All Forum Posts by: Edward B.

@Gareth Fisher

Most people go bankrupt not because they have more liabilities than assets, but rather because they have more expenses than income. In other words, they may be worth millions but don't have enough income from those assets to pay their bills. That's why lenders tend to focus on debt to income vice debt to assets (net worth really). Make certain you are making enough cash flow to cover your expenses and then the reserves are for short term set backs, 4-5 months, until you can get your cash flow going again. Reserves will not help you for long if you suffer a permanent loss of cash flow.

@Josh O'Hearn, discount points are what it costs to buy the rate down. If you do not pay the points then the rate will be higher. You can ask them what the rate will be without points? The points will cost you as a percentage of the amount borrowed. For example, it you are borrowing $100k then 1.25 points will be 1.25% of that or $1,250 that will be added to your closing costs.

@Brian Dickerson, federal law prevents lenders from exercising the due on sale clause if you transfer the property into a trust for estate purposes, but you must remain as the beneficiary, which means that you also still have all of the liability. The way most due on sale clauses are worded now, the minute you assign the beneficial interest to the LLC in order to shift the liability you will have violated the clause. That assignment is not a matter of public record, though, so it will not be obvious what you have done. However, many borrowers wind up diming themselves out accidentally by changing where the payments are coming from, changing the named insured, etc. Historically, many lenders will not exercise the due on sale clause even if you violate it, but it is within their right and they may do so at any time. You may decide that all of this is still worth the expense and effort, just understand that it is not a loophole. If the lender discovers what you have done and so choose they may exercise the clause and accelerate your loan. They may give you a chance to remedy it, or not.

This does not get around the due on sale clause in most cases. Just obscures what you are doing. A trust is not really any more involved than an LLC, and like an LLC it is a good idea to consult an attorney experienced with what you are trying to do in order to ensure what you set up will actually accomplish that.

Talk to an attorney experienced in entity formation, real estate, and asset protection. Form the entity in the state you will be doing business.

@Omaree G.

You have to either have the LLC formed in the state where you are doing business or register as a foreign entity there so that you can be taxed and sued in that state, among other things. You cannot avoid GA law or taxes by setting up your LLC in another state. You will just be accomplishing the same thing with more expense since you will be maintaining the LLC in 2 states. Your only consideration is that you already have the VA LLC so you do not necessarily need to set up a whole other LLC if you do not want to. For what it's worth, VA has pretty good protections and is less expensive than Utah. None of which will help you if you get sued in GA.

@Mark Gruetzmacher, the right to redeem belongs with the borrower, not the lender. A note in foreclosure simply means that the lender has initiated foreclosure proceedings. For you to take the property back on a note you bought in foreclosure you would have to complete the foreclosure and hope that it does not get sold at auction. The danger then is that after you take the property back at auction or you bought it at auction, the borrower then exercises his right redemption and takes the property back from you. So depending on the specific laws in that state you could potentially lose any money you put into the property to fix it up prior to the end of the redemption period.

@Brian Ripperda, really just kind of depends on your strategy. If you hold properties long term you will have to put money into them to upgrade and for CapEx. If you buy right then that is not a problem, but most people never consider those expenses when they buy for the long term and get crushed when an HVAC goes out or the roof fails. If you are rolling properties every 5-7 years you have to have pretty good deal flow and you still have to factor in transaction costs and taxes.

No matter how you raise your kids they may not have any interest in managing a large portfolio of rentals. It can be a real PITA and is not passive by any stretch of the imagination. There are lots of ways around that if you come to that realization though. For example, you could sell your properties individually or as a portfolio using seller financing and then just sit back and let the money roll in without the tenants, termites, and toilets. That is often an effective strategy to mitigate the tax hit as well. Or have it set up to sell everything after you die, then your heirs won't have to pay taxes on any of it. There's actually a lot of variables in that last statement that I didn't take into account, but you get the idea.

@Brian Ripperda, there are plenty of investors that hold properties long term. In fact, I would say that most do. Perhaps not the most vocal of us, though.

@Mark Gruetzmacher, totally different. When a bank forecloses the property goes to auction to satisfy the note the bank holds. You are buying the property at auction and they use the proceeds from the auction sale to satisfy the liens against the property.

You can buy a note that is currently in foreclosure but that is different than buying property at auction. The redemption rules and periods are pretty much different for every state and there are usually ways around them if you know what you are doing. But the reality is that most people either can't redeem themselves or it just isn't worth it because they owe way more than the property is worth.

There are many different strategies used by note investors. Some buy cash flow, some buy and "rehab" the note, some use it to acquire property, etc., etc. Really depends on what your goals and expertise are.