All Forum Posts by: Jerel Ehlert

I'm only licensed in TX, so I can't talk about any other state's laws. But ask yourself what you would be trying to accomplish by passively investing through an LLC? What liability are you trying to limit?

If you pool money from others in an LLC, that may become a security under SEC regs.

As a lender, not an operator, your liability is almost none in most cases.  Certainly not more than Bank of America would for what happens in a property, for example. It is when the lender starts controlling the project do they start becoming liable for what happens.

Just be aware that different states have different ways to regulate lending. Your biggest concern should be to avoid making consumer loans.

If they classified the property as homestead, TX laws cap it at 80% of the "value" (various definitions).

Congratulations on finishing your residency.  My cousin went for his cardio surgical specialty and something like 7 years of residency.

For what you described, turnkey can work. Any form of investment RE ownership will help offset passive income. Max out any employer retirement plan if you work for a system. If you started your own practice, get a self-directed retirement plan and max that out. There are several providers around or contact me if you need a referral (I don't get anything for it). This will help reduce your taxable earned income, but there are legal methods to use IRA money to invest in RE. If you haven't seen a tax bill at your higher income bracket, you might want to get a colleague prescribe something first (joking).

The warning: Any kind of "hands-off" approach will require you to diligently monitor the operator. That means every month, but not less than once a quarter, you must set aside the time to review your agent's activities and assess what is going on, then determine if all is well or if you need to get involved.  For busy professionals it is easy to say you will get to it later, but later becomes next year. Before you know it, your investment is lost when a minor correction could have changed its course.

To effectively monitor your investment, you must understand it.  Doesn't mean you must be the expert.  You should be able to rely on others, but you should be able to recognize the difference between when the transaction is going off the rails v. when it is experiencing a systemic correction affecting all assets in the same class.

Finally, let me re-emphasize: you do not need to be the expert.  MDs and JDs suffer from the same condition: we tend to be the one everyone looks to for guidance.  After long enough time, that mindset spills over into areas we have not been trained to lead.  Sure, lots of times we will be in the top percentile when it comes to intelligence, but that doesn't mean we always know better outside our bailiwick. 

Besides turnkey, you can create a "turnkey" system.  Buy new-ish properties (wholesale, not retail) with conventional financing and hire a trusted property management company. That is a buy/hold method.  If you can find TRUSTED flippers, you can "partner" with them to convert small capital into larger capital capacity.  This also kills your tax bill, btw.

Until you get over the $50K threshold, there are few "hands off" investments in REI. Once there, syndications become an option. I understand that's not ideal, but it is passive. Another is to work with a legit hard money lender or REI debt fund. Both are backed by real property, decent returns (possibly) without driving up your tax bill too much, and leverages you into bigger/more SFR. Or if you do it long enough, builds your down payment for commercial (without needing to syndicate the deal) when you are ready.

Good luck.

I don't think you need to be represented by an attorney to buy property.  

Some states use a title company/escrow agent system, some states mandate using an attorney for escrow.  That may be what you are running into.

@Ashley Atwood I started in 2000 in real estate investing before law school, and worked with investors since 2015.  Prepping owner finance docs can be straight forward when done right. Even if you don't plan on doing very many, it pays to comply with T-S.A.F.E. and Dodd-Frank from the first transaction.  Use an RMLO to get a credit app b/c they will supply some of your required disclosures.  If your interest rate is over a published number (by CFPB), it is a "high cost loan" and appraisal/inspection become mandatory (typically paid for by buyer).  Close at a title company.  Use a promissory note and deed of trust.  If there is an underlying loan, these are wraparound versions, plus the notices/disclosures.  Use a loan servicer to help with your annual requirements.

Sub-2 is mostly an acquisition tool - a means to get properties.  Works mostly when the seller's mortgage is less than rents, little equity, and you have the capital to come out of pocket to reinstate/rehab.  Seller will eventually want loan out of their name and has potential of investor abuse.

Wrap (or owner financing) is more a tool to dispose of property when there's an underlying mortgage. Potential for investor abuse.  Typically paired with Sub-2. Can be used to acquire property, but unusual in residential, more common in land/new construction/commercial deals.

For either, must be diligent about accounting.

Business with family is always tricky, but I'll leave that up to you.

Sub-2 sellers almost always get around to wanting to buy again, and start making trouble with the lender. Be prepared to eventually paying off the loan - either through sell or refi.

If a property isn't selling, it is either price or condition.

Texas has a higher tax rate for real estate compared to other states, but it does not have a state income tax.  When looking at CF models, you need to compare one investment opportunity to other opportunities within the state/sub-market because all of them will have to account for the state's real estate tax rate.  

To compare "deals" in different markets, you have to account for the entirety of the transaction, not just a single metric (RE tax rate). For instance, few if any TX markets have rent controls unlike several markets on east and west coasts. TX does not have an annual filing fee for LLC, unlike CA. And like I mentioned above, TX has no state income tax like lots of other states.

If you want to compare to any deal in the country without using the same constellation of factors, use IRR.

Language is going to get you killed, metaphorically speaking.  If you are going to syndicate and hold other peoples' asset, you mush learn to speak with precision about fundamental concepts.

"Entities" (GP, LP, LLC, Corporation) = Found under the STATE Texas Business Organizations Code ("TBOC").

Tax election = Found under the FEDERAL Internal Revenue Code; S-corp or C-corp 

An LLC can be taxed as an s-corp, c-corp, or disregarded entity for tax purposes. The tax pros can be more specific, but there are limits to qualify for s-corp election.

Legal benefits of limited liability companies for holding real estate are different than the tax benefits of s-corp election.  And the benefits you are seeking may be differently structured if you are talking about the operator entity (the GP or manager-member) or the passive investor entity (the LPs or members).

Precision is your friend.

Houston is a great place to invest.  Plenty of deals and dealflow.  Lots of local resources.