All Forum Posts by: Stephen Chittenden

The down payment is their basis in the property. It is not a gift to you. This assumes your ownership of the property is proportionate to the share of the cost each pays.

Originally posted by @JD Martin:

Very nice work! I think you picked nice colors and finishes! If you are local, you might even consider foregoing the PM considering the full-on rehab you did and the quality of tenants. My experience is that rehabbed units require far less need for a PM than non-rehabbed units, and considering you expect the tenants to be stable, you may be sending that money out for nothing. Some of my units last year had zero calls and were fully occupied. 

The property is located about 60-75 minutes away. It's in the same area as all six of our units (my wife and I own a rental townhome individually and our LLC owns two single family homes and a triplex). The same property manager handles all of our units. All of the owners work full-time+ in our day jobs and don't really have any time to dedicate to handling these. It's worth it to us to have someone else do it. As we continue to grow though, I hope to be able to reduce our fee below the 8% we pay now.

Thanks, @Julie L.

@Karen O. 

@Bhekizwe M.

Thanks to you both! 

Originally posted by @Marie G.:

So I have done a lot of reading and listening to audiobooks, podcasts, forums, etc. This can be so overwhelming. I was wondering if there was anyone local that has any pro/cons from their experience with LLC formation and how it affects financing, asset protection, etc. for Maryland.

I'm looking to have two LLC for my husband and I (I read about the 10 loan max and want to maximize on funding options). So far this is what I have gathered/have questions on:

-From the Legal stand point--- The multi member LLC seems to have the best protection since its not a pass thru entity and seems more like a business.

-Financing- the banks I have spoken too I must personally back loan (until the business has been established for 2yrs and the income can stand alone). They consider any member holding 20% or more interest of the LLC (I would then do 81/19 % for each). They don't really refinance investment properties for cash out options (unless you finance in your name then sell to LLC)---which how would that affect you tax wise as far selling the property. Is it like you have earned that money as an individual?

-LLC Formation- I'm looking to go to court house directly to get it same day. Do you include your Operating Agreement in filing as part of the initial formation? For the LLC address do you have your primary residence? If not what do you use? Any recommendations on programs that generate operating agreements? Purpose of LLC- is Real Estate Investing to broad?

This maybe long winded, but I appreciate in advance any pointers everyone has!

The 10 loan max is for residential mortgages. If the houses are owned by an LLC, they won't be eligible for residential mortgages and the 10 loan max won't apply. Because the 10 loan limit won't affect you, there is no reason to structure the business the way you described (two LLCs with 81/19 ownership) based on financing consideration (liability considerations may make it desirable however). Commercial loans have higher rates than residential mortgages and typically have shorter terms, i.e., a 5- or 10-year loan with 20- or 25-year amortization (although 30 years can be found). That means you have to either pay off the loan with a balloon payment or refinance into a new loan after 5 or 10 years which gives you interest rate exposure. You can absolutely finance a property and take cash out of it. It's hard to do that shortly after you purchase the property though.

You do not file the operating agreement.

You can form it the same day, but it is at the SDAT in Baltimore, not at the courthouse.

The purpose can be as broad as "for any legal purpose."

@Jason Duprat Look for local credit unions that service their own loans.  They will be more flexible.  Small local banks can be as well.  You just need to find a lender that services its own loans.  Then you can sit down and explain the situation with documentation.

I think it depends upon what your objectives are. If you're looking to fix-up the property and the refinance into more conventional financing, you only need a short-term loan of 1-year or maybe 2-years. That would require a lower interest rate. We purchased a three-unit a year ago. We bought for $130k with $15k down (each side pays their own commissions). We avoided real estate transfer taxes by having the owner transfer the property into an LLC and then buying the shares of the LLC from him. (This also avoided the need to record a mortgage on the property.) The loan was a one-year balloon with 20-year amortization at 5.5%. We refinanced with the seller this year into a 10-year balloon with 25-year amortization at 6.25%. That represents a drop in our payments on the note of about $80 per month. We made an additional payment of principal of about $3,000 at the time of refinance. To our way of thinking, this was far better then paying thousands to a bank in closing costs, surveys, appraisals, other loan charges, and recordation fees. We probably could have gotten a slightly better rate from a local bank or credit union, but this way our up-front costs actually reduced the amount owed on the loan.

Originally posted by @J.T. Littlejohn:

@Stephen Chittenden the "after" looks great! An inspiration for all.

 Thanks.  We are pretty pleased with how it came out, even after we had to make some compromises.

Mike, I don't think you're wrong. I think when we get to the point where the unlocked equity could be reinvested in something producing a greater return, we may very well do so. Right now, we don't have a need for the capital and we're picky about the properties we choose to invest in. We're happy investing in-state and avoiding areas like Baltimore City where we think the issues outweigh potential better returns.

Mike, the LLC is owned by two couples and is intended to produce long-term passive income in 15-to-20 years. This is largely a retirement play for us. As such, we select our properties with an eye toward holding the property long-term. We intend to keep are all-in-cost below 75% of the ARV so that we can finance as much money back out of the property as possible. Both of the couples have relatively high income from employment, such that any sale would be taxed at the highest marginal rates plus MD state tax of nearly 8%. If you consider that we'd net about $55k or so after selling and then factor in nearly 50% for taxes, you end up looking at about a $29k after-tax gain. That's pretty good, but we feel like it runs counter to our goal of increasing the number of properties we hold and generating increasing amounts of passive income long-term. The $29k will be returned to us through equity paydown and cash flow, and we can largely defer taxes. That's not to say that we won't decide to sell off some of our holdings and do 1031 exchange into bigger properties or multi-families down the road.