All Forum Posts by: Matt W.

California law prohibits discrimination against income source, but I also don't think anyone can force you to learn the ins and outs of a government program if you don't want the extra hassle. If you rent via Section 8, VASH, HUD etc be prepared to complete a housing voucher, have it approved, schedule an initial inspection, have that approved and wait for a breakdown of tenant vs HAP payments before signing a lease. There are also voucher limits to the maximum combined rent, limits to what the tenant will pay out of pocket, and the voucher contains a number of bedrooms the applicant should seek. We have applicants with 1 bedroom vouchers looking for a 2 bedroom unit, or looking in areas that are above the max rent level. The leases I have always done are 1 year initially, so if you like MtM tenancy beware of that. There will probably be inspections yearly or every 2 years as well to ensure safe/sanitary conditions. Asking for rent increases has to go through the local housing authority for approval which can also take time or not be approved at all due to 'area rent comps' not supporting your asking. It may also take longer to terminate a HUD tenancy (90 day notice to quit in Los Angeles).

Like Rick said above, it depends how many you run per year and how invasive you want to get. Soft checks mean the tenant is helping you pull their own information and thus there is no hard inquiry that gets put on their credit report. You also don't need an office inspection to show you have approved methods of storage and disposal of sensitive information like SSNs. Services like Cozy can help do this. Hard checks mean the applicant provides you all information, and you submit that information to whoever runs your credit checks. They will have to approve your location, storage, and disposal methods because you are recording SSNs and storing or destroying them later. In SoCal we used the Apartment Owners Association (aoausa.com) for years and we recently switched over to Appfolio which is SaaS. Both give credit, criminal, and eviction history and cost around $15-$25 per report depending on the package you select.

Richard,

Sorry for any confusion, please take your CPA/Lawyer's advice. A single member LLC is treated as a disregarded entity, and it is also true that a husband/wife partnership may qualify if you both materially participate in the business and file as "qualified joint venture." This is an election your CPA will be able to advise you on.

IRS Link to Husband/Wife Partnerships

-Matt

While DSTs have matured somewhat from the recession market, my group has had multiple bad experiences from stopped cash flow, short sales, and foreclosures. You have no control and no say as an investor, the trustee can sell the property at any point without investor consent, and it is usually very fee intensive. I do think there is a place for DSTs in the market, and some do well, but you would be well served searching the horror stories that have occurred. 

We have invested with many now defunct providers and we also currently have a few assets with Inland and Passco. Both are huge companies, but we were turned off by Inland selling an asset 2 years into a 10 year hold for minimal appreciation, and not having a proper LTV deal to 1031 exchange into. They also generally require 40-50% down on apartments which are our preferred asset class. We have decided to focus on areas outside of California, source a good management company, and control our own destiny.

Buyer Beware 

Seriously, get a written qualification list going. Most of the time applicants that don't qualify will not submit an application. Employer and previous address references should be required. On time payment history and employment verification if they are working should be done. Learn what to ask, and how to ask it to ensure the applicant's friends are not providing those references. 1. Do you accept evictions? If so, how far back? 2. Do you review for criminal background? If so what is or is not acceptable. (Careful with this one, HUD is starting to issue guidelines saying we cannot blanket discriminate by saying "no felonies accepted" and state attorney generals are now suing owners/management because felonies are creating a disparate impact on certain sections of the population. 3. Rent to income ratio? 4. Minimum FICO score? How many positive lines do you require? How many negative lines or collections will you tolerate? 5. Smoking, pets, musical instruments, etc etc etc. You can group or one at a time then, but if you group, what makes one applicant "better" than another if they both qualify for your requirements? The Fair Credit Reporting Act requires a written adverse action letter as far as I know if there is credit run and a denial takes place. Look into this and your local laws. Charge a holding fee (if legal in your state) so the tenant can't back out penalty free and apply it to their deposit balance on move in. The more procedures you have in place the easier decisions will be for you and the more informed your applicants are, the better the pool you are likely to draw from.

I'm not sure how accurate this is, but the most inventive method I've ever heard was to call a local pizza place that delivers to that neighborhood. If they don't deliver or do so during daylight hours only, it is not a good neighborhood.

LLCs provide good protection if you keep the business separate from your personal affairs. You should learn how courts have 'pierced the veil' of an LLC and exposed owners personally so that you can avoid those types of mistakes. Having several units in 1 LLC will not protect them from creditors if there is a judgment against 1 of the properties that resides in the LLC with the rest, but if your personal home is outside of the LLC that should be protected from lawsuits. Your profile says SD, so keep in mind California with collect an $800 yearly tax on any LLC and also charge fees based on any gross receipts over $250,000 per year. If you and your husband are 50/50 members of the LLC you will need to file an LLC tax return that will generate K-1s that drop into your personal returns. If it is a single member LLC, it's treated as a disregarded entity and no separate return is required. Finally, Fannie Mae/Freddie Mac lenders usually require LLCs to be 'single asset, single entity' before they will approve a loan. This may reduce your financing options, but in my experience there are many lenders out there that do not have this requirement. Getting umbrella coverage is an excellent idea as well, and relatively cheap insurance just in case something catastrophic happens. You sound well informed already, I hope this post was helpful.