All Forum Posts by: Costin I.

Thanks @Nate R. for explaining.

As a primary buy&hold investor, with passive income as the goal, I come from a different perspective:

- The property appreciation is not something you can rely on, as nobody can predict the market fluctuations and time the market. Sure, you can look back and see how things went historically...but "past performance not a guarantee for future results". What if you plan to sell in 5 years from now and 5 years from now there is a recession or a major dip in RE prices? I don't think it is wise to base your buy&hold strategy on appreciation hopes, especially for houses with zero or negative cash flow. Appreciation is creme on top of the cake - it might be there, but it might not.

- Appreciation is a paper profit realized only when/if you sell. It's hope. If you plan on selling, you have to factor in the selling commisions (usually 6%), closing costs (probably 2%), depreciation recapture, taxes on the profit for a true return figure. I contend that if you are planning to hold for under 5 years, you are in fact a long term flipper, not a buy&hold investor.

- Leveraged appreciation (the way Nate considers it) is not just paper profit, is like virtual paper profit. A promise on a hope. It's not going to put any money in your pocket till you sell, and that only if you do it at the right time and in the right conditions. (And what happens if there is deflation? Unlikely, but still possible.)

- Then there is the inflation. To speak about appreciation, you need to speak about and understand inflation. I would say any investment needs to bring you more than the rate of inflation for a real gain. Heck, more than inflation and an additional 25%+ for taxes (e.g. if inflation is 2%, you need to make 2.5% return just to break even).

- And, again if you think long term and passive income, not just storage of wealth, if you can't redeploy that money into something better, how good is that appreciation? For example, let's say you buy a house that doubles in value in 10 years...but then all the similar houses in the area would also doubled in value. Can you sell the house and buy another similar one without adding more money? I doubt you can, not in the same area and condition.

How much of that appreciation is real, caused by area changes in economic conditions, or scarcity of land/space, etc. and how much is just a reflection of inflation (or quantitative easing, aka money printing)?

Read here for much better explanations that I can provide:

The-truth-about-the-real-estate-market

Inflation-adjusted-housing-prices/

US-home-prices

So, yes, you can recover your investment when selling, and hope the appreciation gave you back more than inflation and taxes, or at least kept you in place and preserved the true value.

You can probably count on the net cash flow. And you can count on the equity increase (due to principal paydown by tenants, and even that should take in consideration vacancy, otherwise you do double dipping). The rest is wishful thinking.

But then again, this is just my opinion and from my limited perspective. It could be flawed and subject to feedback and corrections, which I very much welcome.

My 2¢...

A loan for 120K at 5% means $644 monthly in PI. A 240K investment property will have about 5K+ in property taxes = $416/month. Your insurance, property management, vacancy, utilities (when vacant), repairs&incidentals, capital expenses will eat at least another 250/month. You are lucky if you manage to get $200/month clean cash flow.

That means $2400/year, or a grandiose Cash on Cash return of....2%. You can get that with some savings account and leaving the money in the bank, no risk, no effort.

You might get to 2% principal paydown in your 7th year...

@Nate R. Can you please elaborate on that "8% on appreciation (2-to-1 leverage)" - I'm not familiar with how you calculate this number. And how is relevant in the context of inflation (or when appreciation is just a reflection of inflation)?

Here is a diagram I put together to help this kind of questions - take it with required due diligence.

Your questions are quite general, you'll need to get more specific for best results.

Is it a good idea to buy and investment property in Austin,TX? It is as good as in any other area, if it meets your search criteria and investment goals and you know how to evaluate deals properly. Are you clear on these 3 aspects?

Should I get house or a condo? Same as above.

Since I am remote how would I handle issue with renters like something breaks or renter not taking care of the property etc?

• Get an excellent property manager (warning: unicorn alert!).
• Learn about property management yourself so you can manage the PM. Resource: property management books on Nolo, Amazon, and here on BP.
• Learn about proper insurance, management, contractors, etc. - read Nolo Every Landlord Property Protection Guide.
• Read RelucantLandlord.

What are the things that I need to be aware beside the mortgage, taxes, closing cost?

• HOA and MUD costs.
• Vacancy costs (8%+)
• Utilities
• Repairs and incidentals (small items, like a toilete repair or fence small repair, likely to occur more often)
• Capital Expenses (big items, like HVAC or roof, rare to occur, but with big impact)
• Property Management (10%+)
• CPA and Attorney costs
• Tuition (you'll pay for that in either mistakes, time, effort or money)

Checkout this diagram I put together intended to simplify understanding asset protection. 

I'm not a lawyer, nor CPA, so take this with due diligence, but I hope it helps.

I put together a diagram intended to simplify understanding asset protection. I'm not a lawyer, nor CPA, so take this with due diligence, but I hope it helps.

@Rob Hakes Here are some points from my research on the matter:

• “Some Tenants will suit for anything and everything-trips/falls, illegal leases, discrimination, escrow handling, bed bugs, not answering phone, etc. especially if they have attorneys in the family.“
• Insurance is not covering mold related litigation.
• If someone falls through your stairs and the court finds you are at fault because of the nature of the structure or maintenance, your insurance will likely not cover you at all (this is an internal “threat” to your rental and other assets). And certainly neither your property nor your automobile insurance will cover you if you are found negligent in a serious accident (this is an external “threat” to your assets).
• Insurance companies don’t cover “gross negligence” or “fraud”, and when the claim is large they will find a way to deny it, if possible. Gross negligence and fraud are completely subjective - denial of your claim results in you suing your insurance company (expensive!) with pockets much deeper than yours.
• "I'm not naive enough to believe that an insurance company has any interest in doing what is fair and equitable when it impacts their financials."
• “So some people think that they are honest and above board and that will protect them from a lawsuit based upon fraud, but they are wrong. My clients are all honest people, and they still get sued for fraud. The fraud can be based on anything you say or do which lead someone to act or fail to act thereby causing them damages. Since we can't drill into the head of a defendant to find out if they really intended to deceive the Plaintiff, a jury is used to examine the circumstances and make the determination. It does not matter whether in your mind you really intended to state a falsehood or not, merely that what you said turned out to be incorrect is sufficient. If the other party is damaged and it appears you did the wrongdoing, do you believe a jury is going to appropriately ponder the legal nuance between negligence and intentional fraud? One example is what I gave in the podcast regarding a client of mine was sued for a single statement made in a single email that the "plumbing under the house was replaced”. There was a misunderstanding regarding the representation from one party to the other, and voila you have a fraud lawsuit.”
• a "fresh" thread on a scenario one would be better to have the asset protection in place before this happens: urgent-help-potential-tenant-with-pitball
• other related threads of possible interest:

             Asset-protection-success-stories-are-there-any?

             When-has-an-llc-actually-saved-your-assets

             Rental-properties-and-law-suits

In many of the threads you'll see other opinions about asset protection, pro and con. Ultimately, it's a tool in your investing toolbox and you need to learn how and when to implement it, use it, and how it complements the other tools available, like insurance, property management, financing, etc. 

@Melissa Dinas I will not comment on the HML financing portion, but 10% fee is outrageous.

On the numbers you are using, I think you are extremely optimistic:

• Vacancy $40.00 (4%) - very low - I would assume at least 8%, and that with an established house and experienced property management
• Repairs $40.00 (4%) - I suggest a minimum of 6%
• CapEx $40.00 (4%) - I suggest a minimum of 6%
• Insurance $30.00 (3%) - you should use the actual insurance cost (and $360/yr seems low to me).
• Management $20.00 (2%) - You should factor in 10%, even if you plan on doing management yourself. Your time and effort costs money (even if you put it in your pocket) and there might me situations/scenarios/times when you'll want a PM to take care of the property - if the property is not cash flowing with 10%PM cost, you shouldn't get the rental.
• P&I $441.00 (44%)
• Property Taxes $50.00 (5%) - this one is definitely low - the 2016 taxes were $1,049, and you don't know if they have any exemptions applied. You need to find out the actual tax, for a non-owner occupied, and apply it here. 

If you factor it like that, your numbers change to:

• Vacancy (8%) - $80.00
• Repairs (6%) - $60
• CapEx (6%) - $60
• Insurance - $40+
• Management (10%) - $100
• Property Taxes (10%) - $100
• P&I $774.00 (74%)
• Total $1200+ (120%)....cashflow negative.

Also, how you got to the 165K ARV?

And if you going to be in the deal for 77K (maybe a bit more, if you didn't calculated properly your holding costs), why get a 127K loan? Sounds too good to be true...basically, you hoping to get all your money out, end up with a cash flowing rental, and make 50K in the process?

You need to be conservative - if the property doesn't appraise at 165K and you make your calculations based on that, you might not be able to refinance without bringing money to the table (although at 165K you seem to have a good buffer...but I question that number and think you should make your calculations using 125K ARV).

@Mario Palacios You'll need a good insurance policy with good liability protection for each property. You'll also need an umbrella policy. 

And proper management procedures, regardless of how many assets and equity you have. So, learn about that first - and a good point to start is a Nolo Every-Landlords-Property-Protection-Guide book (https://www.amazon.com/Every-Landlords-Property-Protection-Guide/dp/1413307000/)  it will explain about insurance, how to evaluate insurance, and then about property management, property code, proper leasing and all the way to LLC and hiring.

But sooner or later, once the equity in the properties passes your risk threshold, you'll have to implement additional asset protection (LLC). Insurance doesn't cover you in all the cases.

I'm not a lawyer, nor CPA, so take it all with proper dose of own due diligence.

@Matthew Powell There are many things coming into play here: the activity you are planning to do, with your LLCs and with the properties/investments, the "friendliness" of your incorporating state towards LLCs (how easy is to pierce the corporate veil), the availability of Series-LLC option, financing, insurance, etc.

The number of properties per LLC should be based on a number of different factors: equity, number of units, cash flow, location of real estate, and tenants. For example, you might own 4 properties with a sum total of 50k in equity but one of the properties generates $900 per month positive cash flow. In this situation it would be structured so the cash cow property is held separate from the other 3 rentals despite the low overall equity. Or you might have a 4-plex in a C- area, I would keep it separate from my SFR in B+ area. In other words each person/situation is a case by case scenario. It also depends on the structure you want/can put in place and the associated costs, the equity amount you want to protect (50K might be high for me, but you might not blink till higher than 500K), your risk tolerance, all subjective measures.

If you group them together in a LLC, or if you use a Series-LLC, as long you keep clear bookkeeping/accounting, you can have multiple using the same bank account. For example, you have rentals in a Series-LLC as holding entity. You also have a separate operations LLC that is doing all the public facing operations, leasing, hiring of contractors, property management, etc. You track your transactions with Quicken or QuickBooks and have categories and subcategories and tags for all properties. You should be fine if at any moment can produce a report showing the incoming and outgoing for a particular property.

Transferring from your name to LLC, you should be aware of :

• advantages and disadvantage (read https://www.biggerpockets.com/renewsblog/using-LLCs-real-estate/), and
• the DOS - a detailed resource on Due on Sale: https://www.johntreed.com/blogs/john-t-reed-s-realestate-investment-blog/66000067-the-truth-about-getting-around-due-on-sale-clauses. It’s a risk you are taking and many will tell you they “never actually heard of anyone”…but if the interest rates keep raising (and the bank could redeploy the money from a loan with 3% into a loan with 6%) and your loan is further in the amortization cycle (basically the bank already collected the bulk of interest, cause that comprises most of the payment in the first years)…would the banks change their stance?
• methods of transfer (don’t use a quit claim deed - contact your title insurance company to determine coverage and if your policy does cover transfers, and when or how. You take a risk which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.).

"Ignorance is bliss. Knowledge is power, but also a burden. The cure for both: action, progress, not perfection."