All Forum Posts by: Costin I.

Dawn, I looked extensively at the whole subject of LLC, Series-LLC, asset protection, and all the rabbit holes they open (structures, DOS, financing, insurance, etc.) and can send you my notes and checklists, if interested.

Suggestion: cash out refinance and use the money to buy rentals (eventually, mortgage free ones) in an LLC (or Series-LLC). Get some cash flow working for you, maybe even some appreciation. Plus depreciation to maybe help you save from other income taxes. The mortgage note itself will act as a deterrent, while the rentals are protected by the LLC.

Natalie, we moved from Seattle (due to the wonderful continuous gray climate) to sunny Austin 4 years ago and have several rentals in Round Rock and been active in the investment community. Can give you referrals to agents, lenders, brokers, insurers, HML, etc. Are you looking for conventional lenders, portfolio lenders, HMLs?

Ian, even if you refi at 75% of LTV (and make sure of the conditions for that and that you qualify) and get a loan of $232,500, you will still have to bring some money (~10K) to the table and you'll have negative (!) cash flow of (4K+).

You'll also have depreciation, but you'll not be able to use it and it will accumulate only as you do not have passive income.

Unless you plan to offset income tax from another source (and be clear in what conditions that applies), I don't see how this deal is a good one.

Also, if you finance the rehab cost, you will have interest in your holding costs (plus the portion of taxes, insurance and utilities for the duration) - is that factored in your rehab cost? 

Ian

My 2¢:

• If you are keeping it as a rental for long term, the ARV is not that relevant (you are not going to sell it and you can't predict the FMV years from now) – you want the cashflow and ROI to be right.

• Also, you should offer based on your criteria and numbers, not “20-30% below asking price”. If your numbers/calculations are not working, doesn’t matter the asking price.

• I’m assuming “includes water and sewer in rent“ means you are having the expense for water and sewer. If you are renovating this, look into installing separate meters. If not, you need to factor that into your expenses.

• There is no such thing as “built into rent” – if you have the expense, you need to list it and factor it into your calculations – you are missing utilities and landscaping

• You will have closing costs

• You have a mistake in your mortgage calculation: 225K @ 5.25% for 25 years = $1.348/month, not 1,034. With that, your cash flow is negative.

• If only 172.5 is financed and you have to come up with 60K (52DP+closing), then the mortgage payment is $1,034. Annual cash flow $127. 

Beware: transferring with a quit claim deed will not transfer/carry your title insurance. Check with your title insurance before doing a quit claim deed.

Transferring mortgaged property from personal name to LLC will trigger your DOS clause. While rare to be acted upon, especially on a performing note, it's nevertheless a possibility - and in a climate of raising interest rates (when the bank might think they can lend that money for higher profit) that probability increases. Will you be in a position to refinance or pay down on a moment notice? Although there are other ways you can deal with this - you can transfer back to yourself if the bank hits you with a notice, and back, and play that game with them. Or use land trusts.

Umbrella insurance will kick in once the regular policy coverage is exhausted. But both will not cover you in all cases.

I'll send you my doc - it touches upon on many of these questions.

Unless you already have multiple assets you want to protect, with a lot of equity or a business/profession (e.g. doctor) you need to separate from your real estate activities, you shouldn't concern yourself with an LLC - it will slow you down and eat your cash flow and other resources.

Concentrate on getting your deals done, get some assets, build some equity first, then come back and look into asset protection strategies. And that once you covered your other means of protection - like proper insurance and proper property management.

By then you'll have a better understanding on what an LLC involves, what it gives you and how it works in conjunction with all the rest (financing, insurance, protection, management).

If you decide you proceed with LLC, you should look into Series-LLC - I think Montana supports them. I can send you my notes on the whole asset protection question and all the rabbit holes it opens (due on sale clause, structures, insurance, trusts, etc) - pm me if you want.

@Steven Hamilton II That is great advice: "Inquire about who you want to hire in October-December. NOT in February or March that shows a lack of consideration and planning." A good CPA will be extremely busy in that Feb-April period.

The Series-LLC are no different from any other LLC from a taxation/CPA/IRS perspective. But as a legal entity, from the lawyer perspective, they are much different and require a carefully crafted formation document (not a DIY). And some lawyers don't know about Series-LLC, and I met some that bash them despite the fact they know very little about them. Noah mentioned a lawyer specialized in Series-LLC, not a CPA.

@Basit Siddiqi can you please elaborate  a bit on the statement: "You also may be transferring income that is passive rental income to active ordinary income that may be subject to self-employment tax." ?  How/when/why would that happen? Thanks.

@Basit Siddiqi - makes sense, but even then I want to know who signs my return and speak with the person who prepares my taxes. I want my CPA to be familiar (if not downright intimately familiar) with my situation, my finances, my domain of activity and my goals. Will you get that kind of attention from someone handling 695 clients? Or even 100 clients? If every year there are different people preparing my taxes, would I get "continuity" in tax strategy?

Maybe I have too high expectations and we are talking here only about tax filing preparation - like the difference between the CPA helping you improve the bottom line of your business activity and just saving you the few hours time to figure out the IRS forms in April. In which case, I still refer to "CPA is just a tool, you need to learn to use it". Or pay a lot for the convenience of ignorance.