All Forum Posts by: James Mc Ree

Car repos have happened for as long as there were cars.  2007-09 Saw plenty of them too.

The 07-08 crash was especially devastating because it was multiple vectors that were "super safe" and "never" really could align in an unfavorable way:

1. Mortgages are totally safe - the last thing a borrower wouldn't pay.  (Unless they were effectively fraudulent and property values dropped significantly.)

2. Mortgage funds are made up of completely safe investments - AAA rating.  Investors bought them like crazy, enabling more of #1.

3. Banks max out their lending ratios to generate fees.

4. Investors in #2 and #3 wanted some protection, so financial companies engaged insurance companies in these "can't fail" investments creating a huge, invisible liability some of the major insurance companies actually couldn't cover.

All of this is on top of massive real estate price inflation.  Then, the first folks who never really could afford their mortgages are exposed through foreclosures.  The flood of sudden sales, short sales and foreclosures puts a downward pressure on prices that triggers increasing sales and foreclosures.  Borrowers can't afford the payments and actually can't afford to sell because the debt exceeds equity.  They walk away, yielding even more foreclosures.  (Greatly, oversimplified - I know.)

5. Mortgages fail --> mortgage funds drop significantly --> banks must increase reserves without funds coming in --> insurance company calls for coverage result in bond and insurance defaults impacting their re-insurance.  Bankruptcies emerge, starting with Lehman and multiple other major financial companies about to fail.  In parallel, the auto industry collapsed too.  The U.S. economic system was literally on the brink of total collapse, which led to the bailouts.

I don't see anything anywhere close to this today.  Prices are up, but still affordable in most locations.  Mortgage regulations are still generally intact.  The crowd funding market has emerged which effectively replicates what was happening back then, but on a much smaller scale and risks are better understood.

A recession will pressure all the normal financial aspects recessions always effect.  In this one, I think trade-based investments might be most at risk.  Storage-type businesses for logistics and warehouses (not self-storage) were being marketed like crazy to hold all those Chinese products that are now being constrained.  Will we need so much?  Will those prices hold up?  There will probably be some softness, but a localized impact; not Great Recession II.

I agree with @Jacob Sampson.  Take your time and look at a lot of properties.  It makes no financial sense to buy the best deal available in the next month or so if you think you are going to lose money on in over the next several years.  Watch for properties in late Fall and the Winter if you don't see something you like in the near term.  Sellers sometimes get panicky and lower their asking prices and will take lower offers to avoid carrying the property over the Winter.

Consider dropping some letters off in your target market asking if someone is looking to sell before the end of the year.  You can use that over-Winter fear as part of your sales pitch (Winter heating costs, insurance, taxes).  You won't get much of a response rate; maybe none, but you only need 1 good one.  An off-market deal can be the best deal of all.

You may incur transfer tax and related closing costs to sell your properties to your LLC. I recommend modelling your approach both ways over your intended holding period to see how each way works out, assuming you haven't already done that.

Hi Brent!  Congrats on your almost-first-purchase.

Most folks think establishing an LLC for 1 property is overkill. There is nothing wrong with what you are proposing and it should work fine, but you will have an LLC to manage that is a separate entity from yourself. You will need to maintain separate books, separate bank accounts, prepare separate tax returns, etc; just like you are running a separate business. Failure to do so can leave you with no legal protection whatsoever.

Your LLC probably won't have much income on just 1 property. If you make $500/month profit, you will show $6,000 for the year. That might not be enough to buy another property. Fannie Mae & Freddie Mac are quasi-government entities that provide a person with up to 10 lower rate residential mortgages. An LLC does not qualify for these. You cannot easily transfer them into an LLC without triggering the lender's due on sale clause, though I read recently that may be changing. If this is the case for yourself, you will have #2 through N in your name and #1 in the LLC's name. There is nothing wrong with that either, but just something to think about regarding getting the value of your LLC.

It looks like it will be a single entity LLC which with just be a pass through to yourself. The IRS will just ignore it and consider it part of you for filing purposes.

Consider why you want an LLC. If for legal protection, consider liability insurance first. My insurance company quoted me a $1M umbrella policy over 4 properties for about $400/yr. Insurance companies can quote this to a common owner, but you and your LLC are not "common" owners. They would be separate owners.

Good luck!

I set my due date = late date = 1st of the month so there is no grace period.  This made life easier for me as everyone knows when the 1st is coming.  It works fine to be any date if the 1st of the month doesn't work.

Setting a trailing late date often gets interpreted as the late date is the real due date, as mentioned above.  Don't be surprised to hear your tenants say they were only a day late when they paid on the 6th and your late fee started the 5th.

It depends on your market and the condition of the property.  A high-end market may require some of these upgrades.  A marketing plan for a "newly renovated home" may also require them.  One-off upgrades, like a high end countertop in a ho-hum kitchen probably won't do anything.  Low-to-mid market probably won't see much of a benefit in rent.  You probably will see a benefit in shorter vacancy time if your property has a great "Wow!" effect.

In general, tenants don't pay attention to high-efficiency anything.  They want heat, hot water, air conditioning, etc.  They expect it to be there and the air is warm/cold whether it is efficient or not.

I don't have any market data to share with you, unfortunately.  It seems like it would be difficult to get such data as finding identical properties and tenant prospects at the same time, situation, etc.

Check your loan docs.  They will spell out the owner-occupant requirement.

Why are you refinancing out?  What are the lenders telling you who aren't offering what you want?

It looks like you have a 15% loan and you are looking to refinance to a 65% LTV to invest more money in real estate. Your new loan is going to require you to bring money to the table which will make less money available for your investing, at least in the short term. A Fannie/Freddie mortgage will likely give you the best terms.

Lender security will be a consideration. A dollar-for-dollar match would imply you borrow $50k and add your own $50k and put $100k into a property. Is the lender a co-owner with you or have a lien on the property? That will lower your rate, versus it being unsecured. The as-is and ARV ratios are also important to assess lender risk and will drive your rate. Are you offering a personal guarantee such that the lender can sue for your personal assets if foreclosing on the property does not cover the debt? That will lower the rate. "No" to these questions raises your rate.

I am sure your intent is to pay back your lender family member or friend.  Unfortunately, things happen.  Make sure you don't jeopardize a relationship if "things happen."  Go into this with your retiree lender or friend knowing there is risk involved, as compared to "Hey, it's me - you know I'm good for it."  Be sure to give your lender awareness and legal security in case you are run over by @Account Closed's vegetable truck.  ;-)

You could offer a 20Y or 30Y regular amortization at 10%, but with a 10Y term.  It would balloon at 10Y.  The lender advantage is some principle is paid back each month which lowers risk.  That might be preferable to a 10Y interest only loan in which all principle is at risk for 10 years.  You would have a payment of $438.79/month.  Just a thought.

Question on this theme: Does it make sense to turn central air off or raise the thermostat significantly when going away, such as for a week?  I get that the start/stop within 8 hours or so isn't efficient, but there seems like there is a break-even point at some duration.  I am thinking that is a 2-3 days of 90-degree temps.  Naturally, it depends on the temps.