All Forum Posts by: Dan Mahoney

@Charles Harwell Hey Charles, congratulations on your success.  What Atlanta neighborhood are you working in (if you don't mind my asking)?  I live here, too.

I like the way you are thinking about the options.   I think the best answer depends more on your personal situation than on the real estate itself.  

1) How you want to spend your time.  Are you a full time investor or do you have a day job?  Would you rather be managing another rehab or managing tenants?  

2) Your tax situation.  Do you have a lot of ordinary income or mostly capital gains/rental income?  You'll take a big tax hit on the flip if you are already in a high bracket.  Renting effectively defers the tax on the equity gain.

3) Your liquidity situation.  If you do the flip you obviously get the capital back faster.  If you do the rental will you have enough dry powder for the next deal you want to do?  

4) Your overall asset and liability picture.  If you held this property long term would you feel your overall portfolio is overweight Atlanta real estate?  Or maybe this is a good counterweight to your other assets.

@Bruce Michaud Well, sure, the IRA-owned LLC could open a brokerage account. But why would you go through the complexity and expense of having an SDIRA custodian and an LLC to make conventional stock and bond investments through a broker? You only need this structure to invest in alternative asset classes like real estate and private debt. It would be easier and cleaner to just open a new IRA account with Schwab (or similar) and transfer excess funds/cash flow from your SDIRA custodian to the new IRA. You can have multiple IRA accounts and it is pretty easy to move money between them (as long as you don't commingle Roth with Traditional or rollovers with contributions). As a side benefit, you would improve your asset protection by taking the excess funds out of the LLC since they wouldn't be available to potential future creditors of the LLC.

Regarding the application process, the brokers are subject to "know your customer" regulations so they will need to know identifying information for the human being that is authorized to make decisions on behalf of the entity. Also this protects you so other people can't claim they are authorized to transact on behalf of the LLC. So yes, you are being over protective.

@Asim Alam Good luck!  I haven't been to the Clayton County auction.  Would you share results here?

@Barshay Graves You are partly right about the credit implications of using a business credit card.  Yes, the utilization will usually not show up on your personal credit report (except it absolutely WILL if it is Capital One, which I know from experience).  However, unless you are a very big company, your business credit card agreement does include a personal guarantee somewhere in the cardholder agreement.  If you do not pay, it WILL show up on your personal credit.  There is usually also a hard inquiry on your personal credit when you apply for business credit, which is a short term ding on your credit score.  Bottom line:  Due to promotional interest rates, credit cards can be very economical for short term financing (and a viable alternative for hard money) but are categorically inappropriate for long term financing.

@Diane G. This will impact a future refi in two possible ways: 1) If it shows up on personal credit or the payments come out of your personal bank account, it will affect DTI and/or credit score; and 2) May raise quiestions about source of funds for the initial purchase. In either event, if the borrower agrees to use the mortgage proceeds to pay off the credit cards that should help.

Excluding title insurance you should be able to get it done for under $1,000 plus 0.1% transfer tax on a cash close.  The attorneys often give discounts for repeat business, so it can be even lower than this. If you want title insurance the cost will be based on the value of the property.  You may also have to come out of pocket at the closing table for the buyers' pro rata portion of property tax and other seller prepaids but that is not technically a closing cost.  A mortgage has lots of additional closing costs, many of which scale with the amount of the mortgage. 

$1,300/month renters are not necessarily being irrational.  Here are a few reasons:

1) Qualifying for a $1,300 rental is easier than qualifying for a $250,000 mortgage with a $1,300 payment. Mortgage lenders consider DTI, asset coverage, etc., but most landlords just consider rent to income. As you point out, both consider credit. (Yes, NYC is an exception to this and all other rules.) Also outside of some government supported programs (e.g, FHA, VA) most lenders want to see a substantial down payment, which is a huge barrier for people who live paycheck to paycheck.

2) There are lots of reasons one might need a place to live immediately (e.g., new job, divorce, starting school).  Even if one can qualify for a mortgage, a 60-90 day search-contract-close timeframe is simply not workable for a lot of people. 

3) Transaction costs of 5-10% on the buy and the sell (e.g., realtor, mortgage, attorney, tax) often make it more economical to rent if you aren't going to stay put for at least 5-10 years.  Most younger people aren't going to live in a house for 30+ years like their grandparents did.

4) Tax deductions for mortgage interest and property taxes only become interesting once you've reached a certain income level.  People that earn <$50k/yr don't pay much in income taxes.

@Chris Price It's the intersection of supply, demand, and public policy that plays out very differently depending on where you are.  A given housing authority has a number of families with vouchers and they need them to be able to find housing.  That's the demand.  The supply is the number of landlords willing to accept Section 8 vouchers.  When demand exceeds supply, rents go up, and vice versa.

However, given this is a government program, public policy concerns can significantly impact the supply/demand dynamic.  First, in some localities, landlords are not permitted to discriminate based on source of income and therefore are required to accept vouchers.  This increases the supply of available rentals and puts downward pressure on Section 8 rental rates.  Second, the housing authorities have a public policy interest (and pressure from the federal government) not to concentrate voucher holders in bad neighborhoods.  This can increase the demand for units in areas not considered to be economically depressed and housing authorities may be more generous in those areas.  Third, housing authorities have wide latitude to adjust and enforce their inspection standards.  The housing authority wants their voucher holders in the safest and best quality units possible, but if they set the standards too tightly, supply will be constrained and rents will go up.  

There is a complicated balancing act going on in these programs.

@Kiet N.  Even in the absence of a 1099, you are required to report all income on your tax returns. 

Regarding "tax sale flipping," I think the mechanics of what you are describing would work, but I don't understand why an investor would buy the tax deed from you at a markup instead of buying it directly at the auction.  Keep in mind that if you win a tax deed at auction that means by definition that you were willing to pay more than everyone else.  Maybe it would work for an out of state buyer since its harder for them to attend the auction.  

This hasn't been said so I will add it.  If you are going to play the 0% interest credit card game, far better to do it with small business cards that don't report balances to credit bureaus as personal debt (e.g., Chase, BofA, Citi).  I have made the mistake of borrowing for business with Capital One and they put it on my PERSONAL credit report which negatively impacted my credit utilization and, therefore, my credit score.  I challenged this with all the bureaus but ultimately had to pay off my account to get it off my personal credit report because Capital One insisted that it was a personal debt (it wasn't).

Yes, if it is a predominantly owner-occupied neighborhood. We've just had a couple perfectly serviceable duplexes torn down where I live in Atlanta because it was way more profitable to rebuild as SFR. Exactly the situation you are describing.

If you own SFR in a neighborhood that transitions from being predominantly rentals to predominantly owner-occupied you can get a step change in valuation. If you own a 2-4 you'll get some benefit but not as much.