All Forum Posts by: Tony Kim

@Tony Kim

HUD dictates the maximum amount they will pay per bedroom size per market. When you submit the paperwork to start the process, they put the application first through two financial tests.

Comparable Rent Test. SEC 8 compares your requested rent to non-SEC8 properties of the same bedroom size, same property type, similar size and age, same city, within 5 miles. You can find Fair Market Rents by market in the HUD website.

Affordability Test. For this test the voucher holder cannot spend more than 30% of their income on housing – rent + utilities. Properties with anything that uses gas are deemed by HUD to be more expensive that those that just require electric. Old houses are budgeted to cost more to heat and cool than newer houses. The bigger the property and the lower number of shared walls, the higher the utility budget and thus, the lower the rent allowed.

This chart below will give you a  good idea as to why it makes a difference to have a tenant with income.  I am in the Virginia Beach market.  According to this, a tenant with a 3 bedroom voucher who has low income (I have no idea how they determine that low is) is capped at $975, but one with high income is capped at $1251. Fair Market Rent is published at $1533, but I have never had a SEC 8 tenant approved at that high of a rent with a 3 bedroom voucher. I do have people approved for $50-75 over what the high income category shows, but only if they have at least one times the rent in income.  

I hope this helps.     

@Jonathan R. - The reason I require a SEC 8 tenant have income is that we will not get approved for the rents we want if they don’t.  The rent we ask has to be “reasonible” (compared to comparable units), which we can meet every single time.  The rent also has to be “affordable” for this particular tenant, based on their income.  The reason you have to send in alll the houses details is so SEC 8 can use their formulas to guesstimate how much will be spent in utilities to run the house.  This guesstimate is added to your requested rent to determine the entire household budget.  The tenant can only spend 30% of their income on household expenses.  The first portion will be allocated to utilities and if there is any left, this will be their rent portion.  I want strong market rents, and a tenant without income will not pass the affordability test based on the rents we request.  

This said, there are exceptions to this. If a tenant has enough people to have a 4 bedroom voucher, but they want to live in my 3 bedroom house and use a room as a sleeping room that does not qualify as an official bedroom, they can get approved for a 3 bedroom rent without income, because the rent amount will meet the HUD 4 bedroom budget.

 It's up to you. If you want to pay for her to live in your property because you think she is a sweet old lady that's fine by me. However it's not a business decision. It's got nothing to do with your business. You are providing charity. Nothing more, nothing less. As her landlord, as a business you owe her nothing. She is not your business' responsibility.

BP,

 She wants to enjoy our money that we've worked hard for, while our kids are young, and make memories.  To her, that is more important than long term wealth.  We aren't promised tomorrow.    

@Brian Cardwell No question. Just reiterating why putting money on the LOC is the equivalent of 'dragging the brakes' with the so-called 'velocity' method vs just maintaining a $0 balance LOC while putting the same amount of extra income towards the mortgage each month. Even though it has been brought up previously, I only redundantly do so as it's something I have yet to see properly accounted for in any of the examples intended to support it.

The cold hard truth is that if you are a CA resident and invest in real estate and own or plan to own multiple investment properties, and you set up an LLC to hold that asset, ANY state that you own property in and any state that you incorporate your company in, even if outside the State of CA, you will have to pay CA Franchise Taxes on it. Another cold hard truth is that if you create separate LLCs for each of those assets, you will be paying maintenance tax and franchise tax’s on EACH of those LLCs. Eating into your cashflow. Another cold hard truth is that if you are a CA resident, and create a Series LLC, in another State, CA will still charge you a franchise tax on EACH child series you create. The more children "series" you add, thats another $800 franchise tax to the State of CA. Again, more cash flow loss. 

HOWEVER, here is how you can legally work around and limit the CA Franchise Tax as a Real Estate Investor who wants the asset protection benefit of creating child series to place each asset in. Its is called the Delaware Statutory Trust Act 12 Del.C. section 3801 (1988). We will call the the (DST) to make it simple.

The benefits of the DST as a Asset Protection system, and particularly for those CA investors is that you can Series out your properties into child series like with Series LLCs, without paying the $800 Franchise Tax for each child series. The (DST)  is a Business Trust, and allows for the Series structure like protection of a Series LLC.

Again, this is not an investment DST for in institutional investing, but rather a Business Trust DST, and to keep that classification of a trust by the IRS, it must maintain strict compliance or the asset protection structure will collapse. This is where working with your team CPA and Lawyer are a must. There are lots of other purposes of DST. Some use for 1031 exchange's, some use as an investment tool to as accredited investors in institutional investments, etc etc. This is not what this forum is about. This is about the DST for Asset Protection as a trust asset holding company.

Some of the code sections regulating the DST are:

12 Del.C. 380; IRC Section 301.7701-4(a); 

Senate Bill No. 355, 66 Del. Laws Ch. 279 (1988); 

IRC Section 301.7701-4(a);

California's Revenue and Taxation Code (R&TC) section 23101; 

California law, specifically Public Law 86-272. 

@Tony Kim

@Terry Lao

Yeah, there are so many ratios people can pretend are the be all end all. Here’s my example....

$369,000 cash invested

$2,150,000 equity after 5 years appreciation &  loan pay down.

$125,000 year income

$81,000 year cash flow

So...

ROE: (cash flow on equity) a “paltry” 5.9% because I haven’t taken cash back out, I don’t like to owe people money

COC: (cashflow on cash invested) a better 21.8% as rents have increased and interest expenses have decreased

ROI: (true income on cash invested): 33.86% pretty good

ROI: (true income return on cash invested including unrealized $1,055,000 appreciation), (that's appreciation only above 10% "panic sale" and 10% selling costs, closer to $1,300,000 in simple numbers) but not paydown as that's in COC and ROI as my money) 90.86%/year

I could make the last 3 numbers infinite percent and increase my ROE by simply refinancing my $369,000 back out. But I’m happy where I’m at and don’t need more. When they are all paid off in few years the income will rise a good amount, but the cash flow will skyrocket. 

Ps. Many people on here are doing much more and much faster. I only included numbers to back up my point. And I’ll reiterate. I built this small portfolios in 5-6 years around the age of 40 while my wife and I were living on just her nursing income. It’s not as easy as it was 5 years ago but it’s certainly not impossible, especially if you have a two income family or are single and willing to house hack. (That’s how I got my first house many moons ago.) We also bought a new primary every year and rented out our previous house. (Also the straw that broke the camel’s back for my wife and slowed our expansion.) sorry for rambling but trying to give a little hope to people who haven’t gotten started and only hear about the coming crash. 

@Tony Kim

Cash over cash return depends if you pay all cash or you finance. The above example of 200K SFR, financed with 20% down or 40k, is your equity. Thus, 8% appreciation on 200k is 16k. Then 16/40=.40, or 40% return CoC.

If you paid all cash, then you have 200k equity, and with 8% appreciation is still 16k. Thus, 16/200=.08, or 8% return CoC.

The top example is using leverage, and you will be paying financing costs from the cashflows. 

@Bill B.

The numbers on lie. Here's the break down of the 40% in above example. Let's say you put 20% down on 200k SFR, or $40k, which is your skin in the game. The 8% appreciation on 200k is 16k. Then 16k divided by 40k = 40% on your cash over cash return (CoC).

I would gladly take 8% annual appreciation any day of the week. If you leverage with 20% down, then it becomes 40%.

Terry