All Forum Posts by: George Pauley

This is one of those "difficult" things to talk about, especially in a public forum.  :)  I am NOT a lawyer, and past performance does not indicate future returns.

Most mortgages have a due-on-sell clause that says they get paid off if you sell (or transfer) the property. But I have yet to meet a person who has had a due-on-sell clause activated when they transferred a property to an LLC. If a mortgage company did decide to do that, you could always just transfer the property back to your name. In fact you'll likely have to shuffle the property back and forth each time you refinance it.

It's a bit quirky that you pretty much can't get a commercial loan unless you are buying the property under a legal entity such as a corporation.  Go figure.

 I couldn't disagree more.  When those properties are in your name they are in the public record.  Enterprising blood-sucking-leaches, er, I mean lawyers, will search the public records looking for people who own multiple properties, and then find a reason to sue them.  Remember the lawsuit doesn't have to have merit.  The lawyer just needs to make it expensive for you to defend yourself so that it's cheaper for you to settle than take it to trial.
Yes, you need good insurance.  And yes, you need to run an honest business.  But keeping your name off those properties is the first line of defense.  Even if/when a lawyer links all the LLCs back to you, that lawyer also knows that you have had some good legal advice and have set up entities that will make their job of suing you MUCH harder.  At this point the lawyer goes looking for a less savvy victim.

I have learned through my local REIA that my market is very predicatably cyclical on a yearly basis. So I always try to sell my homes in the Spring when the cycle favors the sellers, and try to buy in the summer (it's HOT in AZ) or around Christmas time..

Also, staging the home is ridiculously inexpensive and well worth the cost.

A lawyer once explained it too me thusly. The LLC is a legal entity separate from your personal self. It keeps tenants, gold-diggers, etc. from suing you, they can only sue the LLC (this is a bit of an oversimplification). So keep putting properties into the LLC until the amount that you could potentially lose in a law suit begins to worry you. (The lawyer called this amount my "personal pucker factor" ) Then form another LLC, rinse, repeat.

This reminds me of a thing I've been pondering lately. I think REI is amazing and I truely wish that everyone could do it and become independently wealthy and exit the rat race. But the moment I buy my first rental I've excluded at least one other person from being able to do that. (Because I now own his house! ;) ) REI is a bit of a zero-sum game. But just because the game is stupid doesn't mean I shouldn't be playing to win.

Anyway, it's not just about me.  I have two daughters, and 2 grandsons, and I'll likely end up with the average 4.  Once I have "enough" for me and my wife, then I start working on enough for my 2 kids, then enough for my 4 grandkids, etc.  I can imagine thinking someday that I've provided enough for my progeny.  But I imagine I'll just shift my focus to my community, schools, veterans, etc.

I would add that your -$100 cash flow is likely optimistic.  What happens when the renter moves out and it takes you a month to get another renter in?  What happens when the water heater bursts and floods the house?  There are always expenses above and beyond mortgage.  

My first house was negative cash flow (not by choice).  I didn't mind it so much when all I had to do was write a check for -$100 each month.  My appreciation was way more than that.  But when the property was transitioning renters, or I had to pay for repairs, I HATED that property.

Interest rates are rising, which is putting the squeeze on finding profitable rentals.  So I think there is an argument for getting those properties in your portfolio while the getting is good.

In general, I view leverage as a good thing. The more leverage I have (aka "using other peoples money") the greater the ROI on my investments. But there are caveats...

First, I want fixed rate, non-ballooning mortgages.  I think a lot of folks got in trouble back in '08 because they had variable rates and balloons.  When credit dried up and property values decreased, those people were suddenly underwater and on their way to insolvency.  But if you are fixed rate, then the cost of the mortgage is the same no matter what happens in the real-estate or loan market.

The second half of the equation is my renter's ability to continue to pay the rent.  I want rentals in markets where the economy is strong, and very likely to continue to be strong.  So market fundamentals are important.  I want to be sure my renters aren't going to lose their jobs and will be able to continue to pay the rent.

If these two conditions are met, I don't really care how leveraged I am.  Actually that's not quite true.  If these conditions are met, I want to be as leveraged as possible!  :)

(But, do make sure you have enough cash to make it through a soft spot.  Can you handle renters moving out of all of your properties simultaneously, taking 3 months to get new renters in, and having to do normal rehabs?)

I'm such a fan of leverage, that it didn't even occur to me that someone might put 100% cash down on a property.  :)

I recently exterior painted a couple of my SF rentals.  I actually had the painters coordinate with the renters to determine what days would be most convenient to the renters.

I forget all the reasons why this is not usually considered a good idea. Tom Wheelright (rich dad advisor, cpa) has quite a bit to say about using 401k/IRA for real-estate investing.

A few issues I remember... First, thereis a tax disadvantage. Because the home is in your IRA, the mortgage interest isn't deductable. Second, lenders usually want you to have substantial reserves when investing in real estate. Can you afford a few months of no renter in place? Can you afford to fix the roof, the A/C, etc? So the lender will ask that you hold back quite a bit. This means you might only be able to use about 1/2 of the cash in your IRA. And that reserve you're holding in your IRA has to be cash, ie, not invested in other potentially risky investments.