I have identified the properties I want. They are fully occupied with paying tenants. I have asked for two years of financials to substantiate the claim. What other type of documentation should I ask for? Is there any public record I should have pulled?
I have enough capital to put down 20%, but I'd rather not. How can I dodge this? I can squeeze the 20% down payment out of my primary residence equity, but I'm not sure if this is allowed in conjunction with a traditional mortgage.
I am unsure of what type of entity to create. The LLC is kind of a poor mans go-to, but I don't know that I want a pass-through because of my personal income level. I would also prefer to not actually spend the money I'm making off these properties. The money should remain as part of the entity and as untaxed as possible. I could use some advice here.
A local property management company charges 6% to handle advertising, screening, contracts, collection and evictions. I work 40-80 hours a week on a rotating day/night/afternoon schedule. Until I can break free from servitude, I'm very likely going to need a property management company. A 6% fee sounds good to me, but is it?
The current owner is claiming $20k net annually. I ran the numbers and came up with the same.
Way to go getting started! You're asking a lot of good questions--many of which have answers for which a professional would be worth the expense!
Check with a CPA about the various entity forms and advantages. It should cost less than $200 for an hour, but you may save that much extra in your first year. You will not escape taxes (I never have) but a little input will help you maximize your real estate tax advantages so that you pay less and claim all that you're entitled to claim.
At 20K net, I am assuming you are looking at between a 1-4 plex. That being the case, these will qualify for low-down payment FHA and even some low down-payment conventional mortgages. Ask a mortgage broker to find you the best deal and, if he or she is worth his/her salt, they should be able to find you some deals you didn't know existed. Using home equity is allowable for down payment funds, provided the overall debt to income ratio still works.
6% management fees are low enough for me to question the quality/attentiveness of management you'll receive. We pay 10% where I'm from (NW Washington State). Ask for references, talk to some clients and their tenants to see if they're happy with what they're getting. The company should be willing to provide those and, if not, ask a different company.
@Timothy Daniels Good points. And yes, the 20k net is for 6 units. How does that qualify me for a FHA loan?
It doesn't...up to 4 units can be considered a primary residence, which the FHA is attempting to encourage (home-ownership). 5 units and more are commercial so do not qualify.
You could make an offer with owner-financing, if he owns the property outright. Offer 10% down and see if he'll take it. If you do a 3-5 year call (the date on which you owe him all the money), you would theoretically have enough in the bank account from the earnings of the property to fund the down payment and get a traditional loan (commercial loan, in this case). Nice thing about a commercial loan is that the property's income is what qualifies, not your income.
@Timothy Daniels I never consider any of this. Very insightful. Thank you.
Thanks. I've contacted a CPA in my area and he's going to, hopefully, guide me through my options to maximize a tax advantage.
Originally posted by @Account Closed :
tim had good advice. on llc for your property if u want to keep profits in llc u can. on an s corp. which costs more in my state. then you have to take distributions and then your other income will be looked at.
I don't quite understand this response due to the poor grammar but I sense misinformation.
C-corps are taxed at the entity level. S-Corps have passthrough taxation just like LLC's (excluding that oddball election). I wouldn't go with a C-corp due to the double taxation.
My understanding is that LLC's are really the way to go with passive income like a rental property. If you were to place the rental in a corporation (S or C) you would have to pay yourself a "fair wage". These wages would be subject to self employment taxes (social security and medicare). If the income all flowed through an LLC you could avoid paying self employment tax altogether as LLC's are not required to pay wages.