All Forum Posts by: James Mc Ree

Changing ownership to an LLC is a sale of the property. You will incur most of the impacts of the sale (transfer taxes, cap gains, mortgage due on sale clause, etc). You will lose your low cost government-subsidized residential mortgage if you have one and will need to find a commercial mortgage if you need financing.

The most significant benefit I see in the tax law for this specific situation is the 20% deduction to pass through income.  In my case of only 4 SFRs, that amounts to a savings of less than $1,000 per year in actual taxes paid, but a larger real estate investor would do much better.  It would take me a while to recoup the costs assuming the tax law doesn't change again.

You can't assume property lines are accurately drawn in a government database.  In PA, the markers in the ground supercede what is on paper.  You don't have to survey your land, but it might be worthwhile to be sure it is "your" favorite spot if it is near a border.

Liability is all about what goes wrong on your land and depends only in part on the recreational use you have in mind.  You might have minimal risk for yourself if you just plan to use it for your own personal walking and running.  Bring a friend who falls into a sinkhole you didn't know you had - liability!  You didn't know the kids next door rode their ATVs through your property - liability!  It's a shame a tree fell on your friends' camping tent - liability!  OK, enough downers to end the year.

Liability insurance doesn't make those risks go away, but does provide you some financial protection.  There is always the separate question of can a plaintiff win a case.  You will be protected if they do.  I recommend getting liability insurance if you are at all concerned. It should be cheap for undeveloped land. 

You could reduce your 401k contribution to the 5% match level and shift the remainder to a traditional or Roth IRA contribution. That would give you the same deduction (traditional) or you pay tax but have tax free earnings (Roth). You would also be able to invest in the same type of investment products if that is something you want to do. Potentially the most significant advantage is you can access your IRA funds through a self-directed IRA or the principle can be withdrawn after a period of time without penalty. You can't do that with a 401k.

I recently made this switch, but switched to Section 506 investing and real estate with the remainder funds.  I do have to pay tax on the shifted income, but then have full flexibility to invest as is best versus just what is in the plan.

Good luck!

Jim.

Check with the municipality to determine if they will grant a U&O for the property at its current elevation or will they require it to be raised.  Raising will be a significant cost impact or kill the deal for you if required.

Raising/razing could result in a higher value for you after considering flood insurance.  Flood insurance rates are based on your mitigation.  Insurance doesn't require mitigation, but you can pay dearly for it if you don't.  Your future buyers will be hit by that cost and impact their affordability.

Check the property's flood frequency. Recurring flooding at a property will make acquiring flood insurance more difficult and costly.  I believe upcoming changes to flood insurance disqualify properties with some number of flood incidents.  This may be another driver for raising/razing the property if it floods often.

Check the municipality's flood map for construction. Flood insurance is based on the "current" FEMA flood map. The preliminary FEMA flood map (2012) is believed to be more accurate and is more aggressive. Some municipalities are using it for their building codes.

Otherwise, flood plain properties are just like other properties.  Buyers qualify based on the property expense, including flood insurance.

A way of looking at this: Will the water and ice feature in the fridge get you higher rent?

Look at their credit before and after the family deaths, 401k withdrawals, tax problems and ch13.  If they were in good shape before and are back in good shape now, that could indicate bad luck clobbered them and they might otherwise be responsible.  Talk with them and listen to their story.

I have tenants now with this situation.  Woman had a messy divorce, medical issues and credit was clobbered as a result.  Man had medical issues that disabled him, took his income and it resulted in a bankruptcy.  They met and got engaged.  Talk about a double negative!  Their financial life appeared stable for about 18 months when I met them.  I talked with them about each of their stories.  Medical problems and a prior ex running off with all the family wealth were the root causes of their problems.  I concluded, "Not their fault.", accepted them with my other criteria and they've been great tenants for over a year now.

I wasn't desperate - just doing proper screening and keeping in mind that anyone can have a rough stretch in life, then recover.

It looks like you might have an obsessive, neurotic neighbor.  There isn't much you can do about that.  It may get worse with tenants.  If his behavior is harassing, call the police and they can issue a "do not contact" order (PA term).  It basically means you and the neighbor don't ever talk to each other.  You have to do your part for it to work.  That's the downside of that approach - you have a neighbor you never talk to.

As to pavers, check with your municipality regarding their stormwater ordinance and if they have a regulation on laying pavers as a structure.  You might have to mitigate stormwater runoff.  The municipality will have the only say in what you have to do.  Your neighbor can always sue you, but a letter from your municipality stating that you are in compliance with zoning is all you should need assuming your neighbor cannot point to specific damage as a result of your pavers.

Is there a problem with using a TX bank?

I wouldn't take that deal unless I was a highly motivated seller. You are asking the seller to take 33% less for a property in great condition. Is $149k overpriced in the market? A 90% LTV loan is a high LTV and you are offering a relatively low interest rate for the risk. You are also planning on coming back to them for more financing in 3 years, so they haven't really "sold" the property.

I don't see how the seller gets $35,200 interest over 3 years with a 7% interest only loan on $90,000.  I think the seller gets about half of that at $18,900 after 3 years.

There is nothing that you described that would be illegal that I see.

You need to have an applicant first.

You will have more flexibility if you do not mention in your ad that you accept Section 8 unless you specifically want Section 8 tenants.  If asked, you can tell the applicant you haven't decided yet and aren't familiar with the program, which seems true if you are a new landlord.  You can always decide not to participate in the program if you decide you don't like the application in front of you or go forward with it.  You will  need a new line once you accept a Section 8 tenant.

You can't decide not to participate in Section 8 if your ad welcomes Section 8 applicants.