All Forum Posts by: David Harris

Hi,

I own a 4-unit property in Washington, DC. I used FHA 203K to purchase it and I am an owner occupant. I've been doing a decent amount of renovations over the years out of pocket. Last year a tax professional suggested that I form an LLC, just for the management aspect of this, so that I can write more of my expenses off. Apparently my w2 income was too high to write off the entire amount of money I spent on repairs last year. The tax professional said I may have been able to get back about 3K more on my refund, if I had an LLC setup. Also, this will be the first year I will have made enough off rental income, such that the DC will charge me a non-franchise tax.

I'm wondering is it ok, if I set up an LLC for all management/maintenance related expenditures and to accept payments from tenants but still have the property in my name?

I used 203K in a similar fashion.  It's definitely a great product when used effectively.

Some things I would recommend:

• as @Kyle Gregg said if your bank has solid contractors the recommend, start there when looking for a contractor.  One of my biggest issues was finding a contractor that was willing to work with the 203K method of payment.  I had a pretty bad experience with my contractor, but he wasn't recommended by the bank.
• Make sure you have a good 203K consultant.  My bank did recommend my 203K consultant, he was definitely a stickler, but he caught a lot of shoddy work that my contractor did, and made him redo it.  In hindsight, I wish I would have reached out to my 203K consultant a little more during my contractor search.
• Do your best to have a clear cut plan on what you want done, if substantial work is needed, you will most likely use a GC, you still need to be active in the planning stages and you may have to stay on top of your GC as well to make sure things are done exactly how you like them.

Good Luck! It's definitely a great way to get started.

@Jean Bolger, I have thought about selling it, but pretty much decided against that a while back. Even with the one tenant I have now, if I was to move out (I live there too), median rent in the city is more then what I pay for mortgage - rental income.  I might look at it a lot differently if I didn't live there, but for me to move out find someplace else to live and lose out on future income just doenst make sense to me at this point.  At least that is my current line of thinking

Thank you all for the input and advice.

@Arlen Chou   This is a pretty interesting store, thank you.

1) Were the properties fully or partially occupied when you bought them?

2) Did you hire out any of the work, (like plumbing, electric, etc? if necessary)

You are definitely right about treating it more like a job, and I and I can definitely see where the experience would help you in negotiations moving forward.  

Thanks so much for the input

@Jordan H., yes I am talking about the Brookland area or close o it depending on who you are talking about.  and that was the logic I was going for too, at this point it wouldnt make sense for me to try to compete with some of the larger luxury units, because even if I tried to offer all of the same unit benefits, I still cant compete with the community benefits (ie, gym, pool, huge roof decks, lounges, etc, ground floor retail).  Last night I actually went around and took a look at some 4 unit properties that friends I know rent in to get a look at what they were getting for their rent, and pretty much its what you just pointed out.  Nice touches, but not super luxurious ones.  Actually some of them are quite similar to what some of the new developments do in their "affordable/market rate" units.

If you are a first time home buyer I would definitely suggest you look into 203K and Also NACA. Two friends of mine used the rehab product NAACA offers to get their 4-unit properties, the rates were a little lower (NACCA rates tend to be lower then the prime rate, but you have to take classes). you can use FHA and NACCA for rehabs and just regular loans, granted with both you have to either pay pmi or something similar to pmi. If you go with the 203K route, and try to do a rehab, just from experieince I would say make sure you get an agent (if you use one) and lender that have experience working with the products. I think NACCA chooses the lender for you (not 100% sure about that). I will say just from talking to my friends and looking around the landscape in DC for multi units has changed so DRAMATICALLY. One of my friends did a complete gut rehab on his 4unit in the Trinidad area, but he was under 200K for the shell, but some of the prices ive seen listed on Redfin now, are like 340K and higher for ones that need a substantial amount of work, just on my block alone there is a 2 unit for sale by the owner, he is asking 675 and the place needs substantial work (but it is fully occupied). Still some deals east of the river, but west of the river developers are really snatching everything up and purchasing with cash. Just getting mine was an ordeal, because of all the cash offers I had to compete with, but live and learn.

Good luck to you, I'm more than happy to share more of my experiences with the 203K program, This book was a pretty good book that helped me in the decision

http://www.amazon.com/gp/product/1441483004/ref=oh...

but honestly no book can really prepare you for the process.  It definitely has a lot of moving parts.

Thank you all.

For the advice.  @Orion Walker , your thoughts are kind of echoing how I am feeling now..thanks for the advice.

@Mike Peter, I definitely feel like I still need to learn a lot more about this business, you are definitely right about needing to finish at least one unit.  

@Tom V.  I'm have actually been trying to do what you are saying to figure out which way to go.  Basically seeing what spending X amount of $ can get me in terms of rent.  Trying to use that as a guide to drive what work needs to be done, any suggestions on reaching out to contractors, I have been using angieslist, but past that, I have found that most contractors are booked up, or just dont return calls.  

@Rod Smith .  So, 203K loans.  Yes you are right, you have a adviser to help you estimate repairs and stuff, but thats not really what they do.  The way it really works, is you find contractors that will work with the 203K loan (which is hard in itself, most GC's do not like the way money is distributed so a lot of contractors just wont work with 203K recipients), the advisers job (at least the one I had) was really to inspect what the contractor is doing to make sure you dont get taken for a ride, and that the money is used well, the also approve the draw checks.   In addition to that, they kind of work with the bank (the bank is who recommended my adviser), to keep the banks investment in tact.  My problem was three fold, 1) I wasnt super clear with exactly what I wanted done, I was basically listening to entirely too many different opinions, 2) I overestimated how much work I could to myself in my free time, so my thoughts were to pay for just enough work to get the adviser to say the home is safe for me to live in and tell the bank everything was OK.  3) The contractor I had really slummed, my uncle and my adviser both realized that late into the game, so I just had to ride it out with the guy.  Honestly 203K is a great program, I had another friend with a construction management background use a similar program (NACCA) to get his 4 unit and it worked out well for him.  It's just you really have to have a good adviser and be clear on what you want to do and how much you want to spend.

This makes sense, but how would I go about getting the numbers?  My initial thoughts, were to start looking at comps, in the area that are renting for the amount I would like to get.

The place is in a good mixed neighborhood.  Thats what makes it a little hard for me to figure out which way to go.  There are about 3 brand new large mixed use complexes within walking distance, that are renting from between 2200 - 3400 a month (these have pools, fitness rooms, restaurants and bars, all the frills).  There is also a large low income development as well, in addition to some older apartment complexes and a few multiplexes like the ones I own.  Decent mix of older unrennovated homes, newly renovated homes and on by block a brand new town house community was built, where the townhouses start at 700K (when I moved over there they were going for 350K).  The property values and rents in the neighborhood are definitely increasing.  A lot of new development is going on, and the area is walking distance to mass transit.

The area is truly a mixed income area.  You mentioned spending the money, which at this point I am more open to (I was ADAMANTLY against it early on).  Thing is I am not sure how to go about it, like I said I make a decent salary now and have very low living expenses.  Is paying for stuff out of pocket what you are talking about, or do you mean look into the loan options.  I am still a little new to the various financing options, but I have been learning more since reading this blog.  Thank you for your reply.

About four years ago I got a 4-unit property with a FHA 203K loan, I was 26. The goal was to fix it up, live in it and rent the other 3 units out to cover the entire mortgage and have a a slight profit. I was getting the help of my retired uncle, who is one of these old guys that can fix just about anything and was an avid DIYer, in addition to being a retired HVAC installation teacher.

I ended up having to use a contractor for some of the work in order to get a the loan, my thoughts were to use the contractor for just enough so that I could get the property, and do the rest myself, with the help of my uncle (who owns 2 multiunits and his own home).

Fast Forward to today, I am still not finished.  I have one tenant who lived in the building when I purchased it and has been living there for about 13 years.  While I have made substantial improvements to the building (new roof, new plumbing, some new electric).  There is still a lot more that needs to be done.  Plus me and my uncle are constantly arguing, I'm noticing a lot of things he does don't quite make sense, and in a few instances have cost me money because they were flat out wrong.

I know I need to change my approach but I am not sure how.  I have the one tenant, who covers nearly half of the mortgage.  I have a fairly well paying job, but I also have a substantial amount of work left.  My neighborhood is changing rapidly and the median rent is going up, but along with the increase in rents, the quality of available units is also increasing.  One friend/investor recommended just getting out a loan gutting and starting from scratch, my uncle advocates just doing the minimal amount of repairs and getting someone in, even if I am getting way less rent then I can.  I want to do something somewhere in the middle.  I am apprehensive about taking out a sizeable loan (and unsure how and what options there are in the financing department).  I have a decent amount of savings, and I am about 50% finished with one more unit, what I have left is largely cosmetic, sanz some plumbing and electrical work that needs to be done,  I just recently had a new HVAC system installed in this unit.

Not sure what the next steps I should take should be.  I'm definitely rambling a little bit, so I am going to stop now..lol.

Thank you.