All Forum Posts by: Russell Gronsky

@Mary Jay, these are questions for a CPA to answer about the taxes and your lawyer, about your agents, places of business, etc. as your choice will depend on how you elect to have your LLC taxed.

I'm just starting to unravel this problem myself but I do know that an LLC is not a tax structure, it's a legal structure. You will have to elect how the IRS should tax it. Initially, when you request an EIN for you LLC from IRS.gov, it will default your multi-member LLC to be viewed as a partnership by the IRS for taxes. You can elect to leave it as a partnership, or you can have it taxed as an S-corp. You can elect other taxing schemes but I wanted S-corp so I wasn't paying a lot of attention to the other options.

A multi-member LLC is still a pass-through entity so if you elect to tax it like an S-corp, it will still flow through to your individual taxes. I believe each member of the LLC will need a K-1 to include with your individual tax returns, but you'll still calim all the profits/looses of the LLC on your own tax returns. This might just be for LLC's tha get taxed like an S-corp, again, I don't know much further than this so talk to your CPA.

You do not have to file taxes together with your mom, if she is the other member of your LLC. Everyone files their own taxes.

The reason why I said your choices will depend on how your LLC is taxed is because of how you elect to have your LLC taxed. As an S-corp, each member must draw a "reasonable" salary each year for being an employee of the LLC. So if your mom will be a 5% owner, you'll have to make sure her salary draw is in line with IRS rules and your articles of operation. So maybe you will want to elect a different taxing structure, to avoid dealing with salary draw for a 5% employee, depending on what hte IRS rules are for it.

Yeah...bottom line....CPA and asset protection lawyers are your friends here...

@Christian Hutchinson, your facts might be true but you completely screwed up the negotiation if what you transcribed in your post is accurate. Buying and selling things is an emotional game, not a logical one. IT sounds like you beat the seller up with telling him how bad his property looks, how much work you'll need to do, how he will never get his price and basically, you told him how bad he sucks and how terrible his property is.

Would you want to hear all of that from someone who is trying to buy your property? If it's such a terrible property, "visibly undesirable" and I suck so bad, why did you make multiple offers?

This should have been your opportunity to let the seller voice his concerns, explain his situation and you take the role of problem solver. He's probably owned this property for many years and has grown attached to it. And while it might look like a pig to you (because you're probably right, the place is probably run down and needs a rehab) to him, it's still the beautiful property that has brought him a solid stream of cash flow for many years. This was not the time to insult the seller. Now he thinks you're an a$$ and he would probably rather sell to one of those other investors who offer him $150k cash and are nice about it, then come back to you, even though you offered him more money.

I think you could have gotten the deal done and probably at the price you wanted, if you would have approached it differently.

@Michael Henry, That cash flow was low before your property taxes went up and if your HOA payments haven't increased in the last 2-3 years, well, you can guess where the remaining $130 are going to go in the next 12-18 months.

I'd look at doing 1 of 3 things: 

1. Recast the existing loan which will add monthly cash flow to your pocket. You can then do a HELOC for the equity. This is the least favorable option as you still have an HOA payment that will only increase over time. 2. A 1031 Exchange. 3. A reverse 1031 Exchange.

I personally like the idea of a reverse 1031. It has the same tax benefits as a straight up 1031 but you don't have to be in a mad rush to find the next investment property since you lock that down before you initiate the sale of your existing investment property.

You could look at a cash out refi for 80% LTV, which will give you a lower interest rate than your current loan at 95% LTV and it would put $43,000 (80% LTV of 200k is 160k) in your pocket to go find another property but just like with the loan recast option, you still have an HOA payment that will keep increasing.

Regardless of what you choose to do, get rid of the 95% LTV loan. When you borrow more than 80% LTV, the interest rate goes up exponentially. You can get a good chunk of cash flow back into your own pocket if you get rid of it.

@Kevin OBrien, you are busy and from reading people's responses, everyone else is busy too. Maybe in different ways than you, but busy none the less. Like others said, time management is key. You have to become a time management ANIMAL! 

When I decided that RE was going to be my key to exiting the rat race, I sat down and put every known event I have to do, every day, on my google calendar. This will help you visualize where you have open space to do RE stuff.

I also had a commute that took 45 minutes each way so I used that time to listen to podcasts, audio books, call people, etc.

Then, I STOPPED using to-do lists or task lists. That was yet another app to track/manage on my phone. If I had a task to do, I immediately stuck it into my calendar so when the alert came on that it was time to do it, then I just did that activity.

Finally, I broke up all my activities throughout the day into maintenance activities and evolving activities. 

Maintenance activities are those that you must do daily/weekly but they don't actually grow you or get you any further in your life. Things like laundry, dishes, cleaning the house, mowing the lawn, paying bills, washing your car, re-painting your fence, walk the dog, cooking food, etc. You want to drop as many of these tasks off your calendar as possible as these things take up a lot of time and you're no better off from accomplishing them since tomorrow or the day after, you have to re-accomplish them again. Get an assistant off task rabbit or upwork to handle these things or see if your wife is up for taking on some of them.

Evolving activities are ones you do to gain new knowledge, evolve yourself physically/mentally/spiritually, or further your position financially. You want to dedicate as much space on your calendar as possible for these activities and protect the time you have to do these things as much as possible. This space is where you will get your RE career off the ground.

These things don't seem to do much but I went from a carefree 30-year old with a great job and lots of bar nights to a professional who works 12-hour days 3-4 days a week, runs a flipping business, runs his rentals, runs an AirBnB, spends time with his wife and makes it to the gym 4-6 days a week. 

Once the kids start coming, I'll stop doing AirBnB but I plan to keep growing my flip business and my rental business. I'll just have to step my game up with regards to time management. Is that going to be hard? Definitely. Are there people who work harder and accomplish more than me? Absolutely. But if they can do it, so can I....and so can you, but only if you really want it.

@Seth Gendron, all my estimates are based off prices in my area:

Does this place have foundation issues or a leaky basement? Those are different things. You are describing a leaky basement which you can fix with an interior french drain for about $5,000 or exterior waterproofing ($6,500-$30,000) depending on how much digging has to be done.

Plumbing....without knowing what exactly that means, I'll estimate it at $3,500.

flooring...again, not knowing what you mean by that, I'll estimate $5,000.

House repainted....interior and exterior? Just interior? Just exterior? Ahhh...let's call it another $6,000.

Dumpster rental to haul all the garbage from the rehab...$500

Estimated $19,000, so let's call it $20,000 for easy math...and accounting for holding costs.

So to make a 30% profit ($67,500) and spend $20,000 on repairs, you need to buy at $137,000. Now subtract your closing costs on the buy and sell sides, subtract your 5-6% commissions on the sale and your insurance costs for vacant house insurance and builder's risk insurance (or you can take a chance and not get this insurance).

It sounds like your $125K with 5% back sounds like it might be a good offer, but you'll need to double check your repair costs in your local area and exactly what is needed for plumbing, paint and flooring, to make sure it pencils out.

If you are seeing that the repairs will take 40-50k, then your offer needs to be much lower than 125k to make your 30% cut. Wow...at 50k repairs, 125 buy and 225 ARV...you stand at $50,000 BEFORE closing costs times 2, commissions, insurance and holding costs. The 5% back will help with 1 set of closing costs but not the other.

If you don't have any partners you have to split profits with, the deal might be worth it for you at profits in the mid-to-high $20's, if all the numbers you presented stick. But again, you'd have to double check your repair costs .

@Account Closed, 2 biggest issues I can see for you are accounting for maintenance, capex and any utilities you pay for your rentals, and vacancy risk. Also, do you have kids? Your expenses will go up if you plan on having kids or plan on paying for college for kids you have today.

You keep mentioning how much you make each month after mortgage, insurance and taxes but what about your capex, vacancy, property management, maintenance and repairs after a tenant moves out? Are you accounting for that? And yes, even if you self-manage, you should account for property management costs as you never know when you'll want or need to have a PM take over.

The second and more important issue I see is vacancy risk. You only have 8 doors and you've only been investing for 2 years. You haven't experienced a down cycle yet. When a recession hits and people start losing jobs, vacancies rise and/or rents go down for many places. If you have just 1 rental vacant for 6 months, how will that affect your daily life? What if you have 2 rentals vacant for 2-3 months plus you need to spend $2,000-$4,000 to make repairs from the previous tenant? 

I think you can get past the above scenarios with your savings on hand and available credit but you'll be stressing a lot. You could also be facing banks closing some of your credit cards. That happened to me in the 2008 crash. I had a card with a $60,000 credit limit. I always paid off the card in full each month, never missed or had a late payment yet one day I woke up, logged into my account and saw that while the card was still open, my credit limit was now ZERO dollars!

So my suggestion to you is to re-run the numbers on each of your rentals to see how much you actually make each month, after capex, maintenance, repairs, property management (even if you self-manage, you should account for property management) etc. Run some scenarios on what could happen during a recession to your rentals, savings and credit cards/credit lines. Finally, set aside not just the savings you have today for your family, but also a "rainy day" account for your rentals. How much should you save per house is going to vary, depending on who you ask but a number I hear most often is $10,000 per door.

Finally, I would recommend you go with Option B from your post to mitigate some of the vacancy risk and add a few more streams of cash flow. Managing 11 doors is not much harder than the 8 you have today.

Overall, you're doing a lot of things right and your numbers look good. You might need to stick to a 9-5 job for another year or two but I think you'll beat your goal of retiring by age 45 either way. Good luck!

@Jeremy Hostetler, cut this guy and move on. He said he will call the listing agent today...and that was day 3 after you made contact with him about the property? Unacceptable! 

Real Estate Investing is a business...no matter if it's buy/hold, flipping or otherwise. Your team has to be on-the-ball.

A rock star agent makes you feel like they work 24/7. You may not always be talking to them specifically but their office teams are on point, executing on your agent's behalf when he/she is unavailable and providing you with periodic updates on the status of something without you asking them. They just do it because that's how efficient, successful, high-power teams operate.

I can understand if your offer doesn't get accepted because someone outbid you, but if your agent is too slow (3 days to reach out to the listing agent), that is unacceptable, no matter how you look at it. This means you lost the race because you were never in the race to begin with. 

@Corey Dickens, the short answer to your question is yes, you can package the 5 duplexes into 1 commercial loan, even though the buildings are not right next to each other.

I don't think you can call this package the equivalent of 1 apartment building because you may decide at at some point in the future to sell a few of the duplexes. 

This is a pain in the butt for a bank so some of them might refuse to do the deal for you but don't let this discourage you. There are definitely banks in your area that will do this deal with you with 1 commercial loan.

@Lisa Lincoln, after further research, I decided to go with desktop Quickbooks. It's cheaper than the online "never truly own it" model many software companies are trying to force on consumers. But it does everything a business could ever need and I can easily share the data with any CPA via dropbox or google drive. 

I opened a multi-member LLC that will be taxed as an S-corp. I'm still learning how to use quickbooks to keep track of everything but I like the year of free support for payroll, which I will need to do for myself and my partner, since we are both employees of the LLC. I can't imagine payroll being too hard for 2 people who will each take a salary once a quarter.

Vacation rentals should be fairly simple to account as well. I run an AirBnB and starting in 2018, they send actual tax statements to you. Aside from that, you'll just need to verify the income is accurate and account for operating expenses, which in my case have been very minimal, aside from cleaning supplies, my hourly wage to clean it and the recurring monthly ones like internet, and utilities.

@Alexander Reed, people here are right. You don't need to be in the RE business to become a great investor. However, you are also right that it will greatly help. In RE, just like any other business, you need to know how to leverage money to your advantage and how to put together deals. So, keeping that in mind, if I had to do it all over again, I'd work for a mortgage broker or for a title company. 

You won't learn everything there is to know about financing deals from working for a mortgage broker, but you'll be head and shoulders above most other people. Working at a title company, you'll probably learn (and if you don't learn through the job, ask the Real Estate attorney on staff to teach you) how to structure deals and put together contracts to buy off-market properties. Again, you won't learn everything but you'll know a ton.

In either of these jobs, you'll also interact and have a chance to learn who the rock star agents are in your area and a ton of other useful skills/knowledge that will set you up for success, no matter what kind of RE investing you choose to do.