All Forum Posts by: William Anderson

I have each property in a separate LLC. Basically, I am paranoid. I have something someone else wants. Having every property isolated is a good strategy. The second best is to be sure each of your properties is leveraged to the hilt. If the percentage if equity is very low, it makes it difficult for an ambulance chaser to come after you.

You can create a mortgage for any amount and create an LLC holding company or trust to own the mortgage. You may have a property that is paid off. You create an LLC holding company that only holds interest in other LLCs and mortgages. You have a fourplex worth $500,000 and you have no mortgage. Create a mortgage for $450,000 (example) that is owed by your fourplex LLC to your trust or LLC holding company. That locks up the equity. Its not bullet proof but close to it. FYI, you must do this before any prospective legal action.

The LLC is created to protect your personal assets and to separate your personal business from your investment business. There are many reasons why it's a good idea to create an LLC and quit claiming your business property to the LLC. Insurance is great and absolutely required but it may not be sufficient if a renter or tenant comes after you.

I have always suggested that investors go in highly leveraged. While this is still a good strategy if you can afford it, the next best thing it does is to keep the wolves away. Judgments against an LLC with the property that is secured by a mortgage of 80% or more are not likely to attract ambulance chasers.

Even if you pay cash for the property, create a mortgage for the property through a trust you set up so that the property has sufficient liens to keep the bad guys from your business.  

You can set up an LLC by going to the Secretary of State's website in the state where the property is located. Create the LLC by paying with a credit card. If you do not live in that state, you will need the services of a registered agent, easy to find online.

The reason for creating the LLC in the state where the property is located is that you will be permitted to use the courts in that state if you need to initiate litigation. A foreign company can not use state courts unless you create the business in the state or register as a foreign company.

You will need to create an operating agreement.  You can find samples online.  This is your document.  Most if not all states do not have a mandatory template.  There are some important items to be included but you simply say what you want about who owns want etc.

Apply for a federal tax ID number online at the IRS site.  Do not be fooled by the fake sites that charge you.  The IRS has no fees.

You are now prepared to open a bank account.  

Next, create a quit claim deed to transfer your property to the LLC. You can usually get samples of the format from the County Recorder or Court employee who accepts deeds for recording. Get the document notarized and file it.

Regarding the due-on-sale clause.  Most finance companies do not recognize the transfer as a sale.  The due on-sale clause requires a sale.  While technically it is a sale, there is a connection to the mortgagor.  I am not offering advice here, check with your mortgage holder to be sure.

You may or may not want to see an attorney about the above. If you decide to, contact one in the area where the property is located and one that is a "business" attorney. The action of creating the LLC with the state is simple and you should be able to do that without an attorney. Use the attorney to create the agreement and possibly handle the quit claim deed.

Carlos, I am not familiar with those markets but some basic things apply to any market.  Given the economic situation now, higher prices for property, and higher interest rates, be very careful overextending in the "hope" that you will overcome at least one shortcoming.

I do not believe that we are going to see appreciation shortly, the market is currently in a period of adjustment with prices likely to drop rather than increase.  A few years ago you could invest based on appreciation, that's not the case in much of the country now.  

You should have at least six months of free cash to make up for any losses that were incidental and not planned.  I recommend to my clients that they should wait a while for the market to stabilize, there will be many foreclosures, particularly with short-term rental owners.  There will be a good time to snap up those distressed properties fully furnished.  

Remember cash is king.  Hold on to as much as you can now and be very careful about taking on debt.  I sincerely believe that now is always a good time to buy but you need to buy right.

Starting with a duplex or triplex is a good strategy. These will usually but not always exceed income from a SFR. Plus, you have more than one source of income. Using FHA is a good move and I am a big fan of high leverage when you can get it. Rents have been higher in many markets however, I think we will be seeing some erosion of rents as vacation rentals come to the long term rental market.

You need to do some serious research not only in a market but on individual properties.  Make some safe assumptions now: 1.  Rents may not be stable, they may go down.  2.  Have 6 months of income available for what if scenarios.  3.  Hire a property manager that does background checks and selects good candidates based upon factors in their application e.g. they have not run off without paying the previous landlord.  They have a job etc.  4.  Commit to making repairs promptly and long term improvement of the property.  

I have purchased duplexes in my market of the Mississippi Gulf Coast and done well with them. There is a good spread between operating costs (mortgage and expenses including property management) and rents here . I am from California and years ago, I did very well with four flex and condos. You are correct about moving on to other states where the ROI will be higher and the initial investment much lower. I own an interest in a local property management company that manages property for out of state owners and for vacation rental property owners. The property manager is pretty aggressive about sorting through applications (all legal).

I am also a real estate broker so, I see all sides.  My California clients can't believe the cost of property here compared to where they live.  Cost of living is 35% lower.  This allows people who work at fast food restaurants to actually buy a house. 

Check out Keyladder.com for courses on buying investment property.  
 

We have a complete list of items necessary to set up an STR including electronic lock, wifi thermostat, owner's door lock, replacing the door knob on the entrance door with a handle, and many more things that are often overlooked. How about using "museum wax" to fix everything in place?

Jason, 

As you can see from the advice above, you need to look to other states for opportunities.  I am from Southern California and there was a time for investing there, been there and done that.  I moved to the Mississippi Gulf Coast where property is available at prices I paid in California about 20 years ago.  You may not know that Mississippi has the lowest housing cost in the nation.

People who work at Mcdonald's can buy a house here.  The rental rates here started to increase two years ago and there are good opportunities to buy flip houses at good prices or ones that need the lipstick treatment for tenants to move in.  Our firm offers not only assistance in buying but property management through our subsidiary.  This is a great market for short-term rentals also but at the present, there is too much competition for an investor with a mortgage.

You may want to look at the courses available at https://keyladder.com they will help you get educated on rental property investing.

Isabel, 

Don't lock yourself into buying a property down the street.  Look nationally.  You want to find a property that will generate cash, that can be anywhere.  Find a good property manager who can take the pressure off and help ensure your property is well taken care of.   Start out with the idea that you will not be the property manager.  Build-in cost about 10% for a long-term rental and about 15% for a short-term rental.

I have created two courses on my website.  Investing in residential rental real estate and other in short-term rentals.  You need knowledge.  Keyladder.com

Price is important but so is competition.  There are many more vacation rentals on the market now than five years ago and ABB estimates at least a 4% growth next year.  Many people do not know how to market or price their properties.  They jump in and when their property is not 80% full they start tinkering with a price.  This is why you see so many prices out there.

The more they drop the price, the more they are exposing themselves to poor-quality guests.  I always tell my clients that you can charge $50 per night and rent the property all year or you can charge $100 per night and rent it half of the year.  At the end of the year, the income is the same.  One has less wear and tear than the other.  

With an STR there are only so many ways to market. List on VRBO, ABB, and your own excellent site. Write great blog articles, post on the property on social media, and focus on obtaining 5-star ratings. This is about all you can do. My company does some other things too but that's our secret. Get that price up to the sweet spot. And, hope that some of those STRs sell to full-time residents.

I just read the statement about not telling me it depends. Yet, it really does.  My market is the Mississippi Gulf Coast.  All of our properties are within 1 mile of the beach.  This area serves as the gathering place for almost all state-wide events e.g. cheerleader competitions.  Many people want places that will sleep 10+.  Often we get a houseful of young children here for some competition with their adult chaperones.  It's also a place where people come for family reunions.  It's somewhat central to much of the country.  

This area does not have a party reputation so it's rare that we have to take any action against a loud party.  As property managers, we watch over our larger properties closely when they are going to be full.  FYI, something to consider if you have a large number staying with you.  It's difficult to get the AC down to 65 with 10+ warm bodies, cooking, showering, going in and out.  Be sure the AC is well-serviced.

The smaller units e.g. one bedroom condo usually have a sofa sleeper.  These are great for weekend visitors from New Orleans and Florida who come here to gamble (12 casinos).  The smaller ones are good for two couples when our Coliseum has a big event such as Reba.  We have a good balance with various sizes.  

So, as I said it depends on your market.  

Renters must have 100% of the first month's rent plus a deposit at the time they complete the application.  This is no different than someone signing a contract to buy a house and not having the down payment.

The first couple of minutes into the conversation you need to ask if they have $x in hand and are in a position to submit their application and sign a lease for a move-in on x.  

Never rent to someone without running a background check.  Particularly a check from their current landlord.  My property managers have a few requirements which are as follows:

1.  Have all of the funds now, not two weeks or one month, etc. Now. 2.  They have a job that pays more than double what the rent will be.  3.  They acknowledge that they have read the lease agreement draft with all stipulations and will comply.  4.  They left or will leave the current landlord without damage and have paid their rent on time.  5.  No more than two persons per bedroom.

There are more requirements but these are a start.  If they are relying on income from child support , then proof of funds must be submitted e.g. data about payer and information about their source of income.  

By the way, they all sound nice.  The real nice ones are the ones who pay rent on the 1st of every month, change the AC filters, keep their property clean, and let you know immediately if there is an issue e.g. leaking sink.  Now that's nice.