All Forum Posts by: Serge S.

@Brian Adams great story! I also quit my CPA gig in 2012 to go full time into apartment and SFR investing. I was lucky enough to build enough sustainable cash flow by the time I quit that the transition was easier than anticipated.

It sounds like you are syndicating deals. What structure are you using for preferred rate of return and target IRR? What are your hold periods? Have you sold any of your purchases yet? Are you taking down any of these deals yourself or are all syndications?

Interesting @Ben Leybovich. The big question is what is offsetting inflows? The stock market has not tanked so clearly there is money coming in as well. In my area of AZ, I see all the signs. Luxury SFR segment is red hot, homes that were sitting for a year or more are all going pending and the ones closing are getting asking price.

I also see the movement from equities. Searching for a decent multifamily has become a fruitless exercise. Its always the same profile of seller ... purchased in around 2011 for well below rebuild, repositioned and trying to get top cap rate on proformas. They are selling without a full reposition and calling it "value add." Hardly value add as what they are leaving undone typically cannot be done (RUBS, rent increases that the market cannot absorb).

I was looking at 160 pad mobile home park. Called the broker 2 days after listing. He said the park was a complete dump, it was a full time job and priced at a 6% cap in a secondary market. He thought it was way overpriced yet had 4 cash offers! He has been brokering parks for 20 years and said that this is the hottest he has ever seen the market. He is working with a new generation of buyers, those that cannot source multifamily and typically 1031 exchanging from a small coastal multifamily into a larger flyover mobile home park. He is seeing 6-7% caps on fully depreciated junk that just a year ago would have been sitting waiting for a buyer. Now that is some crazy ****!

I have personally decided to sit out this cycle.

@Jay Hinrichs seriously ... I started with this mindset as well. Created all the LLCs bank accounts and just couldn't keep up. Started piling homes into LLCs that were already operating. As soon as my CPA started talking FICA on distributions (transfers between MY accounts), it was over for me. Carry liability insurance and always do the right thing and you will be fine. If you intend to be grossly negligent then create your cover and good luck.

@Dennis Lanni haha, I would consider your gift card offer. Flagstar does not particularly scare me and I bet your right! The issue is that I have a few larger deals in process all of which have loan components. Last thing I need is a ding on my credit and all of the nonsense involved in removing that strike. 

I tend to agree with @Steve Vaughan and the @Brian Burke school of thought that LLCs are generally overrated. The reality is that if your negligent, an LLC will not help. If you do not maintain a yearly documentation package including full set financials for each LLC, operating agreement, etc then it will not help. It also cannot be a sole member pass through entity. So now go ahead and take your lawyers advice and hold each property in an LLC and grow your business. Imagine you hold 20 SFRs in 20 LLCs, 20 bank accounts to open and reconcile, 20 checkbooks, 20 ACH agreements, 20 sets of financials, operating agreements and K-1 partnership returns. And at the end of the day you need to get paid. So this requires a property management agreement between yourself and the LLCs just to transfer money back to yourself. Those transfers are then technically taxable with the FICA hit! Its pretty ridiculous as a 20 home portfolio will generally be producing marginal net income. Your LLCs will be a very material expense. And for what? The hope that maybe, IF you have done everything to the letter, your liability is limited. We investors can really over think things sometime. Sure its "good" to have the extra layer of protection. Worthwhile? Hardly.

I am glad this thread has been helpful for many. I'd be interested in another thread hearing about investors that got sued and having an LLC actually saved them substantial losses.

Lesson learned, I would not be purchasing subject to deals at this juncture in time (I smell a @Ben Leybovich article why not to buy $30k subject to pigs:)  

Clearly the banks have more in consideration than just interest rates. I agree with the educated opinion that the transfer puts secondary note sales at risk. 

@Jay HinrichsI did indeed transfer to an LLC for "liability" protection. To put the specific deal in perspective, this was my 2nd home purchase in early 2009. 4/2 1985 1900 sq feet w pool on corner lot in nice B class neighborhood Mesa, AZ. Purchased the foreclosure $52k cash in Feb 2009. It had no kitchen, green pool and gutted bathrooms. Under remodeled it the first time for around $20k and finished the remodel the second tenant in. Rented for $1495 for 5 years now w 3 total tenants. I cash out refinanced with Flagstar in 2010 for a $100k personal Fannie loan, 30 yr fixed 5.85%, Low comp on this home today is $225K. My rents have some room but I am fine keeping high occupancy and stable tenants and can afford to do so with this spread.

The clear decision here is to conform with the bank. My portfolio lender will only do 10 yr fixed balloon w 30 yr amt. I don't have access to 30 year paper on non primary purchase. This is why I agree w @Joel Owensthat the commercial products are much better suited for an investor. All this drama on one SFR. They are nice little piggy banks to store equity but you need an awfully lot of them to make it worthwhile.

@Ashley Pimsner yes I am aware the title can be held in a land trust with little recourse from the bank. Its not worth the drama for me. I have found using multiple LLC structures and trusts to hold property to be problematic in scale. To do it right requires much more infrastructure and record keeping than most people will tell you. If you are negligent then it will not matter so much. I continue to carry healthy insurance policies to cover my risk.

@Ned Carey I think it was the insurance notification with the LLC as named insured that drew the red flag. Flagstar and Ocwen prove to be the most difficult to deal with administratively. I plan to just quitclaim the property back to my name and be done with it. I don't have time nor much motivation to start with the Land Trust drama and certainly not looking to "strip" the home. I have credit, assets and relationships that are much more valuable than the home. I'd rather just pay off the loan if it came to that. Here is the actual doc sent to me:

I have other property I have bought and sold subject to financing but don't plan to do anymore such deals. This model has always made me wonder. How do you convince a seller you will keep paying the debt. How is a seller comfortable make a deal relies on a future promise? How is a buyer comfortable that the note will not be called. If it does get called they potentially wouldn't even know about it as the letter would go to the original borrower. This model has never made much sense to me.

I wanted to share a recent experience. I recently received a letter from one of my lenders (Flagstar bank) calling out a deed transfer I made around 2-3 years ago. I transferred a deed via quitclaim from my name into an LLC. The loan was secured in my name as it was one of my first 4 Fannie loans. They noticed that I had a named insured of my LLC added to my insurance. They first demanded that my insurance carrier change the named insured back into my name. Then I received a letter invoking the due on sale clause with a copy of the deed. They are giving me 30 days to transfer it back into my name and change the insurance accordingly. They will not accept mortgage payments in the mean time.

Wow - this is the first I've heard of a bank invoking the due on sale and it happened to me. I've made every payment on time with no issues. This gets me thinking of all the people that buy homes subject to the original mortgage. This situation would be an absolute nightmare if I had to unwind a transaction years later. I don't see how this could be a sustainable model with the due on sale threat constantly out there. All you hear is that the bank will never call the due on sale clause. Well it does happen.

 Couldn't agree more. I have never sold a home to one of my tenants. I end up losing my best tenants as they buy newer SFRs. When I do decide to sell I ALWAYS have a "retail ready" remodel. Its very different how I prepare a home to sell to an owner to what I do for a tenant. These costs can be substantial. Combine that with closing costs and commissions and you need a very hefty premium to purchase price to realize those returns. I have done fine with the stuff purchased 3-5 years ago but the ones I buy today I just assume longer term rental and make sure I'm buying enough equity on the front end to underwrite the exit accordingly. My exit has been to sell to an investor at 5-10% off retail and off market. I only do this when there are other homes I want to buy that have better return on equity or I'm 1031ing into a large apt complex.

Internal Rate of Return. Just a fancier way to calculate the return on an investment that factors in the entire hold period rather than a point in time. You would factor time value of money and such but for a simple SFR over a short hold you can keep it very simple. Search @Ben Leybovich  blog posts for the exact formula and how to apply it to your needs.