All Forum Posts by: Sam Bates

@Craig Jackson I've been in a similar situation that you are currently in and it can be very stressful. I recommend you look at your situation from a holistic perspective and not just purely from a financial perspective. Being an investor/business owner is completely different than a W-2 employee who receives a pay check consistently. For me, my psychological issues/thoughts about not having enough money were more difficult to get past than actually the financial position I was in.

Mywife was at a miserable corporate sales job so sheleft thesalesjob to focus on her photography business that unfortunately has yet to make a profit. I'dalways planned on leaving my six figure salary tax job to focus on real estate. I didn't hate my job, but I didn't feel like I was contributing to society the way I envisioned and I wasn't progressing in a career that I enjoyed and loved going to daily. Security/money as I mentioned before has always been an issue for me so it took a lot of self-reflection and encouragement from my wife to finally decide I to leave my corporate job. The factor that I believe thatfinally pushed me to real estate was that I wasn't pursing my passion and I knew I would never achieve my full potential unless I left my job.

I didn't have a net cashflow goal for a couple reasons. First, my current real estate ventures outside of my SFR's bring in large sums of money, but at sporadic times. They are developments and value add multifamily dealsso I do not receiveany distributions from the properties until at least a year down the road. Second, we have a large nest egg that if something went wrong we could survive on savings alone. I would recommend 6 months to a year of an emergency fund (total living expenses) saved so if you do not make any money you can still pay all expenses without changing your lifestyle. If you do not have an emergency fund then I would suggest your yearly cash flow goal be at least what your current expenses are plus the additional cost for health care.

I also looked at what my future earnings potential with my corporate job plus the real estate I owned then my earnings potential if I solely focused on real estate. I knew if I stayed at my corporate job I'd always make roughly what I was making at that point. My projection for working strictly as a real estate investor wasdefinitely more difficult to forecast, but I looked at the current projects I had going and how I could scale my business as a real estate investor. Iforecasted future earnings because our future expenses will be higher than what they currently are. I believe by scaling my real estate business I’ll be more successful than if I stayed at my W-2 job. Since you have kids this could be your case as well with future expenses such as possibly paying for college or otheractivities your kids plan to participate in.

If you enjoy your job and do not see your investment portfolio growing significantly I might suggest you stay at your job. However, if you believe your job is a hindrance to either your real estate career and or time with your family and you can either survive or thrive financially I would recommend you leave it immediately. 

@Sam White does your LLC have a track record or has it shown income on your tax return?

If you have to refi it out of your LLC into your personal name you could do that then immediately file a quit claim deed with the county and it moves the property back into the name of your LLC. The last quit claim deed I did cost me between $20-$40.

KBS Lending is a mortgage broker in Dallas and Kim should be able to answer any questions you have and provide the correct answer. She is very knowledgeable and has helped me with different financing scenarios I've had in the past. 

@Eliot M. The lenders and or mortgage brokers I've worked with define net worth as your assets that exceed your liabilities and they exclude primary residence. If you have real estate outside of your primary residence they will probably take the fair market value of the real estate minus what you owe. 

I've only worked with commercial lenders in Texas so lenders in GA could differ with their requirements, but I know Fannie & Freddie use the criteria I mentioned before. Since your loan won't meet the $1MM requirement a community bank or credit union might do the deal since they know your market well or if you have a good relationship with a bank you could leverage your experience and track record with them.  Bankers jobs are to make loans and if you have a successful track record they might do a loan on the property without the net worth being equal to the apt.

@Shannon Sadik, Brian is correct. Use OPM to fund the 25% down payment. Most investors will want you to have some skin in the game, but you can raise the majority of the dp from them. One thing to consider is that your net worth will need to be a much as the loan amount. Additionally, most lenders want the borrow to have liquid assets equivalent at least 10% of the loan.  If either of these requirements is an issue you can get one of your investors to sign the loan and become a guarantor on the loan. If the loan is non-recourse most people will not have an issue signing. If it is recourse you might have to give the guarantors a larger percentage of the deal than just the percent of money he/she invested.     

You should create a private placement memorandum (PPM) to raise the funds. This is a legal document created by a lawyer and registered with the SEC. 

@Elmer Dinglasan it is helpful if the investors are accredited, but it isn't a requirement to raise the money. The investors should be a "sophisticated investor" to invest in the deal. A sophisticated investor doesn't have a specific definition like accredited does so the word sophisticated is left up to interpretation. This is one reason a PPM should be created to document all the details and risk factors of of the deal and real estate in general. 

@Robert Hastings Michael is correct. It would be short term capital gains. If a property is sold before a year of ownership it's short term capital gains instead of long term capital gains and the profit would be based on your tax bracket. Long term capital gains tax is at 15%

If you make 155K in 2017 plus the profit from your house you would fall into the 28% tax bracket.  You can include any expenses you have incurred to reduce your cost basis, but if you have a profit of 34K you would pay around 10K in tax.

If you have another piece of real estate lined up to purchase you can do a 1031 exchange that exempts you from paying tax on the profit. There are rules you have to follow and need a 1031 exchange intermediary, but this could be the best way to go.

@Martinis Jackson

@Austin Fruechting mentioned two good ways to structure the deal, but I want to point out you can structure a deal however you see fit. The house is your business so whatever makes sense to you and your investors is the smart way to structure it.

I would also recommend that you create an LLC for the venture. Anytime you bring in partners to a deal it creates more complexity and it is important to have everything legally documented for cya purposes if anything were to go south. You can hire a lawyer to create an LLC or if you have experience an online business like Legal Zoom could suffice.

In regards to question three, I’ve never heard of an appraiser not taking into consideration the repairs on a house. I live in a different area than you, but I would think it’s absurd for the appraiser to not take them into account. I’m guessing with this statement, but maybe the repairs on the other houses didn’t add much value to the house or the market could have went down which would adjust the sales price/comps.

There isn’t any guarantee you can refi out what you put into the property. Lenders select the appraiser and they decide the value. You can dispute the value, but it will not always sway the assessor to see your side. This is why you have to buy the property right and hope the market stays the same or prices increase.

I don’t believe the banks will take into account the number of guarantors on the loan. They only care if the property is occupied, and personal liquidity/net worth/debt coverage ratio.

To answer question four and even to help with the refi the more investors that are on a line of credit app, theoretically, the higher the LOC should be. The bank will analyze all investors financial statements, net worth, liquidity, etc so it should increase the LOC. With that being said, if one of the investors has poor credit, bankruptcies, or anything that could adversely hurt the partnership I would keep them off the app.

@John Leip I would like to echo what the other two posts mentioned, but there is another option you can do to gain a POF letter or preapproval letter.

Meet with a mortgage broker and they can review your financial situation and give a letter based on you finances. A mortgage broker is a great person to add to your team because they can shop around for the best lender and get you the best possible terms. Additionally, if it is a local broker they could have a great Rolodex of contacts and know your market extremely well.

Strictly from the numbers provided I believe it is a solid deal. From my deal analyzer, it projects the cash flow to be roughly $515.00 a month. With an ROE of 15.22%. In this analysis I've even included 10% for property management and 10% for R&M.  In this scenario I included the 15,000K into the loan amount. If you finance it differently the numbers will change.

With the limited information I can't tell you how I would proceed. I would need to know more about the demographics of the market, where it is located, etc.

@Jarvis Smith In the state of Washington all residential remodeling services are taxable.  Below are the citations that reference this determination.

Wash. Rev. Code sec. 82.08.020 & 82.04.050, Wash. Admin. Code 458-20-170, Wash. Tax Determ. No. 11-0280, 32 W.T.D. 107, Wash. Determ. No. 08-0197, 28 W.T.D. 76 

I created a taxability matrix from a software resource I have. It has all the tax decisions and citations from all the states in the US. If anyone knows how to upload an Excel spreadsheet to BiggerPockets I'll be glad to share it. 

Thanks guys I appreciate the compliments.

@William Hull I see you live in Indiana. If you are conducting business outside of TX these tax codes and laws could be different. Unfortunately, sales tax laws follow state laws and not federal laws so each state is different in how they tax materials and labor.