All Forum Posts by: Eric Schultz

Dave Godfrey Just as you would with the profit split, make sure to draft up JV terms on how a loss will be handled if the unforeseen were to happen. If you put up all the cash on the deal, how will the contractor-partner share in the loss? You would be at much higher risk in this situation. In a 50/50 split situation, with $45k rehab and $65k net profit the contractor-partner is essentially getting 72% markup on their work assuming they are doing the $45k rehab at cost of the work. Achieving a 15% - 20% markup on any job is solid for a contractor. If everything goes reasonably well, the contractor-partner is achieving 3.5x - 4.5x their normal profit margin on this deal. That’s pretty generous considering the limited risk they have compared to your risk of funding the cash purchase! If you take on the deal yourself and bid out the rehab work to a couple qualified GCs, you would make 100% of the profits. The overall net profit would likely be lower than the net $65k projected, but there’s no reason it shouldn’t be more than $32.5k with all other variables the same. I’d suggest a 70/30 split in your favor upfront on this first deal. That’s equivalent to a 43% markup on the work for the contractor-partner. That leaves some buffer room for them to still make a solid margin while you get a little more reward on the higher risk you are taking on. You can always set new terms on the next deal.

Matthew Wright You may want to look into doing a cost segregation study on the property to accelerate depreciation to reduce tax liability and increase cashflow. This may help offset the burden of the expenses you are looking to take on.

Juan Pablo Murillo Yes, we carry an umbrella policy as one method to protect our assets. We use an LLC when doing flips, especially with partnerships. One place that summarizes LLC fees by state is LLC University (Google it). It appears Washington state has a $200 LLC filing fee and a $60 annual fee, in addition to tax prep costs. That’s not too bad in comparison to the $800 annual fee that California charges.

Some property management firms tend to front load fees on to the new tenant at the time of signing the lease. A couple examples would be charging a “pet admin fee” and a “risk mitigation admin fee” on top of the application fees, security deposit and first month’s rent. The PM firm keeps the admin fees in addition to collecting anywhere from 50% - 100% of the first month’s rent from the investor/owner for leasing fee. The last thing you need is a PM firm to deter a good tenant due to the upfront fees at time of leasing.

Yes, with 2 rental properties (at ~20% equity) it may make more sense to just carry an umbrella policy and skip the LLC. Some states have annual fees on LLC’s that are higher than a $2M or $3M umbrella policy annual premium, let alone the additional tax prep costs that come with an LLC filing.

General liability, auto and workers comp are standard policies to carry as a licensed general contractor doing residential. As an investor, it’s not a bad idea to carry a personal umbrella policy to protect other personal assets.

Jonathan Warner I’ve used a local lender in San Diego to buy out-of-state properties. You might find lenders local to you that deal with investment properties. Many of them are licensed to do business in most states.

For those actively selling: Give the appraiser some data that you used to list your property: cost of repairs or remodel completed, unique items about neighborhood, comps from your realtor. No pressure, just present facts.

Rehab the property before placing first tenant(s). Move in/ move out inspections and bi-annual inspections noted in the lease agreement. Install 1/4-turn angle stop valves at all sinks and toilets. Install new faucets. Replace backyard decks with a patio slab and step at sliding door (if needed). Do not install screen doors. Do not furnish washer & dryer. Avoid carpet if possible, otherwise minimize carpet in bedrooms only. Install Kwikset Smart Key locks on all exterior doors for easy re-keying.

Have 2 - 3 exit strategies for every investment.