All Forum Posts by: Josh Prince

Hi Jim,

Nice to meet another LA investor. Breaking even in Venice, CA is hard to find! Especially since you have been able to get all of your investment back in your loan. How much gain do you think you have in the property?

Take Care,

Josh

Hi @Account Closed - Buildings with five or more units are generally cheaper per unit and will also have higher gross rent multipliers. That is the main plus.

Generally buildings with five or more units are only purchased by investors, as opposed to buildings with four or fewer units that both investors and homeowners will buy. This means that more people are looking to buy the building, which generally will increase the sales price, or at least make it harder to find a deal.

Homeowners often have more emotions caught up in the purchase and are thinking about factors other than just the bottom line investment potential of the property. A really charming fourplex may sell for above the "market value" of its rental and development potential because the buyer is willing to pay that much to live in one of the units and rent out the rest. Also, because loans on four unit buildings are cheaper, more money can be spent on the building and still have it service the loan.

Another advantage, as Matt points out above, is that you are relying less on each tenant to contribute to your monthly nut. If you have $6000 coming in per month among 10 tenants, one vacancy hurts much less than if you have $6000 coming in from four tenants. On the other hand, it is easier to manage four tenants at a time rather than 10.

You file a form 8832 to check the box as to how you want the LLC to be classified for tax purposes. Generally speaking, with multiple members the default is a partnership, but you may elect to be taxed as a corporation. If you live in a community property state, like California or Texas, and the members are husband and wife as community property, you may also elect to have the LLC taxed as a disregarded entity.

Most of the time, when holding real estate, a partnership is the way to go when you have multiple members to avoid a second layer of taxation (at the corporate level).

I have heard some people electing to be taxed as a corporation and then further making a subchapter S election for pass-through taxation, but I think the benefits of that, if any, may not be appreciated in this situation. Also, there are still some tax disadvantages of holding real estate in an S corporation.

Kyle Clark - If you live in California and you manage an out-of-state LLC, and you maintain the business office (not the registered agent) in California, you are required to register the LLC in California and pay the gross receipts tax (minimum $800, more if you have over $1,000,000 in gross receipts), regardless of whether you have any California located assets.

As Jon Holdman says, the key is whether you are doing business in California and the state has a very broad reach as to whether you are doing business there. It is virtually impossible to live in California and form an LLC anywhere without paying California gross receipt taxes - unless you have someone in another state who can maintain the office and manage the LLC. Even so, if you are really the one running the business, you are probably doing business in California and liable for the tax.

All this being said, you might as well just form a California LLC and save paying the registration to the other (Non-CA) state.

Hi Michele - a few years after buying a small multifamily building I discovered that one of the tenants brought in bedbugs. He swears it is a guest who is no longer invited. I am currently having the building fumigated, but I am worried about a re infestation. It is going to cost about $3500 and that was the most reasonable reputable quote I could find.

I am not sure if that is the answer you are looking for. I had no such contingency in my contract, and I don't think the bugs were there when the seller sold the building. You can always check the Bedbug Registry to see if tenants have complained about the building.

Helen W. I think what Matt Mason referred to was not the Article of the CA constitution limiting property taxes to 1%, but Proposition 13 -http://en.wikipedia.org/wiki/California_Proposition_13_(1978), which limits the ability of the assessor to reassess the value of your property for property tax purposes... so if you purchased something in 1980 for $100,000 and its now worth $2,000,000 in 2013, your property taxes will be based on the $100,000 purchase price, plus limited annual increases -- they cannot just reassess your property based on its fair market value. Now if you sell it to me and I pay $2,000,000 for it, my property taxes will be based on the $2,000,000 figure. Ultimately this means that properties in California are often retained, because selling real estate and buying a new property will generally cause your property taxes to rise.

All that being said, you are right that 1% is better than 4%.

I have considered that question as well, however for me, the deciding factor is taxes -- I am worried that trying to 1031 exchange will push me into not such a good deal, and otherwise, I would rather not pay the federal + ca taxes on the gain. If I could avoid the taxes I would sell my appreciated CA property and realize the gains.

Hi Matt Mason - welcome to BP. Sounds like you and I see eye to eye on LA. I have purchased a few properties over the last four years but now it is really hard to find local deals that are not bid up to really high price levels by excited investors. I was successful in the past getting deals in 90004 and 90016, which are up and coming areas in my opinion, and I missed some great ones in 90026. but those areas have gotten really expensive.

I have thought about out of state or out of area purchases as well, but I have not gotten past 1. not trusting third party managers and 2. reluctance to buy in an area that I don't know the details of the city. If you do take the plunge, I'd really love to hear about it.

Josh.

I have bought both and now I would only buy new from now on. I have had too many experiences where a used appliance needed repairs that cost as much as the purchase price! I'd much rather spend $450 on a new stove than get a used one for $150 and have to keep getting gouged by repairmen.

I find that between sears, home depot and lowes, there are usually deals on appliances that can be had using coupons and websites that give you cash back, which help ease the cost of the new appliance. Also, well, tenants just like new appliances - it looks nice.

Edward Burns - there is an existing problem. One tenant brought them in - his unit is very disheveled. They have crawled up the wall into at least one other unit which was how I found out about it. The first tenant has a serious infestation. the second tenant is light. However, after investigating treatment, it seemed like heat and fumigation were the only two guaranteed kills, and the price to heat treat 2 units was close to the price to fumigate the building. Also, the place is due for a fumigation for termites and needs a termite fumigation for a refi loan. It was going to be fumigated at purchase but when i bought it all cash, we just skipped the fumigation to close the deal quickly. I figured I might as well have them up the amount of Vikane to kill the BBs too.

Thanks for the $100 per unit per night suggestion.. that sounds reasonable - that's probably what I would want myself.