All Forum Posts by: Igor Messano

How is the zoning for your home and would the basement apartment be compliant with your local laws? A big factor on whether it is worth investing in a basement unit is what it does to the total value of the home. Getting 10-12% return on your investment isn't very good if in 5 years when you move out you essentially lose the value you invested. For you to have a real return on your investment, the investment it's self needs to hold value at resale.

As far as the 401k I would advise you not to take the money out. It might seem attractive short term but the tax hit is rarely worth the return you'll get. Don't forget that you get a return on the 401k money as well. If the answer to the scenario above is that A) you are legally allowed to have a basement unit per zoning and B) At resale you can get most of the money you spent building back, then you might consider a 401k loan as suggested above. You can take a loan to build, and then once it is complete and rented, you can try and refinance the home to get your investment money out. Then pay the 401k back and you now have the basement financed through a low % mortgage loan.

I've done something similar but purchasing a property with a 401k loan, refinancing, and then paying the 401k loan back in full and essentially owning a property with $0 down.

I 100% agree with @Anthony Hurlburt that your hands are tied until the end of the lease and that it will be an excellent period for you to see what kind of tenants they are. Income and background screening only gets us to a certain level of comfort around the quality of a tenant. There are plenty of tenants with clean records and decent income that will destroy your unit and not pay on time. There are also tenants that do not make 3X monthly rent in income but always seem to pay on time and take care of the unit.

I would do a cheap background check and confirm employment but keeping in mind that if they have been good tenants then you should be more flexible than you would be with a brand new person that is an "unknown".

 I would be skeptical of this number and if you can, have someone else more experienced look at your assumptions. You could even post it here for some feedback. I can almost guarantee that there is no way you are truly cash flowing 300-400 per month while living on one of the units. A 30 year mortgage on 240k (assuming 20% down with your other equity) with an interest rate of 5% come out to a monthly payment of $1288. This is not considering any property taxes or insurance. Then on top of that you calculate potential vacancies, maintenance, and capital expenditures, I doubt you would be cash flowing at all.

This does not mean this is a bad investment as you have to consider the 4th unit's potential for rent income (and potential for appreciation) but I would just make sure you are calculating your expenses correctly. You might not actually have to spend anything on vacancies or maintenance for a while but then you have an eviction and a heater breaks and suddenly the profit you thought you had is gone and you are paying out of pocket.

I agree that for many people an umbrella policy is sufficient to cover them against liability related to investment properties, but LLC's do provide a level of coverage that a lot of people are often glad they have when something goes wrong. This is something an attorney can tell an individual after looking at their local laws and particular circumstance.

I currently do not use an LLC and rely on my umbrella insurance. However, one thing to consider going forward is to meet with your CPA and do some tax planning. As part of the new tax plan effective this year, pass through entities (i.e., LLC's) receive a 20% deduction on their taxable income simply for being a pass through entity. This can mean huge tax savings depending on the level of rental income you have. If the additional savings outweighs the cost of operating an LLC, why wouldn't you do it? Just food for thought.

I agree with @Marcia Maynard. While the law is on your side to keep the GF on the lease if you want to, why go through the trouble if you can keep the BF as a good standing tenant. You goal as a landlord should always be how to maximize your returns while staying within the confines of the law. Making your tenants happy is usually one of the best ways to do that.

All this is said with the assumption that the BF qualifies to rent the property on his own. If he does not, then you should keep the GF on the lease until he can find a replacement co-tenant or a co-signer just as he would if he was leasing on his own.

I've never heard of a deposit specific to utilities. However, if your tenants do not pay the utilities and you have to pay for it, in the case of water, then you can hold the tenants normal deposit for that amount. So I don't see the point of a utility specific deposit since the regular rental deposit serves the same purpose.

House hacking is a great way to start your investing journey and Manayunk can be a great place to own property as long as you are not over paying. Living in Manayunk with more than half your mortgage being covered by the tenant is great but if you are truly looking at this as something you will eventually move out from and keep as an investment I would take a closer took at your numbers and assumptions. Your total gross rent is $2700 and your PITI is $2150. Unless you are buying at a huge discount that you expect to refi in 6 months and lose PMI you aren't going to get rid of it for a while so keep it in your calculation.

Even if you get rid of PMI, let's say $300, your PITI will be 1850 (assuming the interest rate doesn't go up) which gives you a $900 surplus on the income side. Nowhere here have you calculated maintenance for the property, potential vacancies, the cost to turn over a unit (painting, flooring, appliances, etc.), or any of the many costs of owning a rental. An investment might not have a major bill for several months or a year but when it finally does it might wipe any profit you might have thought you had. Just make sure you are analyzing this with realistic numbers if you are thinking investment. Newly rehab properties aren't immune to maintenance.

This is hard to answer without knowing the area. Purchase price is generally at least 75-80% of ARV minus the repair costs. That leaves room for profit and any unforeseen expenses. ROI, CoC, Cap Rate, etc. all depend on the area and type of REI. Higher end rentals for example have a lower ROI but usually less work on the tenant management side. A C class neighborhood generally will have a much higher ROI and CoC minimum to cover the additional risk and management headaches.

I am late to this thread and way too many replies for me to read all of them. It seems most of them are arguing hypotheticals about the legality of renting, denying, or evicting an illegal immigrant. I want to give a slightly different perspective that I hope hasn't been given yet.

I am an immigrant to the US, now a citizen, but I lived in and still live close to a part of Philadelphia that has a very large population of illegal immigrants, many of which are friends of friends, etc. As a real estate investor I can tell that if I was actively buying properties in these immigrant pockets I would ABSOLUTELY rent to an illegal immigrant as long as they qualified to my criteria. The criteria will need to be slightly different due to their legal situation but with proper screening an illegal immigrant can be an excellent tenant.

Minimal Criteria:

1) Steady employment and income, and not brand new to the country

2) Sufficient security deposits. I do 2 deposits and first months rent.

Pros:

1) Most illegal immigrants make much more money than you realize (usually not taxed) and if you are strict on rent payments and late fees they will always make paying your rent a priority over other bills.

2) They stay in homes for extended periods of time as long as they aren't brand new to the area and still getting established or doing some kind of house sharing arrangement. If you are a decent responsive landlord they will love you!

3) Immigrants will often spend their own money to update things in your home since they can't just go buy their own. They willingly spend the money to make their home nicer despite knowing it isn't theirs long term. You should make it very clear not just in the lease but in person that you are ok if they want to do some updates or whatever but that everything needs to go through you before it is done. I've seen immigrants update full kitchens and bathrooms because their landlord offered to pay for half of the materials.

4) If you have a property that is kept in good working order, you are a fair landlord to work with, you will never have a vacancy. Illegal immigrants have a harder time renting as you can see from this thread and when they find a decent home with a decent landlord they latch on to it. They will be referring you the next tenant prior to moving out because they know someone in the community who is looking for a decent place. I still have immigrant tenants that call me 2-3 times per year asking if I have any vacancies because they have family or friends looking for a home with a decent landlord.

5) You wont have to evict. An immigrant will borrow money, move out, or whatever they need to do to keep you from using the legal system to take action. The last thing an illegal immigrant wants is anyone related to a court or law enforcement knocking on their door for anything. Immigrants are willing to stay here illegal despite the **** situation it is for one reason... It is generally much safer and financially stable than their country. The last thing they want is something as silly as not paying rent causing them to get deported. Now... getting evicted doesn't result in deportation but illegal immigrants have a natural aversion to anything with law enforcement action. In the rare case that it comes to eviction, you can easily negotiate an easier arrangement like cash for keys or just walk away kind of deal.

There are obviously some cons but I think those are more obvious and this post is long enough. 

Good luck,

Igor

The easiest thing to do for starters is to talk to your neighbor about the issue if you have everything confirmed. I would express the concerns not only around the liability, but unless you are willing and able to sell a foot of the property to him, you can potentially have major issues when trying to sell the property. What buyer is going to want to inherent an issue without some kind on concession. Best case scenario if the figure out a way to shave off a part of the deck.

Worst case scenario the neighbor tells you off and at that point you should get some legal advice and exercise what ever right you do have. If they did not pull permits this can be pretty painless in the right jurisdiction.