All Forum Posts by: Sam McPeek

I've searched the forums and I can't find direct answers to my questions. I am looking at starting a partnership(s) in order to invest in buy & hold rental properties, where I bring the deal and management and the partner brings the money. Looking for some insight from those who have done it before, maybe @Brandon Turner or @ Amanda Han can weigh in.

1. With the pass through structure of a LP or LLC, does the entity have to own the mortgage in order to pass through the tax savings to the members? What if my partner is named on the mortgage, and I am only on title...can I still get the tax benifits?

2. The banks I have contacted all say they require everyone who is on title to be on the loan, but in listening to @brandon turner it seems that others have structured it so they are not named on the mortgage. How is this done?

3. Obtaining financing in the name of an LLC or LP vs. personally holding the mortgage?

@Kyle Gregg You are right in that the loan product regs prohibit you to do any of the work yourself, and that relates to any work that the 203K funds are paying for. That being said, I found that I was able to get around that by having a friend sign as the contractor of record and making sure that everyone from my FHA Appraiser, Contractor (friend) and the mortgage representatives knew what I was doing. Basically the mortgage company and the FHA are going to hold the contractor responsible for all work, so you have to have a good deal with your contractor.

That being said, I also had the option of having all draws auto-deposited into MY account for my dispersment to the contractor. I would not have the draws paid directly to the contractor, because I would lose leverage of my own money with the contractor.

@Matt Juels I have found out about them in 2 ways. (1) I have a freind who has been in talks to do some commercial development with the city, and because of his proximity he has learned about specific areas; and (2) we have discussed it with Development Planner (not sure if that's a correct title) for our city who is a part of our BP REI Meetup.

I should say that I don't know how much money the city is going to put into the area, but I do know that they are putting effort and time into focusing on this one area. It's the entryway to our city and also one of the ugliest.

The best advice I can give is to be known by your city's planning, building and parks department heads. Or start a meetup and invite them.

@Melisa Gingrich You could also do a property search with the County Assesor. Our county has a online search function that allows me to look up the address and see the owner of record, last purchase price, tax assessed value, plot info, and property tax history. That's all free, and I would try that before paying for a title search.

My top 5 for rentals:

1. Condition of home including roof, HVAC, etc.

2. General neighborhood -I don't worry about schools as much because all of the schools in my city are really good and all of the schools are currently under renovation or have been renovated recently or are going to be renovated within 2 years. But the general neighborhood is important, as that will drive rental rates.

3. Price

4. Lot size/layout -We have some funky lot layouts, and there are some lots (like my own) that have huge easements. Not a deal breaker, but I want to know what my options are and anything that might hamper those options in the future.

5. City involvement -There are neighborhoods that our city is looking to revitalize. I want to be in those neighborhoods, because my value will rise as the city develops around me. Also, there are possibilities of getting favorable treatment by city officials when investing in these areas.

So as your numbers are stated, you would have $920 left to pay for all other expenses and cash flow. Here's some other things to think about: Property management (figure 10%) Maintenance (5-15% depends on age) Cap Ex (5-10%) Vacancy (for your Area) With 10% figured for the above and 5% vacancy that would leave you with $150 cash flow. That's not enough room for me, so I would not buy it at that price. Also, what repairs do you need to make to the property before renting it out?

@Satha Palani I used the 203K loan when we bought our duplex and I put $64K into repairs. It is a good loan product if there isn't another option, but it is time intensive. @Nicole Pettis has some great insight, and I think answered your questions, but here are some additional things I learned:

1. The FHA appraiser can make or break your project. I wasn't able to find one in the city I live in, so I had to hire one from about 1.5hrs. away. This meant that each draw inspection had additional fees that weren't orignially built into the loan amount. Also, the FHA appraisers in this area seem to be home inspectors as their main business so you might be able to have them do the home inspection as well.

2. If you are already looking at repairs of $40K, then you are into the standard 203K. You have to figure into that 'repair' total the cost of inspections and ensure that fixing all the code issue repairs still leaves room for cosmetics. It sounds like it would be too tight for the streamlined.

3. You have to make sure that the contractor's bid is water-tight...if there are additions or changes after the process has started, it's a pain to adjust the available funds through the loan (but not impossible).

4. Don't be intimidated by the folks handling the paperwork on the mortgage side or the appraiser side. Once the project starts they have a vested interest in making sure the project is completed, so they will be willing to work with you. That helps if you have to adjust the original plan like I did...they didn't want to, but they couldn't really force me to do otherwise.

5. You will have the option of draws coming to you for dispersement, or to your contractor. Do not allow the contractor to get the draws directly!! Set up auto-deposit and disperse the funds to the contractor. Otherwise you could get hosed, and you will find that you have very little leverage/say with the contractor completing the job.

6. You may find that you have to educate people on what is a rule with the loan and what is not, even those that should know better like your mortgage rep. I found that this was a loan product that I had to keep a very close eye on.

7. If you are doing the standard, make sure you check into a builder's risk insurance policy. There is a good chance that your homeowner's policy will not cover you during construction. Builder's Risk policies are more expensive and that will affect your bottom line of what is available for rehab.

All that said, it was the only way that we could purchase what/when we did. It was a pain and I had to fight for my position constantly but it worked out in the end.

This is a great question, and one I have been thinking about a lot lately. I think my answer parallels @Ben Leybovich  

Enough is being able to pick my son up from daycare or school (he's 2 now), instead of leaving while he is asleep and seeing him for only 1.5 hrs before bedtime. Enough is being financially ready to have another child. Enough is being free to serve my church and the Jr. High kids more. Enough is being able to spend more time with my WyldLife kids. Enough is being ready to quit my job when the project ends in my town, so I don't have to move somewhere else in the world.

I don't know that I can put a absolute price on that...but replacing my base $70K salary plus enough to pay higher health insurance would be a good start. :)

@Ben Leybovich Out of curiousity, why Epsom salt baths? I'm in the habit of regularly bathing my son...but have never added any preserving spices.

@Joseph Plaugher 

I find that the taxes are high, however they are determined largely by the individual cities. I live in Tri-Cities, WA which is made up of 4 different cities and each one has a slightly different property tax rate, depending on whic cities have passed school/hospital bonds, etc.