All Forum Posts by: Michael Hayworth

It's really not that difficult. You set up your LLC and fund it. Find a lender to work with. Best choice is a portfolio lender in your area (that'll be a small bank or chain of banks that keeps its own portfolio, rather than selling the loans to another bank - they have different rules than the big banks do). Second choice would be a hard money lender. There are lots of those guys on here and at your local REI assocation meeting.

The banks won't have any trouble doing a loan to an LLC, but they will insist that the principals of the LLC (you and your friend) personally guarantee the loans. They're going to want you to be reasonably well funded for down payment & reno costs, and they'll want you to have good credit histories and financial backgrounds.

You can get a lawyer to set up an LLC for you, but it's really not particularly difficult to do it yourself. There are lots of resources online that do it for a few hundred. When I set up my first LLC years ago, I thought I needed an attorney to do it, and ended up paying ~$1200 for stuff I could've done myself.

Some slightly different thoughts here:

1.  See if you have an issue with your insurance company. Hopefully, you have a good agent you can talk to "off the record" and get his input. Your renter who's operating the AirBnB needs to be the one to carry insurance  that covers whatever this is.

2. AirBnB and VRBO guests tend to be pretty kind  to the property. They get rated by the hosts, just  like hosts get rated  by the guests.

3. A lot of people seem to be jumping to the conclusion that your renter is "knowingly violating her lease." Maybe she is...maybe she just saw an income opportunity and didn't even  think about it.

4. I  WOULD NOT implement  a revenue sharing model. Too much overhead to deal with - you have to look  at her books,,  figure out how much she gained, calculate your percentage,  figure out if she's cooking the books. That's  a lot of overhead. INSTEAD, just raise her rent $400 (or whatever) per month. ( I saw  you commented her lease runs for awhile,but she is in violation of her lease...her choice would be increased  rent or  lose the AirBnB.) Then you don't  have to worry about reviewing her records and all that. Maybe put $300  of the increase in your pocket and offer the tenant who complained $100/mo off her lease.  Everybody is  happy then.

The woman is trying to pick up some extra cash and seems to be doing it without doing damage to your house. If you can work it out so you both benefit, great. Take the AirBnB away from her and she'll have to find something else....she could end up offering "adult  massages" out of your apartment. Or worse yet, end up on here asking how she can make millions in real estate by wholesaling houses with no money down!

When I first started investing in real estate 5 years ago, the first house I did was a flip. The second one was my first rental.

That rental has had a great tenant in it, with regular rent increases, for the last four years. Had to replace the AC a year ago, but other than that, the house has been pretty maintenance free. The tenant got married and moved out, so I decided  to sell it to take some equity out.

Paid $42K for the house back in 2011. We didn't keep as detailed records back then, but I think we only spent $12K on the reno to get it to "rent" level, and just spend $15K on a fresh renovation to get it to "sale" level. Meanwhile, I've been collecting rent and cash flowing a little over $250/mo after mortgage, proptax, insurance and repair reserve, for the last 4 years.  The repair reserve paid for the AC replacement last year.

I comped the house at about $109-110. Decided to list it at $106,900 to get a quick sale, since Uncle Sam wants $101,000 on April 15 (Which I had in my tax reserve a couple months ago, but decided to make my CPA & bookkeeper sweat  a little by spending it on a house at the Trustee Auction. That house will be done next week and I'm sure it'll be sold and closed by April 15, earning me an extra $25K for my tax reserve....but just in case, let's get this one sold quickly!)

Listed the house at noon yesterday for $106,900. http://www.realtor.com/realestateandhomes-detail/3... By noon today, I had offers for $108, $110, $112,900....and $120K. We've said we'll accept offers through Sunday at 5pm, then select one.

Gotta love this Texas market!

Granite is a nice upgrade that should pull a little extra rent per unit without too much extra cost. It also allows you to use undermount sinks, which are also a nice touch. (Technically, you can also do that with laminate, but it's expensive and a pain in the ***.)  

You'll have 8-10 choices in Tier 1 granite. Names may vary by area and fabricator,  but they'll be things like Ubatuba, Santa Cecilia, Giallo Ornamental, White G and a handful of others. You should be able to buy that for $30-35/sq ft, plus cost of sink cutout ($150ish) and a good undermount sink ($150-200).

Laminate is going to be $15-20/sf, usually. It's likely that you don't have that much counter space in a 1BR unit. If you have 20 sq. ft of counter space, you might be looking at $300-400 extra per unit to do granite. That's pretty inexpensive to add a nice upgrade that should translate into increased rents and a higher value when you sell the units, based on the cap rate for your area.

You're in a blue state, so everything's going to be more expensive there, so the rates I quoted above may be a little light, but the cost differences between granite and laminate should still be roughly accurate.

Good luck.

Why is that disheartening? What do you see in the efficiency of government that makes you convinced that government is qualified to judge someone's qualifications to be a GC?

We have no GC licensing in Texas. We also have the best economy in the nation. Every week, I interview guys coming in from California, Illinois, NJ, NY, Michigan....all those "big government" states. Many of them had GC licenses that they spent hundreds of hours of study to obtain...and aren't worth a bucket of warm spit when we put 'em on a job site.

A good contractor should have reviews on Angie's List, Yelp, or other places. Or they should be able to walk you through current projects they're working to let you see their quality. They should definitely have liability insurance. But worker's comp? Do you know what that costs? Do you actually want to make money on these properties, or just spend it all paying your GC?

Interesting. I'm looking at a historic building in Fort Worth that has traditionally been all residential. I thought about moving it to mixed use, but I think I've settled on making it all office space. 

The tipping point for me was the cost of renovation in a historic building. With residential, each unit needs a bathroom and a kitchen. The plumbing and electrical were going to be very high working with old plaster walls, limited attic space, and limited space between floors. Plus, typically more expensive flooring, finishes, etc. With office, I make one shared bathroom in the hallway, no kitchens, and call it good. Reno to turn 9 one-BR apartments  into 7 (5 1BR,2 2BR) was going to be almost $400K, all in. (Lots of other work involved, too.) To make it two large offices  downstairs and 4 smaller office upstairs, I'm looking at over $100K in reno savings. In this area, I think the office space will rent up quickly as well.

Like you, this is new territory for me. Very successful with SFR, but commercial is a new area, so I may discover things I'm not considering along the way.

 Connor, it's about trust. You have to really be able to trust the company you're working with.

Beyond that, though, I'd really encourage you to start local and self-manage your first few. Learn how to screen a tenant, how to handle repair requests (and cordially say no when necessary). A lot of investors don't really like the "people" side of the business - it's the messy part - but there's no substitute to doing it yourself and learning this stuff. Then when you start investing out of state or grow to so many properties you need to hire outside management, you'll be working from a base of wisdom, rather than naivete. 

Plus, you save 8-10% when you self-manage, and generally get better tenants when you screen them yourself.

Lots  of resources on here to help you with the management side.

@Account Closedhas a good idea with asking to see previous projects. Although it's often difficult to get into past projects, I've often toured prospective clients through my current projects that are nearing completion. You can get a feel for quality of work, general organization, job-site cleanliness, and so on. If the GC introduces you to workers on the job, ask them what they're doing - their answers will give you a feel for the scope. (Just don't expect construction guys to sound like corporate executives.)

But @Mark Holencikis right - really good contractors typically won't work for investors. Investors want rock-bottom prices, and most will say they want quality, but will choose price every time. So your pool will have a lot of the unsuccessful/shady types in it that you have to eliminate. Your best bets will be the newer GC who's worked for someone else and is now going out on his own, or maybe the Mexican crew whose English is too rough to allow them to score the best homeowner jobs, or the semi-retired guy who only wants to work occasionally. (Those are rare, but I actually found one in my only out-of-state reno.)

REI groups and talking to other investors can be a great help. Be careful, however - a lot of investors don't want to share their contractors, so they may give you the names of the guys they don't use anymore.

As @Matthew Paulnotes, no good GC will start work without money down. It's important to have a clear, written scope (not just "renovate bathroom", but details as to what that includes.) so that you do have protection if you run into the unscrupulous guy who doesn't start work after getting your money, or constantly delays. For a larger job (say over $20K), most contractors would be willing to do a 25/25/25/25 schedule, rather than 50/50.

I think a lot of the difference in people talking about not paying up front is whether you're talking about handyman work, or small jobs with low materials cost (like painting, although the concept of "licensed painter" that @Matt Shieldsmentions boggles my mind - the government regulates painting in your area????) may work without a deposit. The question you have to decide is if you are doing a larger reno is whether you want to manage each trade yourself, or have a GC involved who manages the whole project for you. I'd really recommend using a GC to start with - coordinating multiple subs on a larger project is really difficult when you're new at this.

Good luck. There's a lot of difficulty in this, but it can be really rewarding to see it all come together.

If you're going solo, most banks are going to want a personal guarantee on your loans. I'm actually meeting with one of my portfolio lenders this morning to raise my guidance line to $1.25M with that bank, and they still require a personal guarantee. I've not found any so far that don't want that.

If you go in an ownership group with well-established partners and a well-funded cash position, you may be able to find a lender that'll lend to an investment group without personal guarantee. That's actually my next step, as I'm going to help a couple guys with money but no experience get started in this.

So an LLC doesn't generally protect your personal credit. What it DOES do is give you some legal protection if you get sued somehow. It's difficult, though not impossible, for a renter or someone else who sues your LLC to "pierce the veil" and get through to your personal assets.

Jeremy,

Welcome. It's tough finding deals in our market. If you're doing 2 sets of 5k postcards each, you're going to spend $4-5K, depending on your list criteria, with no guarantee of finding a good match. Every property I walk into off my direct mail has met with multiple "We buy houses" folks, and it seems like a lot of them are willing to pay more than I think a place is worth, just to secure a deal. I've still been able to secure some deals, but it's very competitive. And, of course, anything on MLS is bid up crazy high.

Foreclosure auction is a decent place to find deals, but you have to pay cash. And even there, it's common to see occupied houses where you have to evict a tenant and where you don't know the interior condition being bought sight unseen for 70-80% ARV.

Boyd's suggestion of a turnkey property is not a bad deal, if you don't want to self-manage. If you do want to self-manage to get that experience and save $100/mo or so, I usually some houses in my portfolio I'm ready to sell off. I renovate, rent, hold for a couple of years, take some appreciation and do it all again. They're not gonna be dirt cheap, but cheaper than most turnkey deals. I've got 20 properties in my portfolio right now. I'll sell a few of those and buy 15 more this year. Three I'm ready to sell are in good repair, all have long-term tenants, and all would meet the 1% rule. Send me a PM and we could discuss.

Good luck, and welcome to investing.