All Forum Posts by: Jonathan Twombly

 You should be able to use a guarantor.

At least in New York, and I suspect elsewhere as well, forming the actual LLC just involves filling out a form and sending it in with your payment. In some places, there are publication requirements, and it's usually a good idea to hire a service for that.

The issue of lawyers comes in where the state requires you to have an LLC agreement even for a single-member LLC. Then you need to hire a lawyer or pull a file on Legal Zoom or some other similar site.

I ran the numbers on this, and owning is definitely better than renting in the long run.  The primary reason for this fact is that rents rise with inflation, so your out of pocket costs rise over time.  In contrast, while property taxes rise over time, unless you are dumb and get a variable-rate mortgage, your largest ownership cost - your mortgage - is fixed, so your out of pocket expense is more stable.

Of course, then you add in the appreciation you get on the property itself, unless you live in an area with declining population, which isn't the greatest idea either for you economically.

Now, let's be clear that owning a house is not an investment in the sense that owning rental property is.  In most cases, when you figure in all the carrying costs of ownership - taxes, mortgage interest, insurance, maintenance, etc. - these costs usually are larger than your appreciation.  People think they are making money because they compare the sale price to the purchase price and leave it at that.

So, owning a home in most cases is a money-losing proposition.

HOWEVER, it is far LESS of a money-losing proposition than renting.  It is far better for your overall longterm financial health to own your own housing than to rent it from someone else.

I have not house-hacked, so take this with a grain of salt, but I am thinking about it from the financial perspective, and it's analogous to owning a two- or three-family house, where you live in one of the units and rent out the others.  The idea is that the rents on the other units cover the cost of the whole property.

The way this would work is that you need an apartment with three or four bedrooms.  You rent the apartment and then look for roommates for the other three bedrooms.  You rent them out at a cost that overall pays for the entire apartment, or even makes a profit for you.

In New York, the opportunity and the problem are the same.  Rents are super-high, so the chance to rent a private room for less than what your tenant would pay for their own studio or 1BR apartment would be attractive to potential tenants.

However, you must figure out a way to qualify to rent the apartment yourself.  In New York, you typically need to show an annual income of 80 times the monthly rent to qualify for an apartment.  This may be prohibitive for an apartment big enough to make money with house-hacking here, unless you go to the way-outer boros.  (Just be sure you are near public transportation or this will be very tough to pull off.)

The thing to be careful about in New York is that the law here is very, very pro-tenant.  If you are subletting the apartment to others, then you become their landlord.  And this means that, if they don't pay the rent, you will have to sue them for eviction, and this is very difficult to achieve in New York.  Courts are extremely friendly to tenants, give them numerous extensions, and bend over backwards to help them, so it's not uncommon to hear stories of tenants living for 6-12 months in an apartment without paying rent.   You would still have to come up with the rent to pay your landlord.

So, if you were to do this here, you would need to be very strategic.  You would need to find an apartment in an area attractive to young people, where the combined rent for 2 bedrooms individually could cover the rent for an entire 3 BR apartment.  You would also have to be very strict about who you rent to, and make sure that they have sufficient income or resources to pay the rent, so you don't get stuck with a bad tenant situation.

I see people making this analytical error all the time on this site: asking what they should pay for an asset "in this market," as if the only thing that matters is buying an asset, regardless of where we are in the cycle or whether they will make money at that price.

Real estate does NOT always appreciate, not even in New York.  There was a major crash here in the 1980s and during the Great Recession, prices went down.  (I know this from experience.  In 2008, I purchased a 2BR/1Ba apartment to live in.  Six months later, I could have purchased a 3BR/2Ba in the same building for $60,000 less than I paid for mine.)

You must learn the market and do fundamental analysis.  Is the property actually in the path of gentrification? Is it near mass transit?  Is it putting positive cash flow in your pocket after all expenses? Can you raise the rents above what they are now?  How much capital must you put into the property to make it rentable and achieve the rents you want?  Given that this is New York, are you even allowed to raise the rents, or is the property rent-controlled

If you can't answer these questions, you are getting ahead of yourself and shouldn't be buying the property.

Here in New York, a lot of developers bid on rent controlled apartments because they think that if they can de-control the apartments, they will make a lot of money.  There is a legal way to do it, but many people cut corners and do it improperly.  I had coffee yesterday with a friend who manages the portfolio of a wealth family that recently had an exit of $700 million and is looking to buy more assets with the money.  He said they have been seeing a lot of assets that were de-controlled but lack the proper documentation of how it was done.  The operators had cut corners.  Because they did not want to buy lawsuits, they passed on these assets.  The last thing they want is to buy an asset based on the assumption that they will get market rents, only to have the city come in and re-control the rents at the old below-market prices, because the de-control was done improperly the first time around

Just one piece of advice.  No matter what story you can tell yourself about future appreciation, hidden value, path of progress, gentrification, hot markets, hipsters moving into the neighborhood, or whatever other non-scientific, non-data-driven "evidence" in favor of why you should buy this non-cash flowing property now because the future prospects are great, DON'T DO IT.

Only buy for cash flow.  Don't buy property that you have to finance out of pocket because of some future return you tell yourself you're going to get that's going to make it all worthwhile.

Cash is King.

There are some people who say it's always a good time to buy.  There are others who say it's a good time to buy when it is easy to find money for deals, as it is right now.

Then, there are some people who look at the historically low cap rates and historically high interest in real estate investing and remember Warren Buffett's admonition to "be fearful when others are greedy."

I won't say don't buy now.  But I will say that you need to be extra, extra careful in your analysis right now.  There are two distinct risks:  (1) a correction in the real estate market; and (2) the risk of a recession - with us pushing past full employment, this looks ever more likely now, hence the Wall Street selloff.

The recession risk is very important. If you pay full market price for an asset at the top of the market, you are taking on an enormous debt service obligation even if you are using relatively conservative leverage of, say, 75% LTV. If there is a real estate correction, but your property is full and people are paying rent, then you can just ride out the rise in cap rates and wait for better times to sell or refinance.

But if there is a recession, and 5% of the people on your property stop paying you because they have lost jobs, and renters start doubling up with friends and family rather than rent apartments because they are out of work, then you may not make your debt service.

So you need to be extra careful right now that any property you buy can pass a stress test of a spike in vacancy or economic vacancy.

If you have an LP in your deal, you are talking about a syndication.  Not only must you have a lawyer do the contract, you must have an experienced securities lawyer do this for you.  This is not something you can, or should, attempt to do yourself.  I practiced law for 12 years, and I do not do these agreements myself, nor would I want to.  It's serious business, with serious consequences if you mess it up.

 Joshua, you're going to need a loan agreement with your friend, which you will need a lawyer to draft.  I suggest finding a lawyer who is very experienced with private loans like this.  He or she will know the standard legal and business terms for such a loan, and that will take it out of the realm of friend-to-friend negotiations.  Unfortunately, I don't know anyone to recommend, but I am sure someone else in the community does.