All Forum Posts by: Zach Westerfield

im not a lawyer or CPA, but most recommendations are to structure as an LLC which files as an S Corp. thats what i did for my flips

@Robert McAllister i would encourange you to look into the business further before you consider buying. i have been researching the assisted living sector for many months with intentions of investing. There is definitely more to it than owning traditional real estate. 

@Aaron Macken I have bought in small towns, however I only buy in those that I know very well. Its important to to know the area well, and what rents and growth look like. There are areas I invest in with town populations under 5,000, but are growing and rents are increasing (as well as home values). Only 15 minutes away are towns I strictly avoid. The same fundamentals hold true for small towns. People need jobs, and usually good schools. Look for a small town with major employers within commuting distance, and pick the one with the best school systems. Urban expansion is here to stay, and as the urban areas push out to rural areas, there is a push of people ahead of the big waves of suburbanites. I know this having grown up in such an area. As rural counties fill up with suburbs, those people who like the rural/small town lifestyle start looking for new counties with cheaper land. Look for these new counties and you will find yourself in the path of progress. 

@Gregg Baird congrats on getting started. When it comes to how and where to use capital and debt, each person's situation is different, as well as each person's risk tolerance is different. The first step is to understand your Risk/Return situation, next establish your long term goals. break these long term goals into shorter term goals, and develop a strategy to use your financial assets, whether that be leverages, cash, equity, etc. 

a few starting points - its important to understand the return as well as tradeoff on each situation you mentioned above. For example, pulling money out of a 401K. first, you are losing the return that money was making, for arguments sake, say 8%. next, you add in the penalty for withdrawal (spread over the term you plan on using the money). Lets say its a 25% penalty. If you use the money and make a 15% return in real estate, it will take approximately 4 years to "pay back" the penalty. 

the same applies to debt. If you have a car loan at 4% and could pay off the balance, you have to consider if you could take the same money and make more than 4%? In general, with the current interest rate environment it doesnt make sense to pay off low interest debt. There are two big caveats to that statement 1. you have the discipline to invest the money, and not spend it. if not, pay off the debt. 2. You can handle the debt payments from a cash flow perspective. If you cant balance your budget each month, pay off the debt first. Once your personal finances are "cash flow positive", then start looking to utilize debt.

Again, all of this is very subjective, and there is no black and white answer. However, hopefully this helps you to start thinking in investing terms. 

That can be a great way to work it, as long as the bank is okay with it. I would definitely still have some sort of operating/partnership agreement up front, where roles and responsibilities are clearly defined. i would also include exit strategies. you do want to be careful about being in business with family. having everything laid out up front can help. 

@Caleb Campbell value add is a great way to go. The BRRRR method is hard to beat. Use the 30K as reserves, and see if you can do a low/no money down deal. I just finished a write up today on my most recent BRRRR. I did this deal for $15,000 out of pocket. if you would like the details send me a PM

It depends on your goals. A terrible deal for one person could be a great deal for another. First I would say consider the fundamentals - what is that market doing? what do future rent growths/prospects look like? A lot of time in small towns, they may not match the numbers you see in urban areas (which is why they are small towns). That doesn't mean its not a good investment, but I would beware if the area is digressing. Pay attention to schools, and make sure people are not leaving the area. Also, consider what the job market looks like. 

Lots of "it depends" in your question. 

Are you looking for turnkey or value add?

I would advise not focusing on the price point, and instead focus on which sector/product makes the most sense for your target area. Invest in properties based on the numbers, not on the price. if you determine your target house is between 100-150K, then i would advise finding a way to make that happen vs buying an "affordable house" at 50K. Putting in the work to figure out how to buy a 150K house with 30K is far more beneficial than figuring out how to fix the problems for a 50K house. It all depends on your market and what type of investment you are looking for. 

Ive been investing for 4 years, an have purchased over $1.5M in real estate. For the first 3 years I never had more than $15K of my own money. 

@Shiloh Lundahl good mention with the credit. If you haven’t already opened a credit card, do it even if it’s just a $500 limit. You have to start building your credit. So much if the leverage you will want to utilize will be dependent on a good credit score.

There is a ton of discussion on here on this topic, so I wont spend too much time. Also, I am not a lawyer, the following is just my opinion, and what I have learn through research and speaking with others. 

The number one reason for holding properties in an LLC is for liability protection. I will not go deep into what this entails as there are numerous books and resources to explain this. Liability protection should always be a multi-tiered approach. The LLC structure is just one level to this tier. The two main disadvantages to an LLC are 1) increase costs (yearly fees vary by state) and 2) inability to get the best loan terms.

When designing your liability protection strategy, ask yourself how much of a target is on your back? if you are new and have little to no net worth, its far less appealing for a lawyer to come after you versus if you have substantial assets that can be attacked. In general, most people buy in there personal name when starting out, and once they build up net worth transfer into LLCs. Also, you eventually will run out of agency debt loans on SFRs, so at this point there is less reason to buy in your personal name. 

Here are some general tiers to liability protection, to get started with before you start an LLC.

1 - policies and procedures - an absolute must, make sure you know landlord tenant law in you state and strictly abide by all rules and regulations. Without this the rest of you liability tiers may be voided.

2 - Umbrella policy - pretty much another no brainer - its cheap protection. 

3 - manage debt loads - if you are comfortable keeping a higher debt limit, it is a strategy to reduce your net worth and make that target smaller. this comes into play when considering tapping equity in existing properties.

these 3 should get you started. but its all up to your own risk tolerance. A final note when you do go the LLC route. Just because you open an LLC does not guarantee protection. That company must look and act like a true company, with all expenses and bookkeeping kept separate from your personal finances. Otherwise, it may look like you simply opened an LLC to skirt liability, which has a high potential of being pierced by a decent lawyer. If you are new and have never ran a company before, I definitely recommend having a lawyer set up you first LLC, and have them walk you through all the necessary steps to maintain full protections.