All Forum Posts by: Chris K.

@Chris Horton

You are probably best off using the $250k as a down payment to buy a large enough property where you can have access to a good team including a good property manager. Could be commercial or residential. You can also reduce the risk by under leveraging the deal. 75% isn't too high but perhaps it's safer to be around 65% to 70%. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Felix Stone

It's a complicated question. You can try to do a search for the "Howey Test" and see what you think. This is a pretty good article on the topic: 

https://www.foley.com/en/insights/publications/2020/02/when-real-estate-transactions-securities-risks

One common confusion I see is the difference between what each member is allowed to do versus what member actually does. For example, take a five-member LLC with one member acting as the manager. Depending on what the operating agreement says, the manager may have most of the day-to-day powers. And as a practical the matter, it might be the case that the four other members just want the manager/member to do everything.

But the fact that the other members are generally not involved in the day-to-day operation doesn't mean that it's automatically a security. This is especially if the members have powers that can counterbalance the powers of the manager. For example, the operating agreement could state that certain important decision requires majority or even super majority votes from the members.  

It's a complicated topic. My advice is to hire a lawyer to review your situation and draft an operating agreement that could most likely stand up to SEC scrutiny. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Chris Fuhry

Short answer is both. You will definitely need a FL attorney can handle the real estate side. You may need a PA attorney depending on what you are doing. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Shafi Noss

I don't see the need to form a syndication for this kind of project. You can either borrow the money from the investor and lend the money again at a higher rate. Or just form an LLC naming you as the manager and add the investor as members.

It will still cost you in terms of legal fees. But probably not much as a syndication. Note that the challenges with syndication is not just the legal fees --- it's also the time commitment to get it set up and operating properly. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Ganessan P.

What size of loans are you looking for?

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@David Haynes

I agree with the general point of your post. Realty transfer taxes alone shouldn't block an investor from investing in an area with higher rates. 

But I do have to disagree on this comment:

Low transfer tax counties have a higher probability for future increases.

This is not true. All the municipalities with higher tax rates are what they call "Home Rule Charter" municipalities. Only those municipalities can impose a higher rate than the default 2%. To be technically correct, Philadelphia has its own realty transfer tax statute. But the net effect is same as other municipalities that can take advantage of the Home Rule Charter. They can charge basically whatever they want. 

It's worth noting that there are a handful of jurisdictions that charge significantly more than the default 2%. Last time I checked, only about 15 municipalities had a tax rate that is higher than 3%. Out of those 15, only Philly, Pittsburgh, Scranton and Reading have consistently had rates over 4%. I believe Pittsburgh recently decided to increase it to 5%.  

The only commonality between all the municipalities that have these higher taxes is that: (1) they are all populous areas; and (2) they have histrionically struggled with severe budget deficits. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Account Closed

As @Steve Morris and @Jaysen Medhurst pointed out, you are probably not going to find an opportunity where you are looking for $600k in annual cash flow with $1 million invested. It would be a challenge --- albeit a doable one --- if you are looking at it from a gross revenue perspective. 

Just note that returns and cash flow are related but different. A lot of "big boy" projects involved sacrificing cash flow during the early stages to get a bigger return at the end. So you need to first decide what your goals are. 

Another way to think about it: do you want to use that $1 million to do something active or passive? If you go with the active route, you have to become an entrepreneur of sorts to make sure you get the best returns for your money invested. If you want to remain passive, you reduce your day-to-day involvement in exchange for lower returns. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Nicholas Weckstein

Shoot me a PM and I can send you some contacts! With COVID-19 restrictions, a lot of smaller contractors have been suffering. So the delay may have to do with that. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Bill Schrader

I agree with @Eddie Brady that you are better off forming an LLC in NC to hold property in NC. If you have multiple partners in PA, then it might make sense to form the LLC in PA and then form another holding entity in NC. But if you own it as an individual, you could probably skip that step.

Note that in Pennsylvania, the default presumption is that you own everything together with your wife as tenants by the entireties. That has some consequences on the legal side depending on your specific situation. It may have some consequence on the tax side as well but that's a question for a CPA.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Khizer Husain

In theory, you use comps for single family homes. You use something call the GRM method for 2 to 4 units. Then the cap rate/income method for anything about 5 units.

In practice, it depends on the market. In my area, for example, most 2 to 4 units seem to sell at a practice using the income method. This suggests that most people in our area who buys these are buying them as pure investments. In more metropolitan areas, 2 to 4 units seem to sell closer to the price of single family homes. This generally suggest that people in the market are buying these for the sake of living there --- rather than as a pure investment. 

The basic concept behind a cap rate is simple --- it's NOI/Sale Price = Cap Rate. Once you figure out the going cap rate of a given market, it can tell you whether you are paying a fair price. For example, let's say you have a property that generates $100,000 in NOI. In a 10 cap market like the area where I live in, the property would be worth $1 million ($100,000/10%). Now let's say that property magically moved to a more "desirable" location with a market cap rate of 5%. Then the building is worth $2 million ($100,000/5%).

To answer your question about whether these methods take account of the last sold properties, the short answer is that they all do to an extent. This is obviously the case for single family homes that solely rely on comps. But even the other two methods take account of this to an extent. If you have a historically 10 cap market but every body starts buying at 9 cap, then that means the investors are more bullish about that area. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.