All Forum Posts by: Jeff Takle

Very good point MikeOH. Statistically speaking, you are dealing with a narrow set of circumstances that are significantly important above a certain number of rentals. I was under the impression this guy in particular was just starting out and only had 1-2 units.

There are lots of people on the "speaking tour" advertising LLC or Trust creation. For most small investors it's not worth the costs involved to create the structure. The game changes if/when you are a professional with many units to manage. At some scale, you can afford to start protecting against a wider range of threats.

Good point!
Jeff

Students are generally harsher on the property but they are less price sensitive. Many of them are splitting rent 3, 4, or more ways. Also, they are more inclined to pay by credit card which helps protect you from bounced checks or late payments.

The nice thing about renting to them is that it really helps to focus your renovations and repairs strategy -- always go for high traffic, durable solutions. However, they take much more care and attention...and paperwork.

Quick question. Why the heck would you sell a property whose market value is $289,000 for $50,000 less than that? As long as you're using "the price at which a motivated buyer is willing to pay a motivated seller at a given point in time" for --market price-- and not "even though everyone else's house is selling for $200k, mine is magically worth $289 even though nobody would really pay that amount right now", then...

You're foregoing guaranteed money for the promise of future money. And, in order to make that $50k back in interest payments from the purchaser, on a $235,000 "mortgage" at 9%, 30-year fixed rate (higher b/c seller financing, just a suggestion), it would take 2 1/2 years...and then discount the cash flows to present value...and it's more like 4 years to recapture the $50,000 you could have today by selling outright at market price.

A much more profitable plan would be to sell at $289,000 using seller financing and get both benefits. The primary driver I think for buyers using seller financing is because they cannot get approved easily for a traditional loan at reasonable rates; it's not that seller financed homes list for lower prices. They are already in a pinch--you give them value by providing non-traditional financing. Don't lower your prices and offer them value they aren't asking for.

If your value proposition is, instead, to offer a bargain basement price, only if they buy it from you using seller financing, I think you're going to have a much tougher sell to the buyers...they'll be too suspicious. If you want to discount it and the real value is 289, drop it 10k.

Just my thoughts,
Jeff

My guess is that he was angling for more fees. Unless you own the properties free and clear, or you have an LLC with substantial credit history of its own, you won't receive any liability protection benefit either. Because,

For you to transfer a property to the LLC if it holds a mortgage, the bank will 1) increase your rates when you refi to the LLC b/c it's a business asset and not a personal asset, 2) require that you sign a personal guarantee on the mortgage. This means that if the company defaults, your personal assets can be attached to the judgment.

If something happens in your property and
-the tenant (let's say) sues you,
-they have to win the suit,
-you refuse to settle,
-it's not a situation of negligence in which case you're personally liable anyhow, and
-the judgment comes in above both what your insurance will pay and the value of the home owned by the LLC...

then normally the rest of your assets would be shielded. But, if you've signed a personal guarantee on the mortgage, then they're not shielded (at least up to the value of the mortgage) even if you've set up each LLC properly and run it like a business so the courts don't "Pierce the Corporate Veil".

Add on the $100-$500/year filing fees per LLC, separate tax fees for business filings, etc. and you're paying heaps for very, very limited liability protection. I'd recommend bumping up your liability insurance coverage on the property to $2M instead for +$200/year. It will cost you less and be much easier to maintain.

There are some benefits to using LLCs beyond liability protection--namely ownership of over a certain # of properties in certain states subject you to more restrictive landlord-tenant laws if you rent them out. I know people who bundle their properties 4-10 per LLC in order to circumvent these requirements. Again, do a cost analysis and unless you're moving 50+ properties I struggle to see how the benefits outweigh the costs in time and money.

I'm not an attorney; I've started several LLCs and run properties in several states; am also a licensed Realtor in two states. Just my humble opinion...

-Cheers,
Jeff

There have been a lot of posts here about whether to open an LLC, S-Corp or other entity, in which state, and for what purpose in order to deal with real estate. I found this resource today while doing some corporate finance, business formation work, and I thought it might be helpful!

It shows a lot of pro/con comparisons for different entity types and situations, and lists out the costs to start each kind of business in the different states, different laws, etc.

http://www.bizfilings.com/

Cheers,
Jeff

i need you to PM me an email address or otherwise let me know how you want to get it.

Nicole,

It is what it is. You've already bought the property. It isn't the best possible deal but hey it sounds like your first so congrats for jumping in. You should add on
[list]
-10% of your revenues as vacancy cost (turnover will run a few days/weeks a year most likely),
-10% for routine maintenance like broken windows, torn rug, painting during turnover..., and
-another 10-20% for long term maintenance stuff. With new construction you will be clear for the first five years (fingers crossed) but eventually it will need exterior painting, landscaping, a new boiler, new roof, new --insert something large and expensive--.
-plus advertising costs each year if you turn over tenants
[/list:u]

Also, I'd recommend ferreting away 3-6 months' rents as a safety for that rental in case you end up with a special assessment or an unexpected major repair. Without the reserve, any major mishap could put you into a position where you're forced to sell the property quickly. That would be bad for you. Many/most new landlords have no reserve; a fickle market can quickly push them into foreclosure or bankruptcy. Don't be one of those landlords.

Good luck
Jeff

Well, good deal, bad deal...it all depends on whether or not you have the cash on hand. In San Diego where you might rent a 1 bedroom on the beach for $2,500/month, you could face needing first, last, plus security to move in...that's $7,500 in cash, PLUS your last deposit that you have to wait up to 30 days after the end of tenancy to recoup, which means a $10,000 cash spread just to move. That's huge and the demand for alternative products is large.

And, while I think your point is valid, the concept is that the legislators appear to support a security fee (whether in the form of insurance or otherwise) as long as it is reasonable and doesn't screw the tenant. Frankly, if it costs a landlord $25/month to get the protection they need, then there's really no justification for charging more so yes I agree that charging $50/mo in that case would probably get you into hot water.

But, surety bonds and security fees are not banned across the board. The difference right now is between legislative law and case law. Legislative law reads pretty strict, but case law supports a looser interpretation of those rules. In California, they're just trying to make legislative law reflect the case law reality. So, in effect, it's not an absolute ban on fees.

Just my two cents.
-Jeff

As the law is written currently, it would appear true. But, case law and what's really happening in the market place suggest differently. In addition, several states are changing this very element of the law.

California has pending legislation right now to allow surety bonds in lieu of a security deposit, which is essentially an insurance fee protecting the full amount of the deposit instead of charging the larger deposit amount.

www.SureDeposit.com out of New York is leading this charge and I expect that other states will follow shortly--I chatted with their CFO over the weekend about this very topic. Rents are increasing and move-in costs are quite high, urging lawmakers to allow reasonable alternatives. It remains to be seen in the final written version of that law whether the surety deposit must be issued by a licensed insurance company of if an individual (or PM company) can provide one themselves.

So, while the laws read that way (no fee, just a deposit), there are large companies in every state managing properties using the fee to help tenants with good credit backgrounds, which suggests that case law would support this kind of fee.

What the written law is meant to protect is having landlords charge an amount equivalent to a full security deposit up front and then not reimbursing it when a tenant moves out, essentially screwing them out of their deposit. If written as a much smaller fee amount explicitly in lieu of a deposit, it appears that case law supports that approach.

-Jeff
p.s. I'm not a lawyer. This is an issue I follow closely because it benefits all parties involved and is a logical solution.

I don't think it's just about getting the money back, it's about doing what you can to prevent it from happening to others. By getting a judgment in small claims court, they get a black mark on their credit record (that judgment can be listed on their credit report). Any future landlord who gets a credit file can see they had a judgment for nonpayment of rent -- a pretty clear indicator.

Also, it only costs about $50 to file in small claims court. You learn the process, which is always good education, and you have a chance at getting the money back. How much chance do you have of getting the money back if you do nothing? I'd say none.

Yes, I've filed in small claims court. Call the court office or, better yet, go down there and talk to the people who work there. Explain what you'd like to do. They will walk you through the 2-3 forms in about 15 minutes. You send a couple of notices off, wait a few weeks, and then get your court date. There's a very good chance the tenant won't show, in which case you'll win.

When you win, contact a debt collection service to go after the debt. They will report the overdue rent to all three credit bureaus monthly, in addition to the judgment. Between the debt collector and the judgment, you'll stomp all over the tenant's credit report, pretty much ruining their chances at future rentals. That is often our only recourse as landlords and therefore, our responsibility to the others in our profession.

How awesome would it have been to see that nasty record when screening the tenant before they moved in? That kind of help is priceless.

-Jeff