved businesses who will do inspections if requested but it is not required. He told me under which conditions they give permits and require inspections and it wasn't our situation.
When I first started blogging here six months ago you asked about the borrowing from ourselves. It was one of our first hurdles. You also told me to talk to a real accountant, which I since have and that was really good advice.
The only funds we had to use to make the cash deal was by a regular, non real estate installment loan against part of the value of our retirement account, through the people who manage the retirement accounts for the company my husband works for. We pay monthly on a 5 year term to repay the money borrowed from retirement. I called them and asked them the questions you asked me at that time. I don't remember all the answers but we followed their rules.
Chris Martin - what is "CO"? I've called the appraiser and am waiting for him to call back.
Ben Leybovich - Thank you. I will remember to ask about including a cap. I don't think I want an ARM, if I can choose. A balloon would be better if it were 7 years down the road. Thank you for your offer.

Opinions? What about paying to separate the property into two 2-units? I've been told it costs $3,000. Double the cost of the refi, double taxes but would allow me to pay down the principal greatly if I sold one side while keeping the other half of the property. I don't see people doing that buy don't know why. Would that give me flexibility to sell half so I'm not carrying so much debt? What would be the sequence of appraiser-cash out refi-sale-paydown?

Thank you Jon Klaus, Pat L., Chris Martin and Jon Holdman for your replies.
It is a relief to find that you all aren't alarmed at the financing terms; that the two loans mentioned might be close to the same terms but not understood by me very exactly. I need to get closer to it. I don't know what my plan would be for a balloon loan. We are willing to sell one side of the duplex if needed. Another question for you, as I prepare for asking for a bank loan, which documents do I need? I am working with an accountant but there is so much to learn, I'm trying to find out the answers before asking him. I am ordering books recommended here so that we can learn quickly. I appreciate so much bigger pockets.
As far as the zoning, I made calls before starting the project to the county and spoke also to the state regulatory agency. I have a copy of the county zoning and had a lawyer (family member) confirm that we were in compliance. They list multifamily as 1-4 units. We are zoned Residential and Commercial. There is still an address on file with the county for the other half of the duplex.
It is a duplex that has not been used as a duplex for a long time, since anyone can remember. The neighborhood is centrally located and about 100 years old but due to the geography, also isolated from the other cities' sprawl. We were told (?) that HUD couldn't sell a duplex so they made a few walkthrough holes in the wall upstairs to sell it.
Financing is another matter entirely. We've done this in a straightforward way, but I need advice on how to get it right. We bought cash (borrowed from ourselves) paid for renovations on credit cards and want to qualify for a bank loan to transfer the debt into a less expensive product. The timing and reaching critical mass of getting the house for us was of paramount importance, is why we did it this way. My goal is to land softly, if it is possible.

Hi - I have spoken to two bankers. The first is with a major bank who was talking about a 20 year mortgage. The second, a local smaller bank, without an application and over the phone, mentioned a 7 year 'abundance of caution' loan.

We paid cash (borrowed from ourselves.) The purchase price was very low for the area ($26K, normal would be 60-95's for half of this SFH in decent condition.) There is not a loan in place. The property is owned through an LLC.

We have turned it from a SFH back to to the duplex it used to be, and are adding two small apartments by subdividing and adding bath/kitchens. We are planning to get an appraisal soon after finishing the bathrooms and then asking him to estimate the value of the 4 units in its future finished state. One apartment is ready to rent and being advertised.

I'm O.K. with the 20 year loan, but the 7 year makes no sense to me. Is it something to consider? I am only familiar with loans on primary residence houses, not investments.

Thanks for your thoughts.

If you buy with an LLC it causes the loan to be commercial which gives more flexibility but most commercial deals are much larger than one like ours. We bought a duplex to turn into a 4-plex in an LLC's name. One apartment is occupied by my son. We hope to look for a bank loan because it was bought cash. Be mindful of specific laws that relate to being a landlord in your state. Good questions that you posted.

Randy F. I agree I think the purpose is to cover property owners who might have a larger number of rentals and do have someone in place to keep down costs. If there are no employees, (in my case) then I wish we could make that clear. The PM has a work crew of 2 persons to maintenance 100+ properties and then calls in separate persons to do elec/plumbing/snow removal and yard. I had planned to bring in my own persons maybe for the yard, maybe for some specific work planned out ahead of time, not the immediate, majority or regularly scheduled kind of work.

I like him because he is low-stress. His success is not dependent on my success but mine is on his. He thinks I'm novel and knows how green I am. I've thought about just signing it as-is (or signing for a short while, until revisions can be agreed on and before a renter found? Like a statement of intent so that he can list it and interview renters?)

If I need a separate addendum to this first agreement, (if the solution below doesn't seem good,) is there someone here on biggerpockets who could draft it for me (I pay them for it) with a one day turnaround? Being Christmas nearby, I need a quick solution so we can move on to renting.

J Scott I am copying and pasting your response so that I will be sure to stay on the right side of the fence. I asked my insurance agent about buying workers comp ins and he said I can't buy it if I'm not in charge of the payroll. Yet the contract seems to say it would be my responsibility. It is required in my state, the agent told me.

Steve Babiak Since he only uses independent contractors (although he owns more than one business and may have workers comp in place somewhere else,)

what if he agreed to cross out "it being further agreed that all employers thereby designated shall be deemed to be the Owner' employees" and in the other paragraph cross out "and if required by law workers compensation"

and then we each initialed next to each place you crossed stuff out. He submitted my concerns to his lawyer already, but wasn't sure how quickly it could be turned around. I want to wrap this up by Wednesday if we can. We need green lights, perhaps more than we need exactness. I want to do contracts right but did not think this would be a problem and it is taking time I didn't know I needed before.

Thank you Steve Babiak, Randy H. and J Scott

(I'm new to the Update feature.) I was saying, it makes me nervous to sign a contract where the workers sent to my property are considered my employees.
Could we add this to the contract: "PM will only hire independent contractors."?
Thanks for your response

Thank you Tim W.. for your reply. Next post at https://www.biggerpockets.com/forums/51/topics/76691-june-30-fiscal-year-disadvantages

I agree.
Next post at https://www.biggerpockets.com/forums/311/topics/79821-what-is-hud-guidelines-24-cfr-206125

Is this strange?
The PM does not have employees, they only have/use independent contractors. So

A) there are no employees so none could be my responsibility? or
B) responsibility could be mine if the independent contractor is determined to be an employee by someone else

so do I have to change the wording, if so, how?

The property management agreement says:
"The broker shall be entitled to employ, supervise, and discharge all labor required for the operation and maintenance of the property, it being agreed that [b]all employees thereby designated shall be deemed to be the Owner employees."
and then in a later paragraph,
"The owner agrees to hold the Broker harmless from any damage suits in connection with the management of the herein described property and from any liability from injury suffered by any employee or other person whatsoever, and to carry, at the Owner's expense, adequate public liability and, if required by law, workmens compensation insurance to name the Broker as co-insured for the life of this management agreement."

the agreement is for 12 months; the PM company is successful and established and I really like them - I just don't want liability for an injury

how can we get this right and move on quickly? His agreement has been the same for a number of years and he says he has never had a question about this item - is it just me?