All Forum Posts by: Roger Rouse

As far as I know, the owner occupancy requirement for conventional mortgages is one year.  So in theory, you could buy a new property each year, move into it, and rent out the unit you were occupying previously.

This would get you much better financing terms on each property -- lower down payment, fixed rate mortgage, and no points. With an FHA load your down payment can be as low as 3.5%.

I don't recommend going too crazy with debt (credit cards, etc.).  That's a recipe for disaster.  Make sure you can comfortably service your debt and have enough cash reserves to weather vacancies and repairs.

Attorneys will usually advise you to title properties in the name of an LLC for the liability protection they offer. Some will suggest a different LLC for each property to compartmentalize the risk.

However, that's not the whole story.

You need to understand that an LLC affects your options for bank financing. You can't get a 30-year fixed rate conforming mortgage with an LLC. You will probably need to get a portfolio loan, held by the bank that gives it to you, and often this means an ARM, points, and/or a higher interest rate.

You also need to file federal and state tax returns for each LLC.

Also, an LLC doesn't shield you from the financial liability of the mortgage. The bank will require a personal guarantee by you.

Some people will advise you to buy the property personally and then use a quit-claim deed to transfer it to the LLC after the closing. You might get away with it, but it clearly gives the bank the option to invoke the due-on-sale clause in your mortgage.

An umbrella policy is a compromise that some investors make -- they accept the personal liability, but then insure against it.  If you go with this option, make sure the policy explicitly covers your rental properties.  Also, bear in mind that a lawsuit can result in someone going after your future income, so make sure you have enough coverage.

You need to carefully weight the pros and cons.

I obtained my real estate license before I bought my first property.  I wanted to learn more about the law, and how the industry works.  It was well worth the effort.

I don't know how Maryland works, but here in Wisconsin you can get an agent's license or a broker's license.  To utilize their license, and agent must work for a broker.

You can easily find a broker that will allow you to work part-time under their license.  They will keep part of the commissions you receive, but you'll have someone to help you with the contracts, earnest money deposits, etc.

Another option is to get the broker's license yourself and operate as your own brokerage. The downside is that you are likely to have to deal with regulations, MLS fees, paperwork, trust accounts, audits by the State, etc.

Unless you are planning to scale up rather quickly, just working as an agent under a broker might be the easiest thing to do, plus you will learn a few things from them.

I've owned five different 4-plexes, some larger apartment buildings, and many smaller properties.  We've also managed dozens of 4-plexes for others over the past 20 years.  In my experience, they the worst of all worlds -- you get all the problems of apartments, but not enough economies of scale to make it worthwhile.

Apartments are more management intensive than single-families.  You start dealing with issues between tenants (noise, parking, etc.), building inspections, and common area maintenance.  This all costs time and money, but you only have 4 units over which to spread the burden.  As others have mentioned, economies of scale matter, but four units doesn't quite get you there.  Once you get to around 8-12 units, they start to make more sense.

Apartments also tend to draw more transient tenants that single-families do. You'll be turning over units every 12-24 months, along with the maintenance, repairs, and vacancy periods that come with that.  With a single-family, your tenants are likely to be in the home much longer.

I don't think you are looking at this correctly.

Your overall cost of capital is normally divided into two parts: cost of equity, and cost of debt. Your lender will tell you your cost of debt, and most investors will tell you that their cost of equity is something in the 10-20% range. That is to say, they would only be willing to pay cash for an investment if it offers that sort of return.

This is why investors usually finance properties -- it is better to buy it with 4% money than with 10% money.  A blend of equity and debt yields a lower cost of capital than equity alone.  If your cost of equity was really 2-3%, you would be very opposed to any sort of financing, because it would increase the overall cost of capital on the investment.

Your opportunity cost, as a separate concept, in the words of Warren Buffett is "what can be produced by your second best opportunity".  If you could apply that money towards a down payment on a property that earns you 10%, then your opportunity cost is 10%.  If your return on investment for the points exceeds 10%, then pay the points.  If not, pay the higher interest rate and use the money on the investment that pays you 10%.

"I'd like to do 5 or 10% down. Is this realistic?"

If it is a 1-4 family and you intend to occupy one of the units, this shouldn't be a problem if you have good credit and income.  After a year, you can rinse and repeat with another property.

If you do not intend to occupy the property, it is more difficult and the loan terms  (rate, down payment. points, etc.) are likely to be less favorable.

On paper, a 20% ROI is very doable for a reasonably leveraged buy-and-hold small property right now, at least here in Milwaukee. That's pretty much double the expected return of the stock market over the long haul.

That probably overstates things a bit, as your return on equity decays over time as the property is paid down, plus the transaction cost is quite high.

One a month is going to require some deep pockets to cover the down payment requirements.

After four, the down payment requirement for a conforming loan goes up. After 10, you can't get a conforming loan, so the bank will need to loan to you directly. Since they are now risking their money (instead of selling it off to someone else), the terms will get worse again. It will get more difficult to get fixed rate financing.

Also, any single bank is going to want to limit its exposure to a single investor. If one loan goes bad, chances are they all will. So you will need a relationship with multiple lenders.

From the perspective of an attorney, you want the protection of an LLC.

However, it comes at a cost. In my experience, you will not be able to obtain as favorable of financing from a bank when the property is titled as an LLC. You might pay more in points, higher down-payment requirements, and a higher interest rate. Ask around.

If you are going to title it in your name, make sure you carry insurance sufficient to protect your personal assets.

Welcome, Megan. I've been buying duplexes around the Milwaukee metro area for about 20 years (since I was 24). I have found them to be better investments than small apartment buildings.

I would recommend looking into properties you are willing to live in for a year, because you can get much more favorable financing, including lower down-payments for an owner-occupied property. After your year is up, rent the unit and buy the next property. If you are willing to do this each year, you can build an impressive portfolio after a few years.

Just make sure you make realistic assumptions about vacancies and expenses. If you and your boyfriend are handy and willing to do some of the work yourselves, that is a plus as well. You will learn your properties better that way and save some money.

Also, consider taking the class to get your real estate agent/broker license. The more you understand about real estate law in Wisconsin, the better. Plus, if you are an agent, you can collect a commission for selling yourself a property!

PS. Think carefully about whether it is wise to invest with a romantic partner to whom you are not married.