All Forum Posts by: George Pauley

Separate LLC for sure.

I would say that the LLC is for legal liability protection, and has very little to do with taxes.  

You'll want to talk to a qualified tax consultant, with REI experience, about the tax situation.  That said, depreciation will almost always be the most important tax advantage your real estate provides.  Basically you get to take 1/27th of the purchase value of the home off of your income each year.  This usually puts you at a zero or maybe even negative gain for the year (in the eyes of the IRS), which means no tax burden.  There are all sorts of caveats to what I just said so, again, talk to a tax consultant. 

After you understand depreciation, particularly what happens when you sell the property, learn about 1031 exchanges.

Good luck!

There are always expenses you didn't (and perhaps couldn't) foresee.  

The heuristic I've been using for some time now is to consider the big items that I know about.  Mortgage, tax, insurance, prop mgt., etc.  Then assume 20% of the rent value will get consumed by repairs, maintenance and vacancies.  I'm pretty sure many will say that 20% number is too high, but... I have found it to be pretty accurate.  :)

The above calculation is for determining whether a property will cash flow, and whether I should buy it, or not.  But in terms of actually maintaining the property you need to have some cash laying around to get you over the rough spots:  Thieves steal the AC in the middle of the night, tenant destroys carpet and then moves out, etc.  I like to keep 6 months operating expenses in cash to handle this.  This number likely IS a bit on the high side.

I think "analysis paralysis" is the number one hurdle that most beginning investors have (fail) to get over.  Real Estate is very expensive compared to the typical costs most people deal with in their lives.  That makes it scary.

And it is tricky trying to give advice about this.  I mean, I don't want to encourage you to do something stupid!  ;)  At the same time, I do want to encourage you to trust in your own common sense.  I can (and I think many others here can), from personal experience, pretty much guarantee you that your first investment will have all sorts of negatives that you didn't know about.  Accept that.  And then move forward anyway.  You will learn a lot.  And your 2nd investment will be better, but you'll still learn ($$$) even more, making your 3rd investment better still, etc.  I like to think of this not inexpensive process as a different way of paying tuition for the education I need.  ;)

One nice thing about real estate is that it actually is pretty versatile.  Maybe you buy a house to flip, but can't find a buyer, so you turn it into a rental.  Real Estate has intrinsic value, and there is (almost) always away you can turn it into profit.  So you have more flexibility on an investment than you likely realize.

Learn as much as you can.  Seek advice.  Make the best decision you can.  And then pull the trigger.

Originally posted by @Anthony Wick:

I’d like to see some further math on your business model. If you forego that extra $50 per month, how much is that per year, over 2-10 years?

Over 2 years that's $1200. 

Now compare that to the tenant moving out.  I find on average (19 rentals built up over 12 years) that it takes me about 1 month to get a new tenant in place.  This includes the time it takes to get the unit back up into rent-ready shape.  But more importantly it costs me about 2 months lost rent, between the mortgage that I suddenly have to pay myself, repair costs, utilities, advertising etc.  So if I'm renting for $800 a month, it will cost me about $1600 to get the new renter in there.  If the old renter moved out because I raised the rent $50, then it will take me 32 months to make that $1600 back.  

I'm not saying never raise the rent.  If we think about rents in a market as being a bell curve distribution, I'm saying you can avoid expensive turn over by keeping your rent priced on low side of the median value, but probably still within the first standard deviation.

@Andrew Shelton. Your question about using personal residential equity to make investments is a common one in real estate. You will find plenty of people who argue strongly for both sides. I think mathematically it makes sense to use the equity. It's simple arbitrage. If I can borrow at 5% to make 12% on an investment, I should borrow as much as I can get my hands on. Emotionally the question is much more complex. We know in the back of our minds that there is risk associated with these investments. And I'm pretty conservative in my approach so I'm inclined to leave my personal residence alone. In addition my wife is pretty against taking out a second or a HELOC and... happy wife, happy life! ;)

Trying to find middle ground I think whether to HELOC or not is probably a question of timing.  It can be very hard for people to get into that first investment property.  They have to scrimp and save and do without, and build up credit, etc.  If those people are young (and presumably have time to weather an investment going bad), and are disciplined, then I'd say yes, go ahead and HELOC to get your foot in the investment door.  But after you have an investment or two, and have some income comining in, the next investment becomes a bit easier, and the next, and so on.  At this point, I think you need to pay off your HELOC and your mortgage and start solidifying your gains.

I heard Kiyosaki recently say that he had gotten to a point in his life that low, but stable, ROI was much more important to him than getting out there and maximizing his profit on every deal. I'm trying to describe that inflection point.

Also, one of the problems with this approach is that just about everyone's first investment ends up being a lemon.  We learn from them and move on.  But, do I really want to tell people to mortgage their home to go buy that lemon?

In the end, the HELOC is a personal decision.

I believe that rental turn overs are the most expensive, profit eating, things that can happen to an investor.  As such, even before Covid, my viewpoint has always been to maintain rents unless they are significantly under market.  And then, only raise them to a point that my renters would still be hard pressed to find a better deal.  "Best house on the block, for the least rent" is my mantra.  Rentals are a long term proposition.  It's not going to affect my bottom line that much if I get the extra $25-50 a month this year or have to wait until next year.  

Anyone know why my posts are always double spaced?  :)

You are putting away $5k a month.  If you buy the new home, costing you an extra $700 a month, you'll only be putting away $4.3k a month.  Most people would be quite happy putting away $4.3k a month.  So point one for buying the new home.  :)

You also have $50k in the bank and need $24k of that to get into the new home.  That leaves you $26k which is a comfortable cash reserve.  Point two for buying the new home.

There is a concept of buying new investment properties to generate the income you need to buy your doo-dads (like the new home).  You need $700 a month.  You can get into properties in the midwest that will net you ~$250 a month for about $25k in expenses.  You would need 3 of these and about $75k.  You could either buy the investment properties first and then buy the home, or vice verse.  Since your condo isn't going to be available forever, and it should only take you about 1.5 years to buy enough investment properties to cover the $700 a month, (at your current savings rate), I would lean towards point 3 for buying the new home.

You did mention building equity in the new home that you intend to live in.  I really discourage thinking about you personal residence as an asset.  You always need a place to live.  If you sell your home to pull the equity out, you will just need to use that money to buy a new place to live.  If you take a mortgage out against the equity then you are incurring (non-productive) debt.

Physics/CompSci here.

Let me posit an engineering response :)

According to labor statistics about 5% of the work force are engineers.  The median engineering salary is at about the 75th percentile of national salaries.  Thus we should expect engineers to have disposable cash to make real estate investments.  In addition, engineers have the backgrounds needed to understand the mathematics of real estate investing. (Something which probably is an obstacle to the rest of the population.)  It should not be surprising that all of this combines to cause engineers to comprise a substantial percentage of real estate investors.  Well over the 5% of the general population.  Which should make the real estate investment world appear to be overflowing with engineers.

I am a fan of turnkey.  It fits my busy lifestyle well.  However, you will pay a premium when going turnkey.  The turnkey provider wants to make money too!

On the surface it just like this particular deal isn't working.  That happens a LOT.  Most deals don't actually work out.  But there will be other deals.  Keep looking.  Tenacity is a virtue when looking for real estate deals.

On the other hand, there is something in the wording of your post that makes me think perhaps you really don't want to deal with the hassle finding new properties, getting quotes, calculating returns on successive properties until you find the one that works?  If so, that's OK.  The sweat equity approach isn't for everyone.  (Did I mention I'm a fan of turnkeys?) ;)

Robert Kiyosaki often talks about the difference between a job and investing.  With a job, you work for your money.  Investing is, should be, much more passive.  Pretty much check your bank statement each month to see how much you made.  (Gross oversimplification!)  A lot of people here seem (to me at least) to have turned real estate into a job.

If you'd rather spend your energy, say perhaps working a job that gives you $25k to invest in turnkey properties, that is perfectly fine and even reasonable.

If you do go turnkey, be sure to check the company and the deal out thoroughly.  Start a new thread and ask other BPer's what their experience with the turnkey company has been like.

Good Luck!