All Forum Posts by: Benjamin Aaker

Hello and welcome to BP! This is a great place to learn and meet other investors.

As @Matthew Porcaro says, a big benefit of house hacking is that you are living in one unit and renting out the rest. You get to enjoy the FHA loan. You will need to live there for at least a year after making that purchase and there are rules about how you can move out. If you are seen to be using this for investments, then you will find it hard to get another FHA loan, making this method difficult to scale, but good when you are getting started.

The benefit of the LLC is that it can help you avoid losses spilling over from one property to another or your personal finances. As you increase in size and wealth, this becomes more valuable. There are a lot of misconceptions about the protections afforded by the LLC, so speak with an attorney. Think of them as a firewall protecting your other assets if one has a loss.

You can indeed transfer the FHA loan into an LLC if certain criteria are met, though your bank may exercise its due on sale clause and require you to get a new conventional mortgage. Again, this is not guaranteed and not scalable. Your best person to speak with is your banker before you make the purchase.

I'm not an accountant and it is much better to ask yours (probably time to get one).

1. Stock gains are considered capital gains and can't be offset by passive losses from your real estate portfolio. A STR purchase won't help you do this. You could look at becoming a real estate professional (REP) and offset your active income with real estate losses, but that's outside the scope of your question. The IRS does not consider your stock earnings to be ordinary income, they are capital gains. And that's only if you realize the gains by selling. Ordinary income for you is your W2 income.
2. These investors are accelerating their depreciation to get the tax benefits. This depreciation offsets the income from the STR. These investors aren't buying for the tax savings. They are buying for the income and utilizing the tax savings they are offered. You don't need to be a REP to enjoy these benefits. Often the cost segregation is done with the intent to sell sooner than the 27.5 years of depreciation for a commercial property, thus gaining more depreciation to offset the income.

Hi Tripp,
Good mentors and coaches are worth a lot and are hard to find. You should take some time to consider what niche of real estate investing you are interested in first. Start going to local meetups and networking events and telling people your story. Most won't be interested in helping you until they know more about you and if you would be a good fit. Next step is to offer some sort of value-add to them. By now, you will know what they do and have considered how you can help them. Perhaps it is finding deals, underwriting, managing, or simply paying them for their time.

Go ahead and sign. You will have agreed to cooperate with them when you originally signed. It's not a big deal.

Agreed with @Chris Seveney. Best to start the process to sell.

If you decide to keep it, you should talk with the contractors - you don't need to do high-end renovations for a rental. You do need to add closets, if possible. Once you get that refi, you will buy yourself a little time to consider. 

Getting multiple contractors involved will be your best bet to get a reliable estimate, though you need to come up with a scope of work. If you have some experience this will be easier, but you have to start somewhere. Get the inspection but remember they are looking for hazards and not considering what repairs will do to the final value or monthly rent. From the inspection write a list of exactly what you want. Finding the fixtures you want installed at the hardware store and pricing them is a must. This way you will be able to compare contractors' estimates, which can vary widely.

As you do this more often, you'll be able to keep a spreadsheet of per square foot prices for materials and labor to get things done and you'll be able to estimate this yourself. Remember to always budget 10-25% (depending on age/condition) extra as a buffer.

I've used it once before and ended up selling to great tenants. The tenants of whom you will be looking often can't buy their own home right now, otherwise, they wouldn't be utilizing this agreement, which typically is more complicated and costs them more. So, you'll be looking for those with some correctable reason they can't get a bank loan. Usually this is credit-related.

I used the lease/option model. You sell them the option to purchase by a certain date or in a window of dates for a certain price. This sale usually involves a monthly payment, which is on top of the rent. Part of that is to pay for the option and part will be credited to them on purchase, which results in having to bring in less of a down payment. If they fail to pay this option, then the option will be removed and they will remain as simple tenants.

Your risk is that you will have to set a price which you predict will be the going rate at the time of the option window. If you are wrong, you might have to sell for a price below market rate. If the house value goes down, the tenant has the option to simply not purchase and you would keep their option money.

Markets with high volatility and uncertainty in the job market are places I would look to deploy this tactic. 

Nothing different with screening other than you may want to inquire about their previous efforts to purchase a house. If they are interested in this, they probably have tried and been rejected before.

You shouldn't be using the cap rate for these properties. The cap rate is used to get an apples to apples comparison across commercial properties. You are looking at retail properties, which have been overvalued for a long time. Which is why it is difficult to find even 1% rule SFRs in a lot of areas right now.

To your second part of the question: Most multifamily will be tenant occupied, which means they are producing income. You should pay based on what they are bringing in and look to increasing the rent. They will have 12 month leases, so over the course of the year you will be explaining to them your plan to rehab their units and bring them to market rent. This is called forced appreciation and is a great way to add value in multifamily. Cap rates are one metric to use in these but do your underwriting based on multiple metrics, not just the one.

Quote from @Brian Willie:

Quote from @Benjamin Aaker:

This will be dependent on the bank. It's very difficult to find a bank willing to lend in second position. Your best bet is to contact the commercial banker at the bank who holds the first position mortgage on the property. Since they already have first lien, they are more likely to offer a second.

 Should have mentioned this is on my personal residence. 

That's OK. Just talk to the residential lender, then.