All Forum Posts by: Scott Lewis

Why dont you offer the HML an equity stake (i.e. probably in the 60-70% range) and have him finance the reno costs? If you're going to be forced to give up equity to get financing (which you will because no one will lend on a second lien) then you might as well partner with the guy that believed in you in the first place.

If you keep your reno costs at $30k, assume 8% selling costs and sell at $135k, you'll be looking at a profit of about $35k, which on a 40/60 (you/HML) split is $14k/$21k.

When you look at COCR, you're at $14k/$5k = 280% (not accounting for cost of loan, you'll need to add them here to get your true COCR) and the investor is looking at $21k/$30k = 70% (I'm not factoring in the loan here because that has a different set of financials, but he would need to add the fees and the $60k to get his true COCR.)

You could offer to partner and help finish the project. Tell her you'll finance the rest of the renovations and split the profit 50/50. Run the COCR numbers and see if they make sense.

Hi Mallory. I just closed a deal where my father in law was one of the partners. The most important thing is to COMMUNICATE up front what the expectations are and then solidify those expectations in writing. If you set up a joint LLC, the operating agreement is where this goes.

There's nothing out there that says equity has to be 50/50. My father in law wanted to contribute money, but didnt want to be bothered with any aspect of the deal, so he got less equity even though he contributed more money. Which was fine with him because he got a great return on his money and put zero effort into the deal.

At the end of the day, sit down together and hammer out a deal that makes sense for both of you because if either party does not feel the deal is fair and equitable, the partnership will collapse.

I think Stacy's right on. If your PM charges the industry standard, then the charge will be equal to one months rent. Annualize that cost and you get $70/month. So if your tenant decides to vacate instead of accepting the rent increase, you have essentially cost yourself $40/month (so for year one your effective rent rate is $760/month) and introduced the risk of getting a bad tenant during your search.

I have this same situation for a Chicago property I own. My tenant has been in there for 5 yrs with no rent increase. Market rate are about $125 higher, but alas, I would have to pay $1300 to find a new one (wiping out all gains) who might not be as good as my current one.

Also, I would not sign a two year lease. A lot can happen in two years and if you need or want that tenant out (say you decide to sell and buyer wont accept conveyance of tenant) then your fight to remove them just got harder.

What about a housing swap, i.e. trading for a distrissed property in a better part of town? You might be able to convince someone to trade their run down home for a nice new home and then just rehab and flip the new home with a better location. While your money is tied up for a bit longer, you might not have to take a loss.

It's a long shot, but like Gretzky said, "You miss 100% of the shots you dont take."

 Dmitriy, that's really good to know. Could you point me in the direction of the IRS code that addresses this? I want to be able to go back to my tax guy armed with some really tough questions for him to answer.

This is a very complicated question, one in which my partners and I sought advice from both a tax accountant and tax attorney.

There are a couple key naunces between the two entities that will differ in priority based on your situation; specific ownership structure (member equity vs. shares,) survivability (i.e. if you die, does the entity survive), ease of management (which Jillian Sidoti mentioned,) and a several others that it would take me 10 pages to write.

My advice, work with a tax a professional in your area and out the details of your situation, let them read your strategic plan, and help you identify the correct structure.

Unless you can accurately calculate your rental's basis and depreciation, use a tax guy, specifically, a tax attorney (if the IRS does come knocking, they can represent you.) Without depreciation, you are losing out on one of the great benefits of investing in real estate.

Also, if you dont already have an LLC stood up, do so and transfer the property to the LLC. Not only will you get liability protection, but you could then stand up a SOLO 401k and protect more of your income from taxes. And LLC's get audited even less than individuals.

Depending on the availability in the county where you're operating, you should have access to the recorder of deeds land records be it virtual or heading down to the office.

My partners and I do our own prelim scrub of the titles using online systems in our markets. Not only does this prevent us for having title issues, but it also gives us great insight when making an offer (we also use this as a sales tactic to convince non-occupying owners to sale to pay the note.) No point in offering $100k for a property with a $200k lien on the title, unless your strike price really is $200k and you're willing to clear all liens.

Hi Edwin,

I used a 203k to acquire and renovate my primary residence. It's a tough (and expensive) process, but worth it.

Wells Fargo also offers a purchase and renovate package, but I believe they require 5% down vs. 3.5%.

Scott