$100,000 to get started.....

12 Replies

Okay, this is only my second post.  I'm sure I'll take a few months before I figure out exactly which strategy I want to go with.  It'll be completely passive over the next few years since I have a career that I enjoy at the moment that is allowing me to put away enough savings to invest in real estate.  I've had a rental house that I sold a few years ago.  I've been the landlord before, and it didn't bother me at all.  So as I figure out how to invest $100,000 liquid cash from Houston Texas, I'd love to hear what has worked best for you.

1. LLC or no? Are there limits to the number of properties you can own under a corporation?

2.  Rent or Flip?

3.  With some folks on here saying Houston can be tough to find properties at a good deal, do you suggest in state or out of state?

4.  Texas has huge property taxes from what I've seen other places.  Any tips on that in the rental world and flipping world in regards to this?

5.  Should I go with cash for first property?  Or should I get loans and go for 4 properties with down payments?

6.  Profits.  How much can I expect to pay towards income taxes?

1. LLC or no? Are there limits to the number of properties you can own under a corporation? YES

2. Rent or Flip? RENT - LONG TERM PROFIT/WEALTH, FLIP - SHORT TERM PROFIT

3. With some folks on here saying Houston can be tough to find properties at a good deal, do you suggest in state or out of state? STAY CLOSE TO HOME/AREAS YOU KNOW

4. Texas has huge property taxes from what I've seen other places. Any tips on that in the rental world and flipping world in regards to this? RENTS ARE GENERALLY RELATIVE/TAKE THAT INTO ACCOUNT.  FLIP - BUY LOW/SELL LOW & QUICK.

5. Should I go with cash for first property? Or should I get loans and go for 4 properties with down payments? LOANS - FOR THE LONG TERM.  USE OTHER PEOPLES MONEY IF POSSIBLE.

6. Profits. How much can I expect to pay towards income taxes?  REINVEST PROFIT AS MUCH AS POSSIBLE TO KEEP TAXES LOW.

1.  LLC or no?  Are there limits to the number of properties you can own under a corporation? Don't need it to start May by when you get 3-4 properties then create one.No limits but you want to look into series LLC in Texas. Each property will be in a separate series for protection.

2.  Rent or Flip? I would said rent to you, since you want passive
3.  With some folks on here saying Houston can be tough to find properties at a good deal, do you suggest in state or out of state?
I suggest stay close to home. There are alway there just have to look harder.
4.  Texas has huge property taxes from what I've seen other places.  Any tips on that in the rental world and flipping world in regards to this? Just put it in when you do your number, it should cash flow with property tax,insurance, repair, etc...
5.  Should I go with cash for first property?  Or should I get loans and go for 4 properties with down payments?
You should go for max property. So 4 using $100 for $25k downpayment each. But for the first one if you are buying foreclosure you might want to buy with all cash, fix it up, and refi the cash out leaving the downpayment. It will make you a stronger buyer if you offer cash.

6.  Profits.  How much can I expect to pay towards income taxes? Should not be much if any of you do rental. The depreciation will off set most of the income.

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Matthew, what you need to do is educate yourself first. No one can tell you what strategy to do, certainly without sitting down to understand your time constraints, willingness to learn, aggressiveness or passiveness as an investor, whether you can qualify for conventional financing or not, your willingness to embrace leverage (loans) or desire to avoid, your risk tolerance for liability (LLC's or not), whether you want to make quick income to build your investable cash, or if you are OK with a very slow build to wealth via rentals. Each choice has its own down sides and tax and liability consequences, though personally I feel the liability issue is WAY over blown even though I was sued once (as a wholesaler). The advice to put purchases in LLCs may be fine for liability issues but you are NEVER going to get loans for that LLC, certainly in its infancy and you are always going to have to personally guarantee the loans anyway, at least until you get to over $500,000 in loans via a portfolio loan where the lender MAY not require the personal guarantee. You may be able to buy with a loan and then put it into an LLC, which could be against the terms of the loan, though I've heard many lenders really don't care.

Your choices should not be made in a vacuum.  Each strategy has its own pros and cons and it is best for you to understand them.  You can make money in rentals or lose you rear depending on the cycle of real estate (going up or down), ever increasing taxes (occurring strongly in Houston metro market), how deep of a discount you bought at, the quality of your tenant, the quality of your management (whether personal or professional), good or bad luck with vacancy and major repairs, getting flooded even when not in a flood zone, the neighborhood improving or depressing due to too many renters and/or crime, etc.

I can tell you professionals and non-professionals alike will be more than happy to guide you into a "deal" whether it is in your best interest or not.  If you don't have the knowledge to know the difference you are at their mercy, which is not an ideal place to be.  You need enough knowledge to at least ask the important questions and VERIFY, VERIFY, VERIFY.

Read Bigger Pockets forums and join a local real estate investment club like the Rich Club (richclub.org) or the Wealth Club, both in Houston.  I think these 2 are the best education for the least money.  Network with people and learn from those that are active.

One comment as to @Kan Boonme 's point #5.  You absolutely can buy cheaper and quicker with cash, however it is current practice in the conventional lending industry to NOT ALLOW a cash out refinance until you have owned the house for 6 months.  I get around this impediment by wiring money to a trusted friend, who loans me my own money, hence I buy with a very friendly mortgage and can refinance immediately with a rate and term refinance as opposed to having to wait 6 months for a cash out refinance.  That has a few vital ingredients: knowledge, someone you REALLY trust and the loan documents.  You can pay an attorney to do the docs once, them use them again and again (if you know how to alter the names, contact info, terms, and legal description).  I was lucky enough to wholesale a deal and take part of my fee via a 4th mortgage (wrap from seller who put a 2nd/3rd to buyer, then part of my fee).  Since I controlled the deal and had the knowledge and trust of the seller, buyer and attorney I reviewed and commented on legal documents so I got a set of docs with everything paid by the buyer.  You'll also need to know how to release the lien from your "friendly lender" and how to protect yourself in the process so you don't end up screwing yourself should your TRUSTED party turn out not to be trustworthy.  That process is generally not something a rookie should do by himself.  Use an attorney if the concept appeals to you.  Only use it if refinancing in under 6 months is important, otherwise it is a wasted endeavor.  There are other important details such as making payment on your friendly loan and proof of insurance for said lender, as these items may be verified by your conventional refi lender during their due diligence or you may not get the refi loan.  Details are important.

Frankly there are other reasons to buy this way, but you may not understand advanced concepts and alternative exit strategies until you familiarize yourself with the basics first.  Again, all reasons to educate yourself and associate with experienced investors.

I am an investor myself in Texas and Houston is a great market. I can share a few tips with you about Paying cash or use leverage and also using LLC's.

I’ve been working with investors for over 17 years and have been fortunate enough to be an investor for the last 10 years. I personally feel that real estate investing is always the best way to go regardless of the economic environment. I love having discussions with some of my very seasoned landlords that have been vesting since the early 80s. To hear them talk about the difficulties of finding loans over the years and also accepting rates that today a lot of new investors would not even think about doing. Most of the investors that I work with have the same strategy that I do. Buy-and-hold. Because of that the sweet spot for down payment typically is 20% down. The main reason for 20% down is they don’t want to have private mortgage insurance and they want the options to escrow their tax and insurance payments. Most pro-formas that you will be presented when purchasing investment property will typically have a 20% down and 80% loan to value scenario.

Can you put less down the 20%? Yes, we do have a 15% down payment option available, but keep in mind it does require private mortgage insurance and your cash flow will not be as good.

An example of the benefits of putting a full 20% down versus 15%.

Price$150,000.00$150,000.00Difference
Interest Rate5.000%4.750%25.000%
LTV85%80%0.05%
Down Payment$22,500.00$30,000.00-$7,500.00
Loan$127,500.00$120,000.00
Monthly Payment (P&I)$684.45$625.98$58.47
Private Mortgage Insurance$71.00$71.00
Total Monthly Payment$755.45$625.98$129.47

As you can see in the chart that for a measly $7500 more in a down payment, you would eliminate having to pay PMI for the next 44 months (44 X $71.00 = $3,124) as well as the cost of money is 0.250% better with 20% down ($7,500 @ .250% over 44 months is $951.57). You do the Math!The next example will show the benefits of using 20% down leveraging for properties versus buying one property and paying cash.

Price$150,000.00$150,000.00
Interest RateCash5.000%
LTV0%80%
Down Payment$150,000.00$30,000.00
Loan$0.00$120,000.00
Monthly Payment (P&I)$0.00$644.19
Monthly Rent$1,500.00$1,500.00
Vacancy 8%$1,395.00$1,395.00
Management 10%$150.00$150.00
Net Cash Flow – (P&I)$1,245.00$600.81

By paying cash for one property for a $150,000, your net cash flow is $1245. By putting 20% down with an 80% loan to value in a 5% interest rate your net cash flow is reduced to $600.81. Let’s not stop there. Keep in mind that 20% down payment on the hundred and $150,000 home was only $30,000. If you bought FOUR $150,000 homes and put 20% down on each with the same loan terms and monthly rents you could increase your return on investment $1158.24 a month. Invest your money wisely.

The Advantages and Disadvantages of titling your Rental Properties into an LLC.

Advantages

The main reason investors prefer to have their rental properties in an LLC is for asset protection. For many years, lawyers, financial advisors, and tax accountants have been teaching asset protection to rental property owners. The more novice investors are worried about losing everything if a tenant or someone gets injured on their rental property. Other investors like to think of their rental properties as a business, therefore putting it into an LLC legitimizes a business entity. In most cases rental properties do create a passive income. This income can be funneled through to your 1040 tax returns on schedule E as personal investment properties or through the LLC that set up. Both ways have tax advantages. I

Legal Benefits – The primary reason to form an LLC is for legal protection. Legal counsel generally has a tough time breaking through the LLC wall. Should any tenets, their guest or anyone on the property to sustain any injuries and the property is owned in the investors name only, their personal assets are at risk.

Tax Benefits – From a tax perspective, any LLC formed with two or more members is classified as a "Pass-Through Company". A "Pass-through" means its income is passed through to its owners and claimed on those owners' individual tax returns. The LLC is subject only to capital gain rates on the ownership shares of the member, and not to the corporate capital gains taxes, therefore is no double taxation. LLC's with just one owned-member, however, are taxed as a sole proprietor and no separate tax return is required. Actually tax dollars say's from holding real estate in an LLC opposed to personal holding the properties is zero. As of 2011, if you own income property and actively participate in the management of the property in your adjusted gross is less than $150,000, you can write off up to $25,000 of rent losses. The amount of the rent losses that you can write off is proportionately phased out between 100,000 and 150,000. Also remember that although the loss is disallowed for that particular tax year it is not completely lost. When you sell your income property, you can write-off any unused rental losses that have accumulated while you have owned the property.

Disadvantages

Expense – when setting up an LLC there are costs involved that are generally charged by an attorney or tax accountant for the preparation of your LLC business. Those fees can vary depending on the source but is highly recommended versus doing it yourself online. Depending on which state you live in even if your LLC is set up in Texas, there could potentially be an annual fee that are paid to the state. Another fee would be the cost of filing separate tax returns for the LLC if you use an account, which I absolutely recommend if you're dealing with rental properties. In addition, the state franchise fees would also be another cost incurred depending on the gross profit of the LLC. The IRS has certain thresholds that they use for these franchise fees. Many investors starting off, don't realize the reality of the impact of any fees against their bottom line until it's too late.

Financing – To me, this is the biggest hurdle for most lenders to overcome. Many investors "Miss the Forest for the Trees" and don't realize that owning properties in an LLC can create problems for future financing. Most 1 to 4 residential loans are delivered to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac's guidelines does not support "Entity Vesting". Entity vesting is when the rental property is titled in anything other than the individual borrower's names i.e. LLC's, S-Corps, or Partnership. First-time investors that have been educated to set up an LLC for their new real estate business don't realize that this can be a problem. In addition, the same investors will set up individual asset accounts in their LLC names to support future purchase transactions. These funds cannot be honored as personal assets because they are in a business. There are special circumstances that these funds can be honored, but requires a complete 2 year analysis of the LLC's profit and loss. This is totally an underwriter discretion.

I highly encourage any investor that’s looking real estate investing to keep the bulk of their assets in their personal account for underwriting purposes.

Due on Sale Clause – Most every Fannie Mae and Freddie Mac loans originated today will have a "Due on Sale Clause". Most due on sale clauses prohibit the note holder to change the entitlement of the real estate property. What does that mean to the investor? It means that if the loan servicer has knowledge of the property being retitled into an LLC, they could potentially call the note do which means you would have to pay the remainder of the loan immediately. Many investors will take the risk of retitling their properties into an LLC. The chances of the servers are finding this information out is quite small but still possible. Please consider this before retitling your property into your personal LLC.

What are my choices if I don’t establish an LLC for my rental properties?

This will strictly depend on your situation and what you want accomplished by forming an LLC. Some investors will title their rental properties into their family trust. This is totally acceptable by all Fannie Mae and Freddie Mac lenders as long as the trust is a revocable trust. Typically the trust will have to be reviewed by each lender and their legal counsel to be able to finance the loan into a family trust. In addition to the normal hazard insurance on the property in addition to the liability insurance, many investors that choose not to put their properties into an LLC will simply protect their assets by getting an umbrella insurance policy. These policies are very inexpensive and have a great coverage in case of any occurrences happen on your property.

@Graham Parham that's a very elaborative response, and thank you for sharing your knowledge with newbe investors like me.

I am going to meet with a CPA this Friday to talk about do's and don't s before I start my journey of buying investment properties and potentially initiate my LLC start up process.

From reading your explanation I am asking if closing a property under LLC is not favorable for big lenders and later on, converting title from individual to LLC could violate the clauses of mortgage agreement, why do I need to have LLC formed if I can't use the advantages of LLC to protect my personal assets against lawsuit or bankruptcy? Wouldn't an umbrella policy be a better fit here?

Also what if I buy the property all cash under LLC and refinance later on BRRRR strategy? Could this be qualified under mortgage laws?

Thank you.

Kami.

I am a newbie in Houston looking to invest a 100,000 as well to start on single family homes within the Houston environs, I intend to buy and hold for long term wealth so do not mind starting my first purchase low and grow from there.

I would be interested in foreclosure as I would rather buy for cash as against mortgage for now. Is there anyone in the Houston area here that can point me in the direction where I can get some good homes for rentals only?

What are the challenges when buying cash and what issues are associated with it? I need to create it for my kids university and retirement as I have my own business providing for us at the moment.

Please feel free to share with me your experience.

God bless and I await your responses.

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