All Forum Posts by: Scott Krone

Where in Evanston?

@Amanda Aesho - Congrats on your first rental property. Each lender has their own requirements. 10 is the general rule. We set up all properties in a separate LLC in lieu of having any assets in your personal name. You may want to discuss that with an attorney. It should not impact your ability to get financing.

@Yaniv Kehat  The person whom I would recommend you reach out to has already done so!  @Rebecca Knox

@Marc Webster  and @Jason D.  If you are going to consider a 1031, than perhaps also consider an Opportunity Fund which allows more flexibility than a 1031 with respect to product type.

@Mike A. - Thank you for replying to my question, and defining your goal. It appears your current path is to use Investment A to generate enough profit so you can get into Investment B. There is merit to that strategy, but as you are experiencing it may not be the "quickest" way. Quick may not mean better for you, as your strategy is based upon buying with all cash. Most commercial properties are not bought with all cash except large REIT's which need to place investment funds. On a smaller level or individual level, most are bought with a combination of debt and equity. Yes debt will impact cash flow, but you are also increasing the rate of return on the cash via the leveraged equity. So there are pluses and minuses to both strategies. The strategy you have implemented is the "safest" as you do not have the pressure of a mortgage payment, but your overall rate of returns are lower due to the lack of leverage.

So, in order to grow your faster, your strategy would require evaluation.  Either incorporating debt, equity partners, or both would allow you to grow faster.  You are also correct the current apartment market with the low cap rates is a challenge to find a deal strong enough economically to make it attractive for an investor.  That is why we sold our apartments.  Like Scott Meyers, we too have moved into other real estate markets like self storage.

@Mike A. -  What is your definition of grow?  You have increased the number of units, and types which is by definition growth.  Please elaborate.

@Terrenzo Monrovia - as with the others, DISCLAIMER: I am not a CPA or attorney. To answer your question. Best route to starting an LLC. Easy answer is you can go onto irs.gov, and click EIN to establish your LLC. Just fill out the answers to the questions they ask. You can have an EIN in approximately 10 minutes. Same with Articles of Organization at the state level. Total cost for us in IL for both is less than $500.00. That is the easy answer.

Longer answer. Personally, I think it is great you and your partner want to use the LLC. I would agree with that decision. For an LLC, you can choose either S or C corp. You and your partners in conjunction with a CPA can determine which corp is best. You can elect that once it is established.

With regard to the structure, you and your partner should alsodiscuss that with an attorney.  There can be Managers and Members, or Managing Members (both).  It sounds like your partner is advocating Managing Members with 50% ownership for each.  That is all spelled out in the Operating Agreement prepared by the attorney.  As a side comment, what your partner has proposed is common as well.  

If you create the LLC with the EIN and the Articles, just deliver that information to both the CPA and the attorney. You can also list the attorney as the registered agent, so they will get all notices (if you know the attorney before, input their information in the questions for the EIN and Articles. This is a nice feature to utilize. Your attorney can do all this for you as well, but you can save yourself some money by not paying the attorney for filling out forms you have to provide them the info.

Hope that helps.

@Jiten Voralia  When you are doing your research, it may be helpful to decide which segment of commercial real estate you find is the most congruent with your investment goals.  Growth, cash flow, both, short term, long term, retail, apartment, office, industrial, self storage, etc.   There are now Opportunity Funds which work in the strategies.

An analogy would be saying "I want to buy a car" - great, now "what type of car are you looking for?"  This will allow you to refine your search and identify various opportunities in the desires market and compare them apples to apples.  In the last two weeks, I have seen offerings in each of these market types.

@Roman Rytov  I think your strategy is correct.  Personally we have liquidated all our apartments as we feel we are at the top of the market.  We are bullish on self storage as they tend to do better in recessions.  With regard to SF in a recession, having the proper leverage is important.  During the 2008-9 crash, SF homes in Phoenix were renting for less than apartments.  Who wouldn't want a whole house with a pool vs a 2 bed apartment.  The way to test your leverage is to "Stress Test it".  How much reduction in cost can you absorb and still cash flow.  Go back and look at what rents were during the 2008-9 Great Recession as a data point.  If you are cash positive with those rental rates, then you are being conservative.

@Aron Fredrix  I appears from your tag line you are in Holland.  To say one strategy is the best across the board, country, or in your case the world, is difficult at best.  While wholesaling may be good in Ohio, that doesn't mean it works in Illinois.  Each market is different.  I also agree with @Frank Wong and @Jay Hinrichs regarding the misnomer that wholesaling doesn't require money.  Any business requires working capital to begin and operate.  

That being said, I did have a client that implemented a very interesting business model in Holland that did not require a lot of cash.  He would acquire housing in Holland utilizing owner financing.  It would cost him slightly more than the owner's current payment, so they could generate monthly cash flow.  He would then lease the house out per room, and generate income off the property to pay the owner.  Because he was able to lease it per room, he was able to generate a higher rental rate compared to renting the house.  He did this close to schools and cities.  

While he was successful at this model, in many cities here in the US, we could not do that due to zoning.  So to determine which strategy is best for you, I would suggest first determine what do you want to do in real estate, is there a market for that product in the area you want to focus, and then determine the necessary cash to accomplish your goal. Once you determine that, then you can explore the equity capital verses the debit options you can further pursue.

Hope this is helpful.