All Forum Posts by: Nick Gray

I found and purchased my first deal off-market via a direct mail campaign of handwritten yellow letters. It wasn't terribly expensive or time consuming because I was searching in one town of 150 suitable properties, but I am now looking to mail to 3500 properties across New Hampshire. How do I do this in a cost-effective and time-effective manner? Pay a high schooler to handwrite my letters? Use a professional service to print typed or fake handwritten letters? Any advice and, if applicable, recommended direct mail services would be much appreciated.

I understand the reasoning behind placing real estate in an LLC: for the owner to shield himself/herself from personal liability in the event of legal action. However, is one LLC enough? Say an investor owns 10 properties in a single LLC and those properties' equity represents most of the investor's net worth. He/she has no personal liability if a tenant takes legal action, but the equity of all 10 properties is at risk. Since that's most of his/her wealth, the LLC doesn't appear to be that useful. Given the above example, should investors break their portfolios into multiple LLCs? If so, how many properties should go into each LLC? There's a balance between legal protection and tax + LLC filing that needs to be struck. Would you name one LLC the holding company of the other smaller LLCs?

I understand the reasoning behind placing real estate in an LLC: for the owner to shield himself/herself from personal liability in the event of legal action. However, is one LLC enough? Say an investor owns 10 properties in a single LLC and those properties' equity represents most of the investor's net worth. He/she has no personal liability if a tenant takes legal action, but the equity of all 10 properties is at risk. Since that's most of his/her wealth, the LLC doesn't appear to be that useful. Given the above example, should investors break their portfolios into multiple LLCs? If so, how many properties should go into each LLC? There's a balance between legal protection and tax + LLC filing that needs to be struck. Would you name one LLC the holding company of the other smaller LLCs?

Whether $100 or $200 or $300 per door is worthwhile is completely dependent on the purchase price of the property. If the unit cost is $50K with $10K down, then $100/month would be a 12% COC return. But if the unit cost is $150K, as it is where I'm from, then $300/month would be need for that 12% COC return. It sounds like we might need another ratio to go along with the 1% and 50% Rules. $200/door/month for every $100K of property correlates to a 12% COC return if a 20% down payment is made. The "0.2% Rule" isn't very easy to remember or say, but maybe it's a good rule of thumb to keep in mind when comparing properties of significantly different values or calculating the number of units required to reach financial freedom.

I'm filing my 2017 tax return and calculating the Schedule E depreciation deduction for a duplex that I purchased in mid-December 2017.

My understanding was that my duplex would be depreciated via a 27.5-year straight-line method on a half-year convention in which the half year's worth came in the first year regardless of when I bought the property. I was thus expecting six months of depreciation despite only owning the property for two weeks in 2017 (in exchange for no depreciation 5.5 months sooner ~27 tax returns from now).

However, Turbo Tax is using a mid-month convention and only giving me two weeks of depreciation. What is the proper depreciation convention, half-year or mid-month? Can I elect to use a half-year convention since it is to my advantage in this case?

Hi Everyone, 

I am in the process of purchasing my first deal, a duplex in Exeter, NH, for $265K. My plan is to house hack by owner-occupying one side with a roommate and (hopefully) living for free. I have just enough money for a 15% down payment and I have been approved for several first time homebuyers' programs, of which I have found the following two options to be the best offers.

Option 1: 30-Year Fixed Rate @ 3.875%, 15% or $39,750 Down Payment, ~$2,500 in loan-associated closing costs (origination fees, appraisals, etc.), $160/month of PMI that can be removed at 78% LTV, $1,219 monthly payment w/ PMI and $1,059 without it.

Option 2: 30-Year 3/1 ARM @ 2.875% to start, 3% or $7,950 down payment, no loan-associated closing costs (origination fees, appraisals, etc.), no PMI, 7.875% interest rate cap with increases of no more than 1% per year, $1,066 monthly payment for the first three years.

I understand that the interest rate risk of an ARM can be very dangerous and that, with interest rates on the rise, it might be more prudent to lock in at a 3.875% fixed rate. However, I want to hear from others how this ARM (Option 2) compares to my best fixed rate offer (Option 1). First, the 3% down payment and lack of loan-associated closing costs would keep $34,300 in my pocket at closing for me to fund another deal in the short-term. Second, the low interest rate and lack of PMI would make for a monthly payment that is $154/month cheaper than Option 1 while I am above 78% LTV and a monthly payment roughly the same as Option 1 once PMI is removed.

If it is relevant to this financing decision, I am fortunate enough to have a W2 job that, combined with a frugal lifestyle, lets me save $3,000/month currently. If I live in this duplex with a roommate, I should be able to save $3,800/month. This would allow me to pay down my mortgage early under either of these two financing options, something that would enable me to remove PMI quite soon or minimize my exposure to interest rate increases.

Which option would each of you choose were you to be in my position? Should I take the up-front savings and additional leverage in exchange for interest rate risk or pay an upfront premium for long-term rate stability? 

Thanks for the help!

@Andrew Johnson Exactly. I ultimately want to carry properties at 75% to 80% LTV, so return-on-equity (ROE) is probably my most critical metric. As I have posted elsewhere before, a cash-on-cash return can be misleading for low money down deals...with 3.5% down, $50/month can be the difference between a 6% return and a 12% return. I think I'll conduct future deal analyses assuming 20% down and looking for an acceptable ROE, even if the purchase will be with 3.5% down (to be re-financed later).

Thanks for the reply @Will Stewart. If I moved out of my first multi, it would only be to house hack another property via an FHA loan (re-fi on the first FHA). I agree that having tenants offset one's own housing expenses is a great way to free up cash for more investing. However, I intend to continue an already active role in Exeter local government, which requires me to be a town resident of course, so following that strategy would limit me to a single town for investing. It will probably be better for me to, as you suggested, stay in the first Exeter multi and then pursue deals in other places like Dover, Rochester, and Newmarket with alternative low money down tactics.

I'd love to hear about your RE investing experience to date and your thoughts on the local market. Are you available for a phone call or meeting sometime? I'm sure that you're busy, so any time that you can spare me would be much appreciated.

Thanks for the post @Richard Dale-Mesaros. Do you think it's possible to get private funding for a cash purchase on one's first deal? What kind of interest rate would I be looking at for that? I have thought about jumping into the wholesaling game, so any contacts that you have in that space would be much appreciated!

Thanks for the replies everyone. I agree with the advice that one should contribute enough to get the maximum match and no more. The match immediately doubles one's long-term ROI, bringing an expected 5%-6% annualized return in equities to 10%-12%. The tax free growth increases that further and the ability to take loans from the 401k is an added bonus.

Does anyone know what the limits and rules are for taking loans from a 401k? What are the financing terms usually and who serves as the underwriter?