All Forum Posts by: Stephen Dougherty

I was informed by my agent that State Farm is no longer issuing 1-2 unit rental dwelling policies in California. I am closing on a SFH in a few weeks and need suggestions for insurance carriers others have used in CA. My agent told me several carriers have left CA recently due to wildfire risk because in CA carriers can't pick and choose where to issue policies in the state so many carriers have just left CA due to the wildfire risk. State Farm apparently has too many policies in CA and is wanting to reduce the number of policies they have so they have stopped issuing rental dwelling policies. Current policy holders are grandfathered in.

I'm confused, on one hand you say, "cannot use my VA loan again for some time and I have continuously run into funding approval issues." but you then later state, "I have plenty of credit at my disposal but I want to use it right."  Which one is it?

If Banks won't lend to you it's because they have reasons your DTI is too high and you don't have enough reserves. Meaning you are in a risky financial position. Address those issues so banks will want to loan to you. I would take the time to work W-2's to build capital and income to qualify. You can also try wholesaling which will let you keep an eye on the market along with generating some income/reserve capital.

I wouldn't do the HELOC if you plan on holding the property long term. Short term (<2 years) then yes I would do the HELOC. Interest rates are only going up and I would rather lock things in now than be stuck with a HELOC with an interest rate that keeps rising. The choice between the other two conventional loan options will largely depend on cashflow, reserves, and your other assumptions/goals with the property. Good luck.

Talk to a CPA (which I am not)... you could do a 401(k), but 401(k)'s have a lot of rules and are fairly expensive to set-up and administer unless you already have one set-up for your business. If I had to guess a 401(k) would be more expensive and onerous than the taxes you would save. I suggest SIMPLE IRA for a small business. The rules are less complex, there aren't any fees (at least at Schwab), and more tailored for small businesses; however it doesn't allow for quite as much in contributions ($14k in 2022).

If you are just starting out I would focus on having a good personal liability umbrella insurance policy. It's cheaper than an LLC and gives you somewhat more protection. The insurance company will fight to minimize any losses whereas you will have to pay a lawyer on your own if you just have an LLC and no insurance. A good lawyer can always figure out a way to go after your personal assets even with an LLC in place. If you are just starting out you probably don't have a lot of assets so a $2M umbrella police would be fairly cheap. Once you acquire more properties then I would suggest adding them to an LLC and then add a commercial umbrella policy. I have 2 LLCs: one for my commercial property and one for my residential properties. Find a good CPA and a good lawyer to talk through things. You should establish these relationships early to avoid costly mistakes early on.

Keep in mind with a 401(k) loan you may have to pay the loan back immediately (or within a very short timeframe) if you leave your job (voluntarily or involuntarily). I'd rather drop my contribution amount to whatever the the employer match is (if there is a match from your employer) and save for the down payment outside of the 401(k). Someone mentioned Self directed retirement plans... these are very tricky to manage and you can get in a lot of trouble with the IRS if you don't have everything set-up and managed correctly. This article shows the risks of a self directed IRA but with gold. Similar things can happen with real estate if you aren't careful. https://www.wsj.com/articles/a...

Keep in mind your debt to income ratio will start to be impacted at some point so you might start to run out of runway. Also, HELOCs can be called if property values decrease as mine did in 2008. Look into the details of the HELOC terms to see if/when the HELOC can be called.

I would seek a CPA.  Not just for doing the taxes but a good one will help give you specific advice for your particular situation.  A good CPA will pay for themselves with their advice and tax savings you might not get if you go it alone.   

What was the condition of the property when you purchased it?  I would think in 3 years there would not be enough wear and tear to justify $12k in repairs and the property should be inspected each year.  I would get a different property manager.  Also, does your Rental Dwelling insurance cover it?  

Are your ads mentioning that the common areas are shared?  Your ad may be misleading people to thinking that the common areas aren't shared and you are attracting renter who want a 1bd/1ba living situation with no shared areas.  How are utilities handled?  Are they included in the rent?  Are some of the units already rented and you're trying to fill the remaining units?  I think COVID has changed how people are viewing how they view sharing living space with other people they don't know.