All Forum Posts by: Sam Elder

"Too tricky and potentially expensive errors to rely on free BP advise."

In all honesty, that may be the best advice I get - LOL. 

Yes, I agree that free advice can be very costly, but as much as anything, I was just looking for a starting point.  In drafting these responses, one thing that came to mind, and that would be the possibility of me buying the other intrests in the entity.  That's a big swing, but it might address th tax issues.

First of all, thank you!

I don't know that there is a distinction, but I guess I am not actually inheriting the properties. I am inheriting ownership in an LLC that we are forced to dissolve because we have differing goals, objectives, experiences, etc. The LLC is wholly comprised of the properties, so while I am inheriting properties (as stated in the subject line), that might not be the best phrasing. I do not know that the distinction is relevant, though.

Ultimately, I guess I am trying to figure out how to dissolve an inherited LLC that owns properties without incurring taxes on the properties. Maybe that is the best phrasin.

Joe, do you not see merit in reducing the principle loan balance while "treading water"?

If he leaves, he is guaranteed to lose $20,000.  At the present rate of burn, he is losing $2500 per year.  I am having trouble reconciling how losing $20,000 at once is better than "losing" $2500 per year for eight years while lowering his principle loan balance by $27,000.  The eight years also creates the opportunity for the property to recoup its value or for rents to increase (which would also increase the value).

My sister and I inherited free and clear rental properties that are held in an LLC. We are starting down the path of distributing the properties, and we are concerned about the tax consequences of dividing up the properties. Specifically, how best can we minimize or alleviate capital gains on the properties as they exit the entity?

Keeping the entity intact and co-owning the entity is not an option.  We do not see eye-to-eye.

We can pay taxes now and then depreciate the properties (again), but we are hoping to find a better option.

TIA,

Sam

Keep it.  Your annual net after HARP is -2500.  At that rate, it will take eight more years to sink another $20,000 into the property, whereas a short sale would be $20,000 immediately.  Over that eight years, you will pay down $27,809 in principle, too.  What you consider an annual loss is actually increasing equity at a faster rate than it is incurring a loss.  It's not ideal, but a $20,000 "loss" offset by a $27,809 "gain" is a lot better IMO than jumping off the cliff.  Oh, and you skip a payment (or two) during the refinance, so cash flow will be "better" this calendar year.  Rates are getting better each day (for now), so ask how much rates need to improve before you get 4.25%.  That would obviously be even better to the tune of a couple hundred bucks a year.

A private lender is a person that seeks to deploy their own capital.

A HML is a business that seeks to deploy its own capital or the capital of others.

Individual v. business basically.

I am a Texas lender in DFW (includes Arlington), and rates are improving.  That said, my experience is that "9 and 1" is going to be through a bank and not a hard money lender.  There are probably private lenders, too, but I am not aware of any HMLs at 9% with 1% origination.

To my point about rates improving, we are implementing a new program (in Texas for now) with rates as low as 7.75% and origination as low as 1.5%; however, it would be 85% of price (as opposed to 90% and would max out at 70% LTV as opposed to 80%). Again, his terms are attainable through local banks, but I am not aware of HMLs in that range.

I draw the distinction because financing through a bank and through a hard money lender are not interchangeable processes for many borrwers. So, yes, it DOES depend.

With your loan-to-vaue between 80% and 85% (excluding any closing costs), your options are going to be somewhat limited.  Find the best option(s) and make an assessment about the viabiity of refinancing by looking at the following:

1. How much is cash-flow improved each month?

2. What am I saving in interest over the life of the loan relative to my curret rate/term?  How does this compare to the $1500 - $2500 the refinance is going to cost me?

As a lender, my advice would be "don't be afraid to rent".

1. If you get financing, it will not be as attractive as what you can get once you are qualified for FNMA.

2. Until you REALLY know an area, where you THINK you want to live might not be where you eventually end up preferring to live.  There are so many variables that will almost certainly change where you ultimately end up.

At the end of the day, a local bank is probably your best option for financing, but there will still be some reluctance on their end if you aren't gainfully employed.  Renting is a great option that gives you far less in terms of commitment if things change, and with the work component being unsettled, I would say that things will likely change.

Sam

David - while I think that your thoughts are not without merit, I think that you have very much overgeneralized wholesaling.

Benefits of wholesaling:

1. Very fast turns relative to 2-9 months to rehab, market and close on a flip.  As the wholesaler, you are finished at closing whereas the flipper is just getting started.

2. You have no exposure to market conditions changing.  The flipper in on the hook if a hot market is no longer hot.

3. The wholesaler has no/limited exposure to changes in the scope of work that are necessary on a property, whereas the flipper must address new found issues in order to sell the property.

4. The wholesaler doesn't have potential fallout with a "permanent" occupant that a flipper does.  Despite the best due diligence, mortgages can be "tricky", and it's very problematic when you are under contract and the house doesn't appraise or the borrower's ability to purchase changes.

5. Your profit as a wholesaler is determined in advance.  As a flipper, your profit gets smaller throughout the process when pretty much anything changes.  There are very rare opportunities when things change for the better.  Usually, changes impact your bottom line.

It's not for everyone, but I would almost rather be a wholesaler than a flipper.  Of course, I would rather buy/hold than either of those.  If it's worth fixing, it's worth keeping.