seeking advice on creating an entity for investment property
Encinitas, CA · Member since 2020 · 10 posts · 3 votes
seeking advice on creating an entity for investment property
Most Popular Reply
Attorney · Slidell, LA · Member since 2016 · 322 posts · 179 votes
6yLLCs are the most common for buy-and-holds, though S-Corps can offer a lot of value if you're doing wholesaling or flipping.
14 Replies
- Accountant · Atlanta · Member since 2020 · 71 posts · 38 votes6y
@Account Closed,
A Limited Liability Partnership would fit you needs bases on the information given. But to give you a better response I you would have to give me more information on your future goals such as will you and your brother continue to purchase properties together?
- Encinitas, CA · Member since 2020 · 10 posts · 3 votes6y
Thanks Kevin - I will respond to your direct message.
Originally posted by @Kevin DeVargas:@Account Closed,
A Limited Liability Partnership would fit you needs bases on the information given. But to give you a better response I you would have to give me more information on your future goals such as will you and your brother continue to purchase properties together?
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes6y
You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
- Encinitas, CA · Member since 2020 · 10 posts · 3 votes6y
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
- Attorney · Slidell, LA · Member since 2016 · 322 posts · 179 votes6y
LLCs are the most common for buy-and-holds, though S-Corps can offer a lot of value if you're doing wholesaling or flipping.
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes6y
Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
- Encinitas, CA · Member since 2020 · 10 posts · 3 votes6y
Well my friend, that is the beauty in the "knowing". There is gold in them hills, even in California. So far i've made a few offers, where rents would justify a healthy cash flow. I'll admit there's a higher downpayment than the MW, but there's also higher upside on the appreciation front. You just have to be aware of gentrifying neighborhoods.
Originally posted by @Jacob Sampson:Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes6y
Originally posted by @Account Closed:
Well my friend, that is the beauty in the "knowing". There is gold in them hills, even in California. So far i've made a few offers, where rents would justify a healthy cash flow. I'll admit there's a higher downpayment than the MW, but there's also higher upside on the appreciation front. You just have to be aware of gentrifying neighborhoods.
Originally posted by @Jacob Sampson:Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
I have no counter since I have 0 experience in those markets. It would be an interesting discussion to compare what each of us considers cash flow. For example - I calculate cash flow as rent - 30%(vac, maint, and capex) - PITI = long term average cash flow. How does that compare to how you calculate cash flow?
- Encinitas, CA · Member since 2020 · 10 posts · 3 votes6y
Hi Jacob - that's the exact calculation I use. I'm running slimmer margins 20% $500 on a piti of around $2500. Of course i'm being conservative, so it could be better. I'm also focusing on smaller lots, single story homes and newly updated roofs. It's all about proximity to work corridors out here.
For example, San Diego county has multiple, and they attract higher paying jobs, people adjust what areas they want to live in.
- 6yCory CarlsonBusiness MemberReal Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
Originally posted by @Jacob Sampson:
Originally posted by @Account Closed:
Well my friend, that is the beauty in the "knowing". There is gold in them hills, even in California. So far i've made a few offers, where rents would justify a healthy cash flow. I'll admit there's a higher downpayment than the MW, but there's also higher upside on the appreciation front. You just have to be aware of gentrifying neighborhoods.
Originally posted by @Jacob Sampson:Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
I have no counter since I have 0 experience in those markets. It would be an interesting discussion to compare what each of us considers cash flow. For example - I calculate cash flow as rent - 30%(vac, maint, and capex) - PITI = long term average cash flow. How does that compare to how you calculate cash flow?
Are you finding yourself low on your expense projections? 30% of the effective gross income seems low especially if its INCLUDING vacancy. . Also, the lender doesn't look at vacancy as an expense subtracted from the EGI. The EGI is Scheduled Rent + Other Income (RUBS, parking, laundry, etc) minus vacancy. Then I subtract taxes, insurance, owner paid utilities, repair/maint/turnover, property management and reserves to give me the operating expenses. Subtract debt service and investor specific effective tax rate to come up with the NOI. This spreadsheet shows the flow of our thinking to analyzing a deal. Its a partnership scenario/illustration so ignore the returns. I work in high cost, highly appreciative markets and am curious of these low cost, higher CoC markets. Appreciation has played such a huge role in building our clients net worth.
Constant Commercial Real Estate Inc543 Reviews - Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes6y
Originally posted by @Cory Carlson:
Originally posted by @Jacob Sampson:
Originally posted by @Account Closed:
Well my friend, that is the beauty in the "knowing". There is gold in them hills, even in California. So far i've made a few offers, where rents would justify a healthy cash flow. I'll admit there's a higher downpayment than the MW, but there's also higher upside on the appreciation front. You just have to be aware of gentrifying neighborhoods.
Originally posted by @Jacob Sampson:Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
I have no counter since I have 0 experience in those markets. It would be an interesting discussion to compare what each of us considers cash flow. For example - I calculate cash flow as rent - 30%(vac, maint, and capex) - PITI = long term average cash flow. How does that compare to how you calculate cash flow?
Are you finding yourself low on your expense projections? 30% of the effective gross income seems low especially if its INCLUDING vacancy. . Also, the lender doesn't look at vacancy as an expense subtracted from the EGI. The EGI is Scheduled Rent + Other Income (RUBS, parking, laundry, etc) minus vacancy. Then I subtract taxes, insurance, owner paid utilities, repair/maint/turnover, property management and reserves to give me the operating expenses. Subtract debt service and investor specific effective tax rate to come up with the NOI. This spreadsheet shows the flow of our thinking to analyzing a deal. Its a partnership scenario/illustration so ignore the returns. I work in high cost, highly appreciative markets and am curious of these low cost, higher CoC markets. Appreciation has played such a huge role in building our clients net worth.
We purchased our first property in 2005 and base the 30% number on what I see in QuickBooks for the last 15 years. I am mostly SFHs, duplexes, and 4plexes. I don't find NOI calculations valuable for these types of properties. I think it becomes more valuable with commercial 5+ units.
I know appreciation is a big deal to some investors. For me, I only really care about cash flow. If I get appreciation it is just icing on the cake. But the deal has to work without appreciation. That may only be because that is my local market. We don't see a ton of appreciation. As an example I purchased a 3/1 SFH in a C+ neighborhood for $40k essentially rent ready (I think we spent 2k to finish it off). It rents for $825. I looked on the county appraisers site to see the last time it sold. It was 20 years previous for the same 40k.
- Encinitas, CA · Member since 2020 · 10 posts · 3 votes6y
Originally posted by @Account Closed:
Hello BP community
I'm curious if anyone else has come across this situation. I'm looking to purchase an investment property with my brother who lives in another state. We are looking at either AZ, FL or CA. I am seeking advice on the best entity to create to allow us to not screw up when the tax man comes. The plan is to be 50 50 partners. We have not decided whether it will be a long term hold or flip. Feel free to share best for either situation.
We already have financing figured out, so solely interested in the best type of legal entity to create.
Thanks!
Greg
HI all - we seem be getting a bit off topic. We've had a couple interesting responses, but wanted to point back to my original request. For those of use investing top markets that may require multiple investors, how do you handle entity creation?
Specifically, I am thinking about buying a property with my brother who lives in another state(FL). What I want to avoid is an issue with who pays taxes, double paying or any other issue that could arise. Would both states want their share of taxes? What are some ways to simplify this?
Thanks for your insight!
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
@Account Closed
This is where a business attorney and a tax CPA come in very handy. You should engage professionals to have the deep conversation with both you and your brother to determine the facts, circumstances, and goals of both parties.
An LLC taxed as a partnership may be the way to go, but it's not possible to give a definite answer.
Also, you shouldn't want to take a boilerplate, general approach and implement it. Doing this usually takes time (and money) to unwind later when it's discovered as sub-optimal.
- 6yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Jacob Sampson:
Originally posted by @Account Closed:
Well my friend, that is the beauty in the "knowing". There is gold in them hills, even in California. So far i've made a few offers, where rents would justify a healthy cash flow. I'll admit there's a higher downpayment than the MW, but there's also higher upside on the appreciation front. You just have to be aware of gentrifying neighborhoods.
Originally posted by @Jacob Sampson:Originally posted by @Account Closed:
Hi Jacob,
Thanks for the advice. I'm not familiar with partnerships but I can do some research. I am looking into those markets, because I am most familiar with them. Invest in what you know :).
I have a pretty good idea of what rents I can generate, and I feel comfortable that markets like SoCal and Phx, etc will be desirable for renters going forward. I'm always open to the insight of others. Where do you invest and why?
Originally posted by @Jacob Sampson:You could just do a partnership. No real need to get an LLC, though they are cheap so it really isn't a big deal. As a side question, why do you want to start investing in the 3 most inflated markets?
I agree 100% invest in/where you know. I live in the midwest so that is where I invest. My only issue is I only care about cash flow and I don't think you can find cash flow in inflated markets. We mid westerners generally wait every 10 years or so for those markets to break and then sneak in and buy a property or two then wait for the market to inflate again.
I have no counter since I have 0 experience in those markets. It would be an interesting discussion to compare what each of us considers cash flow. For example - I calculate cash flow as rent - 30%(vac, maint, and capex) - PITI = long term average cash flow. How does that compare to how you calculate cash flow?
I hope these are all very conservative over the ownership period. Also at purchase I do a more detailed pro forma that I should revisit occasionally but in practice mostly do not. Because I do not revisit the pro forma, my on-going spreadsheets use the following estimates (starting at first rent increase, prior to that I use the much more accurate pro forma I did at purchase).
Self manage LTR with no HOA: rent * 0.6 - mortgage (principle and interest).
LTR without HOA with professional PM: rent * 0.5 - mortgage (basically I use the 50% rule even though I believe it to be conservative in higher rent areas (such as my area were 2BR rent for ~$2K) without HOA. I believe it is aggressive in the low rent areas were 3 BR rent for less than $1K). Note the extra 10% reflected in the cash flow calculation without use of professional PM comes at a cost of the effort to self manage. Professional PM increases the passivity. BTW this is for a good PM. One with good and reasonable priced contractors. One that is well organized and provides the financials ready to be used by any accountant. Some PMs use expensive contractors.
Well established STR with professional PM: rent * 0.5 - mortgage (this seems strange that it is the same as the LTR but it is because the rent point is so high that maintenance, furnishings and cap/ex as a percentage of rent is so low). For example our duplex STR averages $16k/month rent for a RE that is around 1500'. I guarantee that maintenance, furnishings, and cap ex do not add up to 5% ($800/month). They probably are less than 3% ($480/month). The PM fees consume much of the expenses.
We do not self manage an STR. So I do not have a quick calculation formula.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.