All Forum Posts by: Ted Rud

James, lot's of great insight here already. Sounds like you are already on a fantastic start for retirement savings! If I was in your shoes, here is what I would do.

1. Keep your 401k - I like to look at this as a nice safety net for if your real estate ventures don't go as planned. It also depends on your taste for risk. Pulling out your current contribution to "put all your eggs in one basket" (real estate), might not be a good thing to do as a relatively inexperienced real estate investor, but like others have mentioned, could result in the greatest returns over a longer period of time.

2. Match whatever your employer requires to get the full 401K contribution provided by them. Free money! Unless you can find deals that have a better ROI then this, I would highly recommend it.

3. Max out your Health Savings Account (HSA) if one is provided by your employer. 2021 IRS limit is $3,600 (single, under 55yr old) for 2021. My company allows this to be invested in an S&P 500 index fund with low fees. HSA's are triple tax advantage, meaning contributions are pre-tax, grow tax-free, and can be withdrawn tax-free for approved medical purposes (otherwise once you turn 65 can be withdrawn similar to your 401k).

One tip here is that there isn't a time requirement to withdraw funds from your HSA to cover allowable medical expenses. Keeping good documentation along with receipts will allow you to withdraw up to that expense amount at a later date tax free. Therefore, people will opt to pay out of pocket for the time being to allow those funds to continue growing tax free. I'm not sure if this is something that will be changed over time, so it's probably best to keep an eye on it.

4. Max out a Roth IRA if your income (MAGI - modified adjusted gross income) is less than $125,000 in 2021 (Single Filer). This may be contrary to what some others here believe, but I feel that have retirement savings in multiple forms come your retirement, will give you the best options for tax-advantageous withdrawal. Especially since no one will be able to predict what laws regarding to tax will be at that time.

The 2021 limit is $6,000 (single, under 50yr old). I actually like my Roth better than my 401k as my goal is to be making more money in my real estate in my retirement years than I am currently making today. Roth IRA's are post tax income that can be invested in multiple ways (stocks, mutual funds, etc.) that grow tax-free and can be withdrawn tax-free in your retirement years.

5. Use the remaining to start investing in real estate! I recommend getting to know your market and analyzing a ton of deals so that you know when a good one comes by. Also, start making connections with local real estate investors as they will provide good insight for your market. Start slow and make sure you have plenty of emergency funds! The deals I've bought over the past 4 years have had actual cash on cash returns of 15%-19% (we shoot for 10% but tend to overestimate expenses or underestimate rent) and principal pay down of another ~10%. Not even taking appreciation into account, we have been seeing a total return of 25%-29%! I will note that we have been self managing our properties along with fixing them up at the start, so definitely not as passage as a 401k!

Best of luck to whichever direction you decide to go!

A lot of good solutions already mentioned. Here is one to consider if you are willing to work with her. Next time you visit to pick up rent, leave a stack of 12 envelopes that are post marked for your address and already have a stamp. Tell her to use them to mail you the rent. 12 stamps are going to be a lot cheaper than the gas you use driving to pick up rent and not to mention, the time savings. If she can't do that, I would follow some of the other responses with regards to getting her out and new tenants in place. Sounds like she is just being difficult to be difficult. Best of luck! 

Like Austen mentioned, I would recommend reaching out to a few bankers in your area to see if any of them are willing to work with you. Sometimes Credit Unions are able to work with you a little more than some of the big banks (more flexibility), so definitely add one of those bankers to your list! 

My ideal scenario (if I could go back to when I graduated college and do things again) would be to buy a new property for 5% down, live in it for a year while renting rooms to friends and fixing it up, then buy a new property for 5% down after that year is up. Rinse and repeat until nearing 10 loans, at which time you might be tired of moving every year, or banks are no longer willing to give you another conventional loan for only 5% down. This could be done with single family homes all the way up to 4-plexes. Once a property hits 5 units, it no longer falls under a conventional loan and will automatically bump you into the commercial loan space (typically requires 20-25% down and 15yr - 20yr terms, most with a 5yr ARM, rates also tend to be a bit higher vs. conventional). My current loan preference is a fixed 30-yr loan. The reasoning is it maximizes cashflow which allows for a faster turn around to get into more properties!

Also, most banks will allow you to buy a new property (1-4 units) for 5% down, live there for a year, and then buy your next owner occupied property for 5% down until you have somewhere around 10 loans. You do not need to refinance any existing loans. This is really nice as rates are near historic lows. This allows you to lock in a 30yr fixed rate at a low interest rate!

Now if you plan to scale faster than one property a year, the second property would be looked at as a commercial loan. My banker requires 20% down and a 20-year term that has a 5 year ARM (adjustable rate mortgage). These commercial loans have a little bit higher interest rate as well. Different bankers may require 25% down or a 15-year, 5yr ARM, so it is important to find a banker whose rates work for you.

I'm guessing your banker is thinking you are planning to buy this 4-plex within 1 year from when you purchased your current duplex, or that you do not plan to live in the 4-plex? That might be their reasoning for telling you that you need to to either refinance your current house to have 80% LTV, or why you need to put 20% down on the 4-plex.

I would not touch your original loan, as Steve has mentioned. You do not need to refinance it in order to rent out the entire house either. Read this - https://www.investopedia.com/a...

As far as the down payment on your next property, you may still be able to buy with 3.5% down for an FHA or possibly 5% down for a conventional as long as you plan to live in the next property for at least a year. This will mainly depend on how long you have lived in your current house and what your debt to income ratio is. This is where meeting with a banker to go over those details will come in to play.

From putting together your various comments, I'm coming from the perspective that you are looking for recommendations on whether or not to sell or rent out a duplex you currently own and live in. Right now you are able to work from home but at some point may need to move to another state due to your job change. There is still a possibility you could work from home indefinitely, and therefore might be able to continue living where you are. Lastly, it sounds like if you do move out of state, you will likely rent for a year until you decide what neighborhood you like best and then buy a property there. If I were in your situation, here is how I would approach it -

Firstly, I would rent out the other half of the duplex ASAP. If you do end up selling down the road, already having a paying tenant in place could be looked at as beneficial from the buyer (instant rent). The lease you put in place with said tenant will transfer over to the new owner and then it will be up to them on how to proceed (renew another lease or not to, simple as that). I wouldn't get too hung up on how you "think" the tenant may feel. The document you both sign is legally binding to the terms you both agreed to.

Doing this will pay for some (maybe all) of your expenses in the near term. When you do decide to move out, consider renting the other half of the duplex as well. Depending on how much you would be able to cash flow would be the deciding factor for me on whether or not to sell. For deals in my market, I look for properties that will Cash Flow a minimum 10% of what we have invested.

Example - 20% down on a $200,000k property plus closing costs (estimated at $4k) is $44k. Lets say our holding and improvement costs before we get tenants to move in is another $6k. That puts our total investment cost at $50k. Now let's say you are able to rent out the property for $2,100/mo with the tenants paying all utilities and yard care, PITI is $1,200/mo., property management is 8% of monthly rent or $168/mo., and maintenance + cap ex is another $210/mo. (I typically estimate this as 10% of rent... but this could vary a lot based on age of the property and how recent upgrades/repairs were made). That puts your total monthly expense at $1,578 which means you cash flow $522/mo. After one year, you will have accumulated $6,264. $6,264/$50,000 gives you a cash flow of 12.53%. This does not even take into account the amount of principal you are paying down on your property or any potential appreciation. You also can claim depreciation for taxes. In this scenario, I would decide to keep the property. Side note - In this example, I neglected to include vacancy. You may want to factor that in, but even if you were to have the property vacant for 2 months of the year, you would still likely be cash flow positive.

Some other things to consider -

1. When you sell, it's typical to pay 6% in commissions to realtors (3% to buyers realtor, 3% to sellers realtor).

2. When you decide to purchase a new residence, if you are strapped for a down payment, you may need to sell. Ideally, you would let the positive cash flow on this property be the down payment on your next one.

3. How much equity do you have in your current property? You could potentially refinance (rates are near all time lows) and pull out cash for a down payment on another property. If you do, make sure the numbers still work for cash flow as your monthly payments will likely go up for PITI on the duplex.

There are many directions you can take this. Hopefully by analyzing the rental potential of your current duplex will give you a better idea of which route may work the best for you! I myself love building cashflow positive properties (basically little money factories). Let me know if you have any questions and I'll do my best to check back in!

A few things that you could provide that would help us analyze your duplex are -

1.Purchase Price of the Duplex.

2.How much do you have invested? Down Payment, Closing Costs, Improvements.

3.What do you still owe in Principal on the Duplex.

4.What is your current monthly PITI? Looks like $3,000 from what you mentioned above.

5.What does the other unit rent for?

6.What would your unit rent for?

7.Are the utilities separated by each unit? If not, how much are they on average per month?

Best of luck!

Hi all,

I've searched around and have not been able to find an answer to my question posted in the description. I can go on Cozy.co's website and see the successful Payments along with what is posted to my Bank Statement. Instead of the Tenants Last Name and a Random Character String, is there a way I can have it refer to something else instead? Maybe a portion of the property address and the tenants last name. See example below -

Payer: John Smith

Address: 123 Apple Street, City, State

Bank Statement: 'Smith' 'STYZHSDFIHJSJI'

I would prefer the Bank Statement to read: '123 Smith'

If there isn't an easy way to do it, has anyone "Cheesed" the system and Changed the Payer's Last name so it appears as below -

First Name: John

Last Name: 910 Smith

Therefore the Bank Statement would Read '910 Smith' 'Random Character String'

Will that work?

Thanks for any guidance!

One last train of thought - You might also want to consider going over expectations with your out of state investor. If I were in your shoes, I definitely wouldn't want to come up with the dime for paying on something like this. Just like modifying a lease over time, doing business is a process of learning/failing/adjusting. Now that you've had a relatively minor "fail," it's time to adjust so that you are in a much better position next time something like this comes up down the road! Best of luck!

When working with smaller contractors, we typically use lock boxes and change the code when each contractor is done with their portion of the project... although that won't necessarily make the contractor lock the door on their way out. Like others mentioned, it's best to make sure the contractor is licensed, insured, and has a clear idea of what your expectations are when it comes to the end product, timeline, and the conduct in which they get there.

I would contact your contractor and let them know what the issue is and ask them how they would like to handle the situation. They might simply say "We locked the door, we have no fault in this" and then you're back to square 1 (unless you can somehow prove that they are at fault). If they are honest and in good faith, they might be willing to pay for the "stolen" appliances or be able to provide you with some sort of compensation. When it comes to these types of situations, be observant on how the contractor decides to handle things... it can be a big tell on whether or not they are genuine and are someone you should consider working with in the future!

Let's back up the train on this a little bit. Who originally paid for the $10,000 of materials that was "stolen"?

If it's the subcontractor, Great! It wasn't actually stolen, just never installed per the agreement that the sub had with the GC. Next step - GC finds a new sub and you might see a bit of a delay in the work.

If it's the GC, that's an issue that the GC is going to have to work out with the subcontractor. Not your problem.

If it's you, now we have a problem. I don't pay my contractors until the project is complete (or partially) and material is placed and to my satisfaction. I NEVER pay in full for anything that has yet to be finished as this is my only leverage to making sure the contractor fulfills his contract and doesn't up and leave me with a partially completed project. From the sounds of it, you don't have any receipts so I'm guessing those materials were not paid for by you?

The property owner should never be on the hook for missing materials that are caused by a feud between the GC and one of their own subs! Always use a lockbox and make sure only the contractors you want working in the house have the most up to date codes. As mentioned above, the contractor should also have insurance to take care of theft and other issues that may arise during construction.

To Answer your remaining questions -

"A. why was ALL of the flooring, drywall, cabinetry, etc ($10k) sitting in the house at one time, as opposed to buying as needed."

This is more than likely a logistics thing on the contractors end. This is another reason why it is important to have a lockbox and only allow the GC and his subs access to the site while performing their contracted work. Another reason why it is important for the GC to have insurance.

"B. sub-contractor supposedly bought materials and is obviously not talking to my GC anymore, so he can't provide me receipts."

I don't see why receipts from the sub would matter? You, or should I say your contractor, is obviously not going to pay the sub for work that hasn't been performed. Fill me in if I'm missing a key piece of information here.

"My initial reaction is that it seems a bit fishy to have this much material disappear, without receipts. Should I just say I'm willing to reimburse for the receipts I'm provided, everything else is on my contractor? How would you guys handle this?"

I wouldn't "reimburse" anything. Pay your GC for a finished product. It's up to the GC to manage his own subs, employees, materials, logistics, insurance, etc. and then you will pay the GC once the project is complete or when certain milestones are reached as agreed upon up front (pay requests for completion of certain items).