Next Steps after getting 1st Duplex Under Contract

23 Replies

Hi BP crew,

I am closing on my first investment duplex in Rochester, NY at the beginning of October (super exciting!) and want to make sure that I am keeping the ball rolling in terms of investing. I financed through FHA and am covering down payment and closing costs myself and am not entirely in a financial position to jump right into a second property right now if I were to utilize a conventional financing. I am wondering if anyone has any recommendations on the next steps to keep my investing momentum moving forward. Should I look at forming an LLC and then rolling the property into that? Should I start saving up for a down payment on the next multi-family? Does anyone think that it is more beneficial to go with single family rather than duplex-quadplex?

I am continuing to educate myself through bigger pockets on how to be a landlord and setting up systems that will make everything run smoothly. I am also trying to network as much as possible. I unfortunately had to miss one of the last Rochester investor meetups but am looking forward to ones in the next month or two to build up my network and connections. I am going to be managing my first rental as I live in the other unit and am certainly open and eager to operating another(s) if the opportunity were to arise in the Rochester, NY  market. I just wanted to see what your thoughts are based on where I am at this early in the game.

Thank you! I look forward to connecting!

-Ryan O'Malley

@Ryan O'Malley There really is no need for an LLC right now. The only real advantage to an LLC is to protect the asset from a lawsuit. Since you will be living in it you could homestead the property and as your primary residence, it should be sheltered from litigation but consult an attorney to be certain of the laws in your state. Start saving up for the next one. I am of the opinion that more doors are better so duplex, triplex, quad unless I find a screaming deal on a SFH.

As @Tyler Gibson says LLC is not worth it. As of now just try to put money aside for your next purchase. Imagine that you are "paying" the rent you should get for that apartment. Try to live there for two years to take advantage of tax cuts when you sell and then try to move and see if you could get conventional for the next one.

@Ryan O'Malley  Here's my take as a fellow small multi investor in Rochester.  I would first research a good lease, you'll need one to either rent to a new tenant or put the existing tenant on (only if they are month-to-month currently, otherwise you need to honor the current lease term.)  My lease (actually rental agreement, I don't do year leases) has evolved significantly over time.  Either through experience or seeing language in other leases that I liked.

If the house will be vacant when you take possession, see if there are any improvements you can do that will boost rent and enhance "rentability."  New paint for sure, maybe new flooring or refinish hardwood floors.  Replace a grungy, out-of-date bathroom vanity and fixtures.  Update lighting, replace outlets, switches, and plates.  New appliances go a long way if the ones in place are old and gross.  How are the kitchen cabinets and countertop?  Not much to paint those and replace countertops/sink/faucet.  Work on the unit you'll be renting first, then work on the one you're living on as time/funds allow.  I assume you're going to DIY most of this; labor is very expensive and will kill your savings rate for sure.

See what you think of property and tenant management.  The most difficult part of landlording is managing people and their expectations.  You'll find out if you're up for it once you encounter difficult situations.  It's easy to collect rent, but when the furnace goes out, or you hear yelling and shouting next door constantly, or they don't pay that month, that's when you learn.

Start saving up for the next one.  I found it to be a slow burn at first, partially because renting a single unit doesn't add much when capital improvements crop up.  But as you pick up a 2nd and 3rd, things can start to accelerate.

Oh, as for an LLC right now, not necessary. And you can run into problems if you quit claim the deed into the LLC after buying in your personal name. The bank can call the loan due, it's called the "due on sale" clause. Lots of folks say it doesn't happen, but it does. And if interest rates ever go up appreciably, banks will be incentivized to call non-compliant loans. That's my take, at least. I'm admittedly very conservative when it comes to risk.

@Ryan O'Malley, congratulations on your first property! I was in your exact situation back in January 2019. I have now had my first duplex for 8 months and have just been focusing on gaining experience in property management, record keeping, etc. while I save up for my next property. I have already been through the entire turnover process and have many repairs under my belt at this point.

I'd be happy to answer any questions you may have going forward.

Even though everyone wants there to be an easy answer to this question, the real answer is, "it depends." Some investors have a very low risk tolerance, or they have a lot of personal assets they want separate from their investments, and so they will invest in an LLC immediately. Others don't own anything beside their starting investment, or they are willing to accept the chance of a lawsuit and will operate with no liability protection to try and leverage the money to grow faster.

Realistically the general approach to asset protection is described pretty clearly in this article. You will need to decide how much protection you are comfortable with in order to be able to move forward with your investments confidently. I personally hold everything I own in their own liability protective entities (LLC, Series LLC or other entity,) but I have the benefit of creating these entities myself...

For your situation it sounds like your exposure is quite low. I would probably set up an LLC anyway, since they are quite cheap to form and you will be setting one up in the future anyway. This will give you a low-stakes opportunity to learn how to operate it correctly. In the end you just need to decide what you want to use that money/time for! Best of luck to you moving forward!

Hi @Scott Smith , recently purchased a duplex in Cleveland (I live in Florida) in my personal name. I want to protect it with an LLC to keep my personal finances and the duplex separate however, the bank I'm working with, can't get me a straight answer about a due on sale if I were to transfer title. What are some other ways to protect me and the asset? I looked into land trusts with a LLC as a beneficiary, however, this is still considered transferring the name on the title. What should I do?

I have considered that , so are you creating a separate bank account for rent collection and funds for expenses? Is it just a regular checking account ? 

@Deb S.

Save up for your next deal. After a year has passed refinance your FHA loan into a conventional loan. Then buy your second deal with another FHA Loan.

@Ryan O'Malley   Congratulations on the new multi unit.  Something I always ask new people is what their goals are and where they want to be in 10 years.  Really sit down and think about it.  Do you want 4k per month cash flow, 10k, etc.  Living in your multi unit will really give you a good sense if that is how you want to proceed or if you would only like single family homes.  Everyone has their opinions on what works for then.  The nice thing about a multi unit is that you have more doors to generate income.  And as pointed out above you probably have some ways you can improve the property over time to increase rents or reduce expenses.

@Ryan O'Malley you need to educate yourself on landlord law first and foremost.  Legal proceedings can be a killer cost if you don't know the law.

Make sure you have an application, lease, and screening process.  

As for the LLC, if you form an LLC for future investments you will need to use a commercial loan, not the best option when you are just starting out.

You should save as much money as possible and use it for your next investment down payment. Do that as many times as possible, then start borrowing your equity to keep building. That's the best way to snowball. The FHA on a duplex is a great first move, well done... Good luck!

Originally posted by @Rik Patel :

Hi @Scott Smith, recently purchased a duplex in Cleveland (I live in Florida) in my personal name. I want to protect it with an LLC to keep my personal finances and the duplex separate however, the bank I'm working with, can't get me a straight answer about a due on sale if I were to transfer title. What are some other ways to protect me and the asset? I looked into land trusts with a LLC as a beneficiary, however, this is still considered transferring the name on the title. What should I do?

If you transfer the title into the Land Trust and assign the LLC as beneficiary, then you are still able to provide the paperwork to prove the chain of ownership to the property. The St. Germain Act excludes the transfer into the Land Trust from the Due on Sale Clause, and since you own the LLC you can provide the documentation to prove that it isn't "changing name," you are just restructuring the entities into estate planning tools for yourself.

If this is your first time attempting this strategy I would recommend having an experienced attorney walk you through the process. It is possible to DIY, but investors can sometimes scare off lenders by trying to explain strategies or do the transfers in the wrong order. Having an attorney walk your through the process the first time can cost you some money, but you will be assured it is done correct the first time.

Originally posted by @Rik Patel :

Thank you! What if I signed a document with the bank when I was closing that I won't quit claim a property? @Scott Smith

 Better follow that  agreement. It sounds like you are in foreign territory, so I would encourage a lot of caution with any plan you move forward with. You could look into a warranty deed, as opposed to a quit claim. But I would still say it's best to have a professional look into your situation and help you navigate to an outcome you want. If you start trying to implement different ideas without having the full picture you can run into an issue down the road. Be sure not to break the contract, otherwise they can just call your note back.

An example: if you didn't have the document stating you would not quit claim the property, I imagine you would have done that without asking advice. Most Title Insurance companies will cease to offer insurance if a Quit Claim Deed is used for the transfer as the Quit Claim Deed offers no warranties as to clean title. Each decision in the process impacts your business down the road, so it is really encouraged that you have someone assist you with this process. 

This is not legal advice. I am just giving my opinion as a real estate investor.

I personally have some properties in my name and others in LLC. I was fortunate to find some deals over the past few years so the ones that have higher equity on I place in LLC, the ones I have mortgages on with little equity I've kept in my name.

Originally posted by @Ryan O'Malley :

Hi BP crew,

First, learn how to run the one you have successfully. As you do that you're going to learn the mechanics of the business. Once you have a grasp of what to do and what to not do you can expand and start hiring people to do some of that work for you. Then it's just a matter of scaling an existing network of systems and processes that are proven to work. 

That should be a good start. Good luck!

Originally posted by @Ryan O'Malley :

Hi BP crew,

I am closing on my first investment duplex in Rochester, NY at the beginning of October (super exciting!) and want to make sure that I am keeping the ball rolling in terms of investing. I financed through FHA and am covering down payment and closing costs myself and am not entirely in a financial position to jump right into a second property right now if I were to utilize a conventional financing. I am wondering if anyone has any recommendations on the next steps to keep my investing momentum moving forward. Should I look at forming an LLC and then rolling the property into that? Should I start saving up for a down payment on the next multi-family? Does anyone think that it is more beneficial to go with single family rather than duplex-quadplex?

I am continuing to educate myself through bigger pockets on how to be a landlord and setting up systems that will make everything run smoothly. I am also trying to network as much as possible. I unfortunately had to miss one of the last Rochester investor meetups but am looking forward to ones in the next month or two to build up my network and connections. I am going to be managing my first rental as I live in the other unit and am certainly open and eager to operating another(s) if the opportunity were to arise in the Rochester, NY  market. I just wanted to see what your thoughts are based on where I am at this early in the game.

Thank you! I look forward to connecting!

-Ryan O'Malley

 If you want to go with 30 yr financing you'll need to keep title to the property in your personal name. Shouldn't be a big deal. Just ensure you or your property manager are complying with building standards and have a liability policy of at least $300k and you're in pretty good shape liability wise.

Thank you, everyone for the great advice! I appreciate you reaching out and I am looking forward to my first go-around at this first deal. Best of luck on your current and future REI ventures!

@Ryan O'Malley Congrats on the purchase! I used to work in insurance, and as others have mentioned you can get some of the asset protection benefits starting an umbrella policy - but you can also just increase your liability limit on your current homeowners policy which will probably be cheaper than having a separate policy. Once you have multiple properties it starts to make more sense to have an umbrella policy.