All Forum Posts by: Zachary Sakena

@Zachary Sakena Purchasing properties through an LLC is all you truthfully need and that is more for business planning than anything else (if you consistently follow through on the items I previously shared). Technically nothing Anderson recommends is wrong but in most instances what they recommend is completely unnecessary. The issue in most instances is the inability to articulate the risks and how these structures will actually help and therein lies the issue and why most go over the top on asset protection expenditures. Unfortunately there's a lot of alarmist/scare tactics utilized to upsell these services that do nothing but generate revenues for those who are selling the service and often leave the clients with recurring expenditures i.e annual maintenance costs.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise egregiously violating the law. You are more likely to be struck by lightning twice. The vast majority of lawsuits against landlords involve wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

Can you take the steps you suggest? Sure. Is it necessary? Probably not.   The best way to avoid conflict and liability is by being proactive in the way in which you manage your property.  Be a good communicator and responsive to tenant's reasonable requests. Avoid premises liability exposure.  Screen your tenants well. Carry appropriate insurance (property, general liability and make sure you are listed as additional insured under tenant's renters policy and 3rd party vendors). Hire licensed and insured vendors.  Stay up to date on all licenses and permits that may be required. Use a well drafted and fair lease. Do those things consistently and you will avoid most liability and conflict you are concerned with.

Ironically it's normally the individuals who go to the greatest lengths believing they are protecting themselves who are the most reckless in the way in which they operate their real estate. They are also the same individuals who are constantly involved in conflict, have terrible loss run histories and therefore higher insurance premiums and are paying far more on legal. It's something I have been observing more and more. That's the property owner profile you want to avoid. 

That isn't necessary for your first rental in my opinion. Where did you read about doing that and for what purpose?

@Zachary Sakena your post has brought upon multiple questions. Starting with the question of whether you can subdivide the parcel without paying off your current mortgage, the question is what is the home on the smaller parcel worth, rather than focusing on the current ARV of $325,000.00. The current lender could appraise the smaller parcel and perhaps determine the collateral is sufficient. I purchased a vacant parcel in Mount Airy that was adjacent to the sellers home. Unlike your situation, the parcels were always separate from each other, but the sellers loan was collateralized against both the single family home parcel as well as the vacant parcel. The lender was Wells Fargo and they required an appraisal in order to release the vacant parcel. This was 3 years ago and the seller ultimately decided to refinance anyway because rates at the time were more favorable but I believe for illustration purposes, that's the conversation you can have with your lender. Perhaps there is a middle ground where the $145K balance has to be accelerated down a certain amount for the lender to be comfortable with the release of the subdivided parcel. Ultimately the value of the single family home lot is the critical piece to the equation.

With respect to financing the new build, assuming you receive the zoning relief and can subdivide the parcel and the parcel is released from the current mortgage you should be able to use the land towards your equity. Construction lenders will look at the total cost and typically finance 75-80% of the project (right now its more difficult to reach the 80% threshold with market uncertainty). The appraised value of the land will be the key factor, but does seem like you will likely need to contribute some more cash than merely relying on the land. 

As a side note,  it doesn't seem like the margins are very good if you are spending $450,000 on the hard construction, still have carrying costs (debt service/loan origination, taxes, builders risk insurance and general liability) and have to include the subdivided parcel which presumably decreases the value of your current home. It seems like your true all in costs are going to be well north of $500,000.00 when factoring in the contribution of land, which is low margins if you believe the home is only worth $600,000.00 once constructed. It seems the offset between the reduction in value of your current homes parcel coupled with the equity from the new home, you are adding less than $100K of equity to go through a variance and then build a home. Seems like a lot of brain damage for very little gain. I do believe $450,000.00 is a high number for a 2,200 build, but even if that number was more in line with where the construction should be, your margins are still really thin. Unless this is your dream house and that's what's necessitating the build, not the economics, you should really think twice before executing on this subdivision/new build.

Zachary,

If you lived in the home for 12 months you really do not need to worry about the mortgage company. The only time you need to worry about a refinance or a "Change" in occupancy is if the loan is an FHA, VA, DPA (Down payment assistance) program, Fannie/Freddie Home style that you have lived in less than 12 months. Since you have a conventional loan if you lived in it for 12 months your all set.

The hard part is going to be convincing the new bank/lender that you are going to be building a Primary residence that close to your "existing" home. I can tell you from experience the real challenge is the distance between the lots/homes. Keep in mind the reason why it's usually denied is because a lot of investors buy a bigger lot to in fact build more "investment" rentals on the other lots, but say it's going to be a "new primary home" to get the higher LTV/LTC to build.

If you’re willing to put 15% to 20% down you will not have that problem but if you’re looking for a 10% down or less it’s going to be a very "Hard sell" to the underwriter. Again the reason why is the distance between the new home and the fact that it’s on your soon to be subbed parcel. It can happen but you need to have a seasoned Banker or Loan officer with very lien ant construction underwriters.

You will need a solid and very descriptive "LOE" letter of explanation and make sure you’re not trying to build a 2-4 unit or a smaller home versus the current homes GLA/SQFT or it will "Not" get approved. The underwriter will require this home be superior in nature to the "exiting" home for a reason to build as a primary. They will not let you build a smaller home or something inferior because it will look like your downsizing.

This is tougher to explain in detail so if you have any questions feel free to reach out I enjoy helping and talking REI!

Where in SJ?

It all depends upon the total cost of construction, based on that your monthly fixed cost/mortgage will come into picture.

You cannot rent too far from market rate, essentially you should have some spread between mortgage(construction cost) and rent to cover for cashflow, vacancy etc.

I would suggest you to keep the selling it out as your second exit strategy if renting is your first one. in that case your construction cost + selling cost cannot be more than market price of new construction.

You can also try to reach out to developers to give them a piece of the pie but then you will have to sell for sure.