All Forum Posts by: Cindy Larsen

The local market data available in your spreadsheet is interesting but it would be much more useful if you broke down pricing by type of rental unit

Housing size: #bedrooms, #baths, sqft
Housing type: SFR, duplex, triplex, 4plex, >4units in complex

If that data was available, it would be a lot easier to determine what asking price I should list units for.

My best current method is

1. last years rent + inflation,

2.compared with HUD housing data which tells me the 40th percentile rent for the number of beds and baths, by county. This HUD data is for determining section 8 rental amounts, and since I target my properties and units at the 60% to 80% range of market rents (class B), I at least know I can charge more than the HUD rent. I also compare last years HUD data to the previous year to determine how much the market has gone up.

I also compare with local listings, including comparing amenities available. I charge just slightly less than units in large complexes with more amenities. Turns out some renters dont want to live in cookie cutter apartments, and will pay almost as much for my units without the amenities.

I also google for info on market rent trends

After all that,

I make the best educated guess for each unit/location that I can

More detailed data would be very helpful.

So far, my units have always rented for asking within a month, except units that entered the market in the winter, which rented when I dropped the price by $25/month. Those units, I leased just until summer, and then raised the rent by the $25 plus my educated guess yearly rent increase.

My yearly leases are all ending May 31. I have offered current tenants a 2% increase (pointing out that it is less than inflation) and 2/3 have decided to stay (so far, not all tenants have replied yet since I gave them until April 30 to decide) and some even thanked me for the less-than-inflation rent increase.

As a first time home buyer, you are in a great position to buy, because there are programs that will allow you to get a mortgage and put down only a 3% or 5% downpayment on the property. I believe this same low downpayment will be allowed if you buy a property with a partner.

So, a $300,000 duplex, for example, would only require a $9,000 or $15,000        downpayment. If you don’t want to wait to save the downpayment, a partner with downpayment $ is pretty much your only option to buy soon. 

If I were you, I’d do the following: 

Find an experienced investor partner, form an LLC with an operating agreement that spells out who owns what percentage of the property. This might be 50/50 or 60/40 with your partner providing the downpayment and experience, and you providing the (hopefully) increased ROI due to the low downpayment and from possibly decreased interest rate resulting from your great credit, and certainly decreased interest rate from owner occupying the property.

Can you find a property that cash flows with such a low downpayment?Run the rental property calculator on available properties to find out. Low downpayment = higher mortgage payment = less cash flow.The BP calculator is a great tool, but beware: you have to put valid info in to get valid info out of the calculator. So do your research on what those numbers you input should be, and be conservative on what you can rent the property for. Are there maintenance/repair costs that you will need to pay for up front? Who is contributing those funds? No? Are you sure?Who is paying for the home inspection, the appraisal, and the other costs of the buying process? Are their capex costs that will need to be paid for in the near term before the property has built up a capex fund?No? Then where will that money come from? So, after researching everything and identifying all upfront costs and all ongoing expenses (vacancy, maintenance/repairs, capex, property management) if it cash flows, then buy it.

If you live in the property, you would pay the LLC the same rent as any other tenant. The LLC might pay you for managing the property, if you were qualified. So learn how to manage properties. Start with Brandon Turners Book on Managing Rental Properties. Start with a duplex. Move up to more units when you have more experience.

Live in each side of the duplex for two years, doing maintence/repair on the side you are not living in, to be able to deduct your percentage of the maintenance/repair costs from your percentage of the income. Plan an exit strategy to sell the duplex in the 4-5 year time frame, so you get the capital gains exclusion on your entire capital gain (since you lived in each half of the property for two years of the five years before selling).

I'd also have both partners invest an equal amount of their profits from the LLC each year in paying down the mortgage, resulting in building more equity sooner. When you sell, your equity (less your half of the sales expenses) becomes the downpayment on your next property.

Anyway, that’s what I’d do.

Also the people recommending that you take control of your finances, reduce expenses, and start saving are right. One of the best ways to save is to start by paying off any debt you have. This will free up the money you were spending on those debt payments (mostly interest) so you can save it. A 401k loan is not bad, but be aware that if you change jobs, you will be required to immediately pay off the loan.  This can be bad if you just lost your job because the company downsized or something. on the good side, if you use the 401k loan to pay off a small debt, and then pay off the 401k loan, then repeat, you are paying interest to your retirement plan, instead of to a bank. And it is at an interest rate that you pick, which will immediately reduce your required payments vs your previous debt payments. So keep paying the same amount you were before, and the 401k loan is paid off quickly.

Work smart, and do well. Good luck.

CJ

Brian,

No, it won’t show up on a credit report. But, you WILL be doing something unethical, and possibly illegal (fraud) if you do not disclose this to your lender. if you do disclose it, they will reduce your income available to qualify for a loan by the amount of your brother’s monthly rent. That will have a huge impact on how much you can borrow. I’d ask my lender directly how this situation is handled

Try Aliant credit union. They have no problem with multiple accounts, and do personal and business banking: I don't think there is a requirement for an LLC. They also have 1% or greater interest on both checking and savings

House Hack while living in paradise. Luxury Living in the country! Santa Cruz(28 miles), Monterey(23 miles), San Jose(54 miles): no matter where you work or play you are close to home. Ten miles from the beach and minutes from shopping. Enjoy over 2.5 private useable acres. Updated cook's kitchen with natural gas stove, granite countertops, oak cabinets and stainless-steel appliances. Open floor plan and wide windows fill this impeccably maintained home with natural light. French doors lead to sunroom and patio. Surrounded by beautiful gardens and low maintenance lawns with unrestricted water. Separate driveway leads to the income producing one bed 552 sq ft. cottage with it's own fenced yard. Newly remodeled main home offers cedar siding, cathedral ceilings, quality hardwood and tile floors. Stay connected with two DSL internet connections. New gas furnace. EPA rated wood stove. Easy attic access. Spacious upstairs master with bath, walk-in closet, private balcony. Two spacious bedrooms and bath downstairs. Beautiful, private, peaceful: home.

Can't aford to buy in silicon valley? House hack from a paradise. Live in the cute cottage with it's own fenced yard and private driveway, while you rent out the amazing main house out to completely cover the mortgage. Or live in the main house, and the cottage covers half the mortgage. OR rent out both and cover all expenses plus income while your equity grows. Current rent from the cottage is $1330, which is below market rent (my realtor says $1500).  Same great tenants in place in the cottage for the last 2.5 years. The tennants really want to stay. Either residence could also be great for air BnB.  Cottage is approved by county as a senior living unit, has it's own address and utilities separate from main house.  Main house has 1885 sqft plus additional space: sunroom, patio, balcony/deck, garage, huge attic. Gorgeous gardens and 3,500 sqft of low maintenance irrigated lawns. Surrounded by forest with deer and birds.

Open house every weekend in August.  Great turnout last weekend. Come see.

On MLS. Check out the virtual tour with 3D floor plan.

17165 Wilson Way, Royal Oaks, CA 95076

I'm moving to Washington, and don't want to do remote property management. I'll be looking for multifamily properties...

Patrick,

Have you considered buying the property from your Mom using the Installment Sale method? The basic idea is that

1) you become the new owner

2) your mom becomes the bank and you creat a mortgate note/ deed of trust, just likemam

@Zee Singleton in my opinion, given the situation you described above, the best thing to do with your $5000 is to open a self directed Roth IRA. You can then invest in real estate, mortgage notes, or anything else you want (carefully following IRS rules about prohibited transactions). The benefit of investing this way, is that your investments are tax free, forever. If you are starting out with a small amount to invest, you can buy pieces of consumer debt through lending club and prosper. You can buy pieces of mortgage notes through real estate crowd funding sites such as peerstreet. The interest you earn is tax free. You can contribute more to your Roth each year, until you have enough to parther with someone else (or their Roth IRA) on buying a rental property.

You can also get money into your roth by converting other retirement accounts such as 401k (paying the taxes on however much you convert each year sooner, rather than paying more later, after it has grown, when the IRS forces money out of your 401k via RMDs). If you assume a 7% return on your 401k account, that means it doubles every 10 years, so the taxes you pay later will be much more.

Another way to get money into your Roth IRA is to create a business that you do a few hours a week (possibly real estate related as others have suggested). That business can have a retirement plan called a solo 401k, andnyou can make both before tax and after tax contributiins to it. THe great thing is that you can make after tax contributions (up to your total taxable income from that business or $55k whichever is greater) to your business's Roth 401k. Then, you can convert the funds from the Roth 401k to your self directed Roth IRA.

After a lot of research, I picked mysolo401k.com for my selfdirected Roth IRA and solo 410k provider. Each year the amount of money I have invested in the Roth IRA is a larger part of my net worth, and it will never be taxed with either ordinary income tax, or capital gains tax. My plan is to convert money out of my 401ks into the Roth IRA, up to the top of the 28% tax bracket [conversion amount = top of bracket - my AGI]

I pay the taxes on the conversion amount using this year's income instead of paying the taxes with part of the retirement funds, as that gets the most money into the Roth IRA. The reason the Roth IRA is so powerful is that taxes are your biggest expense (and everyone elses biggest expense too). The Roth IRA elimimates that expense, and makes whatever you invest in much more profitable. if you ever need to take money out of the Roth IRA, it is a tax free distribution. The same money withdrawn from any other retirement account, such as 401k, is taxed as ordinary income, which means, it bumps you into a higher tax bracket, and is taxed at that rate. RMDs are mandatory with everything except Roth IRA, so you end up losing up to 39% of your retirement funds with every retirement plan except Roth IRS. You never have to take it out of the Roth IRA, and you can invest it in whatever you like, and take distributions if and when you need to, on your schedule, not the IRSs schedule.

Jared, Very interesting article. I'm a new investor, and was confused about one thing in the very first section. You said

You actually only have a taxable gain of $19,166 ($34,168 cash flow + $14,088 principal portion of your mortgage payment – $29,090 depreciation). We add back the principal amount of your mortgage payment because it is not a tax deductible expense and subtract out the deprecation we listed above.

I don't understand how the principle portion of the mortgage payment is a taxable gain, at least not until you sell the property, right? My understanding was that each year, you pay taxes at your regular marginal tax rate on: your rental income - IRS allowed expenses - depreciation - interest paid on mortgage. Then, in addition, when you sell the property, you pay capital gains taxes on your gain which is (roughly):

sale price - purchase price - capital expenses - mortgage amount outstanding.

How is principal gained through paying down the mortgage a capital gain? Isn't that principal just a reduction in how much debt you have?

Oh, I see, the mortgage amount outstanding when you sell is less, so your capital gain is increased by the amount your principle increases.

If that is right, I am still confused by the idea of the capital gain for the first year including a capital gain that will not be taxable until you sell the property, and then, it will be taxable at capital gains rate, not at regular income tax rate?  Am I wrong about there being a difference between the taxes you pay yearly on rental income, and the capital gains taxes you pay when you sell the property?

Please clarify this for me.

Thanks, CJ