What would you do in my position?

Question

What would you do in my position to acquire another income producing property of any type. Land? SFR? Commercial? Long Distance? ( I know what I want to do, but would like to see how other people would approach this situation):

I’m in a linear market where appreciation is around 1.5% a year. We do not bake appreciation into our numbers when analyzing deals.

I have one rental fully paid off worth $95K. Cash on cash return is 7%. $95K equity.

Second rental i bought for $70K. Traditional 30 year fixed rate at 5%. I have $17K of my own cash in the deal. Cash on cash return is 8% and 11% if you include principal paydown. House is worth $80K (sweat equity and added a bedroom). 25K in equity.

My primary residence is a zero down 30-yr fixed rate VA loan at 3.875 APR. worth $130K. Only $8K in equity.

I have the ability to save $20k a year from W2 income and rental income. $20K is more than enough to buy one property a year in my area with 15/20/30 yr fixed loan with 20% down and cosmetic rehab prior to renting.

I’m going to assume answers will vary depending on personal investment philosophies and where people conduct real estate activities globally. I’m in Northwest Illinois or as Brandon Turner would say..... ruuuurrwwaaallll United States.

Penny for your thoughts! Best Regards!

George Skidis · Answer

Disclaimer: I sell Insurance and prepare income tax returns. This is where my perspective comes from. Always hire a qualified attorney before attempting any legal strategy. We also sell access to legal help.

Assett Protection #1: First I would set up an LLC as a management company. Be careful not to call yourself the property manager unless you are actually a real estate agent qualified to be a property manager. You can be maintenance supervisor or whatever. Write your leases between your ownership entity and the LLC in such a way that the LLC assumes all liability for managing the properties.

A single member LLC is a disregarded entity as far as the IRS is concerned. However, it lets you set up a Self Directed Qualified Retirement Plan which is better than a self directed IRA for several reasons. PM me for details.

Assett Protection #2: Make sure you have $1 million in liability insurance for each property.

Assett Protection #3: Get a COMMERCIAL Liability Umbrella policy for all of the rentals and LLC.

Next I would set up a self directed Health Savings Account (HSA) on my own. It should not be part of your W-2 income. This is available when allows you have a high deductible medical plan. Put what you save on health insurance into the HSA. It grows tax free for life. This can be used to pay current medical bills or if you are lucky it becomes a second retirement plan. Money here cannot be withdrawn for any reason but medical until retirement age or face a stiff penalty. The right HSA allows investment in the stock market.

You did not mention married or single. That has a huge impact on the next item.

If I were a single guy, my next property would be a four family. Live in 1 unit and rent the rest out.

If you have lived in your current home two out of the last 5 years. sell it after you buy the four plex. you can rent it for a while but SELL the current home before the 5 years runs out. Then claim the owner occupied capital gains exemption to avoid the tax. Use the proceeds to buy another four plex.

Lather Rinse Repeat

Good Luck and Good Investing

Carl Fischer · Answer

@Tim Houzenga

I like to keep properties leveraged for asset protection and better cash on cash returns. I would use equity lines on the properties that have equity. I would buy more real estate. Possibly diversify into multi family, office, retail, industrial, etc. I would also do a 401k/Ira/HSA if possible and invest in more tax free real estate. Work if you like it or not-your choice-your goals.

Randy Bloch · Answer

Your goal and what you are going to do are two different things. Without understanding your goal I don’t how anyone could provide a recommendation

Tim Houzenga · Answer

@George Skidis. Thanks for the input. I have to get with an attorney to work out the LLC piece.

Currently I own properties in my own name as my intention was to sell and not get into real estate. I carry over $1M liability for peace of mind. It Might reduce cash flow a bit, but the peace of mind is worth it and the numbers still make sense. I’m very conservative.

Now I have the bug and looking to buy two properties a year for the next five years so adding other layers of asset protection is vital.

Tim Houzenga · Answer

@Carl Fischer. Thanks for the input. I’m in the process of pulling equity out of the fully paid rental and putting it to work in two more SFR properties. I’m pretty conservative and want to master SFR before moving to commercial, but could definitely see how more ambitious people would cash out as much equity as possible and leverage $100K into a $500K property.... just not my style or philosophy.

The refinance would also help a lot more when it comes to tax time. Icing on the cake I suppose.

Best Regards!

Randy Bloch · Answer

That is like asking for a map without knowing your destination

Randy Bloch · Answer

It would be helpful to add your goals?

Quit W2 job

Replace 10k in W2 income

Pay for kids college

Some people will say cash out everything and go invest as much as possible in real estate and keep doing this...but depending on your goals u might only need three REI with no mortgage to reach your goal.

Max T. · Answer

@Tim Houzenga

If you like your W2 keep doing what you’re doing and buy a new property with conventional financing every 1-2 years. Maybe think of selling the primary and buying a 2-4 unit to live in.

Keith Perkins · Answer

@Tim Houzenga I personally would do the asset protection plan mentioned earlier in the comments and once that is complete I would start to leverage the equity to 60% LTVs to get more property till I have to get creative with financing and at that point I would step back and see how much further in the water I was comfortable going i.e. going with commercial financing and/or private money. I also have to question your numbers about the equity. I personally think of equity as the amount I would put in my pocket if I sell. If I sold a 95k home I would imagine I would put 88k or so in my pocket.

What would you do in my position?

What would you do in my position?

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