All Forum Posts by: Jason Barnett

I am also interested in knowing about the risks. Anyone here have some hard won experience?

$1900 is fully rented. At 3 renters ($1425) I can cover PITI and water/trash expenses (roughly $1300 total). And yes the breaking even figures in about 2 months' worth of vacancies over the course of this upcoming year.

Not only that... but in some markets there is a long waiting list for section 8 (3+ years in Dayton ATM) so tenants don't want to lose their section 8 status. It's extra hassle, but it has benefits. The main problem that I have with section 8 is that you pretty much have to use their contract terms instead of your own.

BEWARE! Read the fine print on your prospective tenant's Section 8 voucher. I found out the hard way that the seller of my building had an "agreement on the side" where the tenant was supposed to pay $84 per month in addition to her subsidy. Section 8 specifically does not allow this! So instead of getting the $462 a month I thought I would get I'm only getting $378 / month.

If you buy a building with Section 8 tenants then you must assume their lease. At the end of the lease though you are pretty much free to do as you please.

Originally posted by "all cash":

My rule of thumb was that my SECURITY DEPOSIT (not cleaning deposit) was equal to about 130% of monthly rent. So if the rent is $3,000, the SECURITY DEPOSIT is $3900! Hope they don't stiff you!
all cash

In Ohio this would be a minor no-no. First of all if you have a real estate license you can not charge over 100% rent for the deposit. Second, if you ask for a deposit that is more than 100% then you will have to pay interest back to the tenant for the amount over the 100%.

YMMV

Before you go looking for serious financing you need a well written business plan. Show the ROI and cash flows for each year. Be cautiously optimistic with your estimates. If you don't have this first then you might end up meeting that big fish, but you don't know how to sell your dream to him!

So once you have the plan together.... you're looking for what is called an "Angel Investor". They usually have groups in local areas and it takes some real searching to find one. It's not a slam dunk, but it's the single best way to get serious financing for a solid deal.

Another resource you might try is your local Small Business Development Center (SBDC). These are retired veterans of industry that very well could be Angel Investors themselves. Even if they're not they might know someone.

In the end it's all about networking. You are just 6 degrees of seperation from a big fish. Talk to everyone you know! Make a sign and bring it with you when you sit down in a coffee shop! You never know where opportunity will stirke and you just need to keep looking. Good luck!

I did an FHA loan for a fourplex. Seller even gifted the down payment to me so I bought a $130,000 with about $500 out of pocket for closing / appraisal costs.

If you have a good FICO score then you can do what's called an 80/20. You get a loan for 80% of the value and a 20% loan for the balance of the property. People say that you should do this to aoid the dreaded PMI, but beware! Sometimes the interest rate on the second loan is so bad that you're (financially speaking) better off going with the 100% loan and just paying the damn PMI.

In these cases the key is that your sales price has to be lower than the appraised value. MLS can give you comps to give you an idea before you seriously consider buying the property.

Also... if you're not using a RE agent when you buy then you can ask that the 3% that would normally go to the agent get gifted back to you.

I had a friend make a suggestion to me the other day, but I don't know if it's legal. He said you and the seller can write an addendum to the contract stating that you will get $X,000 for repair costs, but you just use it for the down payment. Is this actually legit / legal?

Originally posted by "birdburd":

Hi
I personally have run an S-Corp, a C-Corp and an LLC. Each entity was geared for a different kind of business.

Bird

Just out of curiosity... is there any reason why you wouldn't choose to use the LLC? All of my research (for the state of Ohio anyways) seems to show that an LLC is a less restrictive version of an S-Corporation. For a single owner I think an LLC makes sense.

I've even heard of some people that will set up multiple LLC's and then have each one own just one building. The logic being that if one of the LLC's gets sued (fire, or whatever) then the rest of the portfolio is protected from that loss. Practically speaking though I'm not sure if it actually makes any difference when you go to court.

Originally posted by "all cash":

I'm going to take a view that many others WON'T agree with, but I think I can refute their "tax advantages" point-by-point.

Well then let's get started with a healthy debate.

Originally posted by "all cash":

1. You get to "write off" your expenses! I don't consider this an "advantage" to REI, after all you can do this with any other investment as well. Often a big expense of RE is interest. Let's see, you pay your bank with one hundred cent dollars in order to avoid paying the government with 25 cent dollars. Huh.

A couple of things here. I would agree if you said "I don't consider this an advantage to REI because you can do this with any other business". When I own a business I get to start paying for things with pre-tax dollars and it adds up. I mean how many of you need a cell phone to operate your business? Well, isn't it nice to get an automatic 25% off your cell phone bill? So you're right that it's not unique to REI, but it's an easy way for the average american (with a day job, no other businesses) to increase their income.

As far as interest goes... well it's nice if you don't need money for loans, but some of us aren't as well off as you are (yet ;)). Beyond that basic finance principles show how leverage can increase your returns, IF you can achieve an ROI that is significantly higher than your cost of capital.

Originally posted by "all cash":

2. Depreciation! Well you have to recapture it when you sell, and you will eventually sell.

Ever heard of a 1031 exchange? Check it out via google and/or the IRS website. It is entirely possible for you to fully depreciate a building, sell it, buy a new building, and never pay taxes on the gain from the sale of the first building.

Originally posted by "all cash":

Most tax benefits (since the tax reform of '86) only accrue to LOSSES. If you're in REI to generate losses you won't be in it for long!

I'm not 100% sure what you mean by "only accrue to LOSSES". Are you talking about tax loss carryforwards?

In any case it is 100% possible for you to have LOSSES for 20 years, but to have positive CASH FLOW for each of those years. In fact, this should be your goal. If you're leveraging your purchases by using debt financing then this is possible with almost all value / bargain purchases.

"Cash flow" is king. If you are trying to evaluate a property you want to look at "discounted cash flows" (google it if you don't know, it's basic finance, but critical to understand).

"Net Income" is important... but there is a difference between "Net Income" and "Taxable Income". A good accountant will explain this difference further if you like. PM me if you want.

Originally posted by "all cash":

There is one (although you have to cheat to get it) "tax benefit". If you're working on your own residence and you go to HD and spend $1500 or so, the receipts for that could ACCIDENTALLY fall into the file where you keep your receipts for your rental units. Thereby creating an adjustment to you net taxable income that wouldn't have been there before.

I won't suggest you do the above... although some people certainly do. But consider the following list of household expenses that could legitimately be expensed:

- rent (if you use office space in your home you can take a percentage of your home mortgage / value)
- cell phone
- lawnmower
- tools (home improvement tools, obviously)
- computers
- software (although really there is a lot of great FREE software out there if you know where to look... but that's another topic for another day)
- internet connection
- vehicle (but be VERY careful about this if you plan on doing it)
- gas for the lawnmower
- business lunches

... and more. The above is a list of things that you would legitimately need for a business and you could legitimately write off on your taxes. All cash, do you have a CPA that does your taxes for you? You should seriously consider hiring one as they can put a big dent in your tax bill.

Finally remember: there is a HUGE difference between "Tax Evasion" and "Tax Aggressive". You can be aggressive without actually breaking the law... or you can be conservative and give more of your money to the government. Personally, though, I prefer to keep as much of my money as I (legally) can.

That got a bit long-winded didn't it?

I could absolutely use some help! I have three sticky issues at the moment, but I'll start with my most pressing problem.

There is a woman that was in my building when I bought it. She was never technically (I think) a tenant since the old landlord broke the contract early with this tenant *before* I bought the property. So in other words this tenant was in the process of moving out when I bought the building.

Some relevant facts:
- The woman is a section 8 (HUD assistance) tenant
- The damages consisted of major and minor damage (I replaced the flooring due to water damage, I replaced a door, had to paint, clean, fix the stove, etc.). Total damage is around $1500.
- I have pictures of before / after the repairs, but I do not have any pictures from when this tenant moved in (since I didn't own the building when she signed her lease).

Is it worth my time / money to take this to a lawyer? Or do I have other options?

It probably has something to do with all of those big fat dedcutions you get to take ;)