All Forum Posts by: Arlen Chou

Hello All,

I am still a relatively new buy/hold investor, but over the past 2 years I have put together a small portfolio of 13 doors.  Although I am fairly comfortable with the mechanics of buy/hold, I am still trying to figure out the best way to move money between various "internal" entities.  

I am still getting conventional loans that are generated under my name for MFR properties. However, I have placed my properties into an LLC and I have a S-corp to handle management tasks. This seems to be a pretty standard set up on BP. What I am trying to better understand is how money should move between the organizations ESPECIALLY when it comes to tax time.

Currently, it seems that loans from banks need to be generated under my personal name, LLC's are the entity to hold the property, and S-corps are the way to go if you are doing activities like management. I realize that there are on going discussions about taking the personal loan (HELOC or otherwise) and then transferring the property at a later point to the LLC. Assuming that I don't want to take the risk of the bank activating the "due on sales" clause, and I keep the loan in my name, but the property in the LLC, what is the most tax effective way to move money around these entities? Do you just call the initial money to buy the property "capital investment" and just leave it in the LLC?

I am assuming that the tenants should write checks out every month in the name of the LLC. Additionally, since the loan is in my name, the banks will send out the interest payment info out with my name on it at tax time. This leaves me with a situation where the income is going to one place, but the tax benefits are going to another. I am trying to figure out this dilemma.

As for getting money into the S-corp, I am assuming that either the LLC or I personally should be "paying" for services based upon some simple contract.

Any insight would be greatly appreciated!

-Arlen

@Loren Thomas thanks for the quick response.  Yes, I am most concerned about tenants putting hot pots down on the counter...  I have found some materials that claims it can with stand 500 degrees F, so I might try it on my next project.  Again, your work looks great!

Thanks,

Arlen

@Loren Thomas The counters look great.  How are they holding up?  I am very curious as to know how they react to heat, like if somebody put a hot tea pot or frying pan down on the counter.  How about scratching from the bottom of coffee mugs or an accidental knife slice?

-Arlen

@Franklin Romine really? That is 100+ x the cost and100+ x the time spent for the same money in your pocket...

@Account Closed you need to b extremely careful right now. You cannot mix a personal relationship and a professional relationship and be successful.  You can have them in parallel, but not intertwined. You must decide which one is more important to you. 

If this is a professional endeavor, then you need to do as many have stated, pay him as a contractor or get a real one who can do the flip quickly.

If this is a personal relationship based decision, which it sounds like, acknowledge that you will NOT make as much or any money on the deal and give the guy a 50/50 deal. Anything outside of that and you start arguing about little things and jeopardize the relationship. But you really have to be OK with getting the financial "short end of the stick", because you will. He will control the speed and the quality of the flip and I suspect you will start to feel a TON of frustration. But that is the path you will have willingly chosen if you pick relationship base business vs. a true business.

Either way, if this a person that you plan to keep in your life for a long time, focus on protecting that relationship by choosing either one of these paths. Don't fool yourself onto believing you can mix the two and come out ahead.

As John D Rockerfeller had wisely said,  "a friendship founded in business is better than a business founded in friendship".

-Arlen

@Dan B. I would agree with you if you only look at a single primary residence, by definition the property would not "cash flow" as it does not generate income.  However, it is important to understand that "cash flow" and "investment" are not the same nor interchangeable as terms.  A simple example would be purchasing stocks or getting an eduction... there is no cash flow in either, but both are investments.

To the regular civilian buying a home, they think it is an investment and they put money into it waiting for the day they sell to get their money out.  In this scenario I would agree with your analysis.  However, I believe that most people here on BP are past that point and understand the concept of leverage in an overall business plan.  My original post was for those folks, who want to make their money work for them and not just park it in their own home.

In my case, I prefer to look at a broad picture and see my primary residence as part of an overall business strategy that contributes to "corporate cash flow". On a monthly cash flow basis, the residence does not contribute in a positive manner. However, when used as a tool for leverage, it has powered my ability to purchase 13 doors in the Bay Area within 2 years and build a "cash flow" positive REI company. The check that I receive from the cash out refi will go toward more property in the Bay Area, which will further add to my "corporate cash flow".

@Christian Carson I understand the generalities that you are basing your reply.  You bring up 1929 and 2007 as anchor points to your statement.  Although history has a place and I do agree that if we do not learn from it we are doomed to repeat it... However, 1929 was a totally different world, both Geo-politically and economically.  As for your reference to 2007, my post specifically addresses that point in time.  I purchased in 2002 when real estate was starting to falter, economy was slowing, 9/11, etc. contributed to what would turn out to be a bubble bursting in 2007.  I am also presenting a fact about where the value of that same property is today.  There are no generalities here, I am giving specific points in time and dollar values.

What you appear to be glossing over is the fact that I bought when prices were high, the bubble burst and the value of my property is even higher today.  The fact is the Bay Area market did not burn to the ground.

Is the Bay Area RE market over heating like in the late 2000's... maybe.  But my, admittedly statically insignificant example would point to the "sun coming up tomorrow" if the market does crash today.

This post was NOT intended to be a blanket strategy to be applied blind folded across all markets.  It was just a simple and honest example of what has happened in 1 simple case.  The intent was to give LOCAL investors who are starting up in the Bay Area one additional data point before they decide, based on generalities, that "the sky is falling" and that they cannot succeed in this hot market.  Although there are many people who are extremely successful in investing "out of state", I am certain for every successful out of state investor we hear about there are at least 10 who got burned and stay quiet.

It is easy to get sucked into the idea that people have to get into REI as soon as possible, and the fact is that many people believe the cheapest and fastest way for Bay Area investors to do it is to go out of state. But cheapest and fastest are not always the best ways... Sometimes it pays to wait; save your cash, study a market until you know each street by heart and then make a decisive move.

Again, I am not saying that this is a strategy that applies to all markets nor all investors.  It is just one strategy and one example of what has happened to one investor during a single cycle in the Bay Area.

-Arlen

@Steve B."Pride commeth before the fall"... Really? 

Nothing is perpetual, expect for time and nothing is guaranteed but death and taxes. I don't believe that I said the Bay Area market was perpetual. I am pointing to a FACT that I bought PRIOR to the bubble bursting, lived through the crash, and where my value is CURRENTLY. If anything, my post is acknowledging the existence of cycles.

If you want to call 6 figures of TAX FREE cash in my pocket luck, I will be happy to take that luck all the way to the bank. 

The fact is that EVERYBODY gets lucky and skill is nothing but the preparations for that luck. Prepare for luck and you will be successful... Don't prepare, and just whine that others are lucky.

-Arlen

@Jay Hinrichs I agree Portland is great.  I fly into PDX a few times a year to visit customers in Hillsboro for my W2 job.  Also my sister and her husband lived in Portland for a few years.  My brother in-law used to work for Nike in Beaverton.  Got to love the perks that Nike employees get!  I was looking into getting some properties up there, but then my sister and her husband moved back to Palo Alto and I did not want to pull the trigger without some local support.

@Jay Hinrichs nothing wrong with chasing rainbows... I know the rainbow ends right here in the BA.  Picked up two 4-plexes in Mountain View in 2013 and recently closed on a 5-plex this past February in Oakland.