Filed under: Bad Credit
Question: I am looking at acquiring a rental home this year and another one next year. I am also wondering if I should form an LLC company to help protect myself from liabilities. Some examples are:
- Occupants visitors slip on tile in backyard swimming pool and break leg
- I myself have a minor car accident and lawyers find out I own multiple rental properties
- Nosey employer (mine) wonders why my name is directly listed to multiple homes in area
- I get sued by anyone
etc
Ultimately, over the next few years, I plan to have 3 to 5 rental homes in my possession.
Your thoughts/opinions wanted please
Answer: I am appalled at the lack of sophistication of the resplies to this thread. However good may be the advisors that some of you have, you obviously are not being given the basis for those professionals’ judgment. (And I don’t even live in the USA, and can give a better reply.)
You need to weigh two different issues: personal liability (the one you mentioned) and tax advantage. Sometimes the two go hand-in-hand, sometimes not.
A few thoughts, without however exhausting the issues (after all, you are not paying me):
1. Bear in mind that you may want to minimize capital gains and/or death taxes. The first (IRC sec 121 tax-free sale up to $250K or $500K (or more, under the latest regs, if the house is owned by more than 2 occupiers who’ve lived there the requisite time) may be lost if the property is titled in a manner not allowed by the law (a co-op or condo is OK). Similarly, homestead protection may be lost; and the benefits of those 19 states that have tenancy by the entireties for married couples.
2. Use of a Family Limited Partnership, LLC, LLP or trust arrangement can yield valuation discounts for estate and gift taxation, and perhaps for capital gains tax too.
3. Use of a disregarded entity (single-member LLC: virtually all states allow them) will help with respect to liability matters. But it won’t save the property if you file bankruptcy. (One of the entitites in paragraph 2 might be of some help there.) What you need is lots of liability insurance to protect you, and perhaps an umbrella policy for yourself.
4. The big issue with corporations, S or C, or an LLC taxed as a corporation, is double taxation of gain: inside gain (a C corporation pays income and gains tax) and outside: when you dissolve or sell the corporation, you pay tax on your gain on its shares. Even a hybrid entity (one taxed as a partnership or disregarded entity in the USA but taxed as a corporation in the foreign country — Canada, the UK, and most other countries other than Switzerland) will have that problem with respect to the foreign tax authorities. (But not all countries tax gains on land within their borders when the owner is nonresident. Most do, but Britain does not, unless the owner has a permanent establishment and/or is deemed to be trading there. Virtually all countries do tax rents; so tax treaty provisions are important. You don’t need to know this in your case, but I added it to make my answer complete.)
5. Another issue is the consolidation of profits, gains and losses and (in the USA) the convoluted Passive Activity rules and — more and more important over time — the Alternative Minimum Tax.
Sadly, few small investors can afford the accounting, tax and legal advice they really need. Anybody who tells you right off the bat that “LLC is best” might be right — but if s/he is it will be purely by accident. In some states, LLCs are said to be expensive to run.
There’s one last point worth mentioning: use of a C corporation (as managing agent, perhaps with separate LLC as owner, or you can own the property yourself) can allow you to hive off income as salary. And if you’re really successful and you decide to spend your days and nights in the Caribbean, then you can probably get a $80,000 foreign earned income exclusion. And if there’s a social security totalization agreement or the corporation is not incorporated in the USA, then there’s no FICA to pay.
January 1, 1970
Question: OK I have a question… I’m the guy on the other side of the coin. After going through bankruptcy, I am now trying to sell my home to my father. I have two mortgages and two tax liens against the property. The tax liens are not property taxes. My father is paying enough for the property to pay for the mortgages but not the taxes… What happens to the liens after he buys the property… Do they go away?
Answer: Damn are you dumb. I guess that’s how you got your tit in a wringer in the first place. No they don’t go away. You will not be able to deliver the property with a warranty deed or full title insurance. Any title insurance issued will not cover the tax liens. Your dad or anyone else would be a fool to purchase this property from you in this manner.
Your Uncle has you by the short hairs. You are going to have to negotiate with him. The only other alternative is to allow the property to go into foreclosure and have Dad attempt to buy it on the courthouse steps. However, if there are others who are interested and the property sells for more than the mortgages, the tax liens will still need to be paid before you see a dime. If the liens are income tax liens, and recorded junior to the mortgage liens on your property, AND you are not personally getting any proceeds from the sale of the property, you may be able to obtain a release of the liens as to this specific property from the IRS. A competent escrow officer should be able to help you, or call the District Director’s office for the IRS and request the Application for Release of Lien. Also, if the tax liens were personal to you and not direct to your property, like property tax liens, then your bankruptcy may have/should have brought you some relief with respect to the liens. I know I am assuming the nature of the non-property tax lien you referred to, and if I’m wrong you can disregard this suggestion, but others may find this information helpful.
January 1, 1970
Question: I’ve been landlording for over 10 years now, and can’t believe so many folks would be interested in getting in on this kind of investment. It is more hellish than ever.
Here’s what I’m dealing with:
Duplexes that will not sell. Tenants who have no respect for the upgrades and out of pocket expenses we’ve put into the properties. Tenants who don’t even keep a clean house. Tenants who leave ya with a mess that takes a week just to clean up (over 80% of tenants). Capital gains taxes that require a loan to be taken out to pay if the properties DO sell (thereby also negating all the deductions taken over the past 10 years). Needing a loan just to counter the taxes on the deductions even tho I’d be selling *at a loss*. Having roaches destroy the quality of the home AND tenants that COMPLAIN about it even tho THEY ARE THE CAUSE OF IT. Tenants that threaten violence when they don’t agree with the rules of the lease. Tenants who treat you like shit because you’re kind and caring, and therefore easy to take advantage of. Tenants who treat you like shit because you command respect and are in charge. (You can’t win, either you’re too easy or too hard). Property values that plummett because of tenant’s trashing it. Tenants that sue for many tens of thousands of $ due to non-existing and therefore unprovable “negligence”. Overall lower quality of life worrying about a place that isn’t filled, and mortgage payments that can’t be made. Possible bankruptcy. Possible loss of everything else I’ve worked so hard for. All while most of these people get thier money for free.
Yeah, real estate is definitely hell. The only saving grace is when one is lucky enough to find a gem of a tenant (one in approximately 100).
Answer: Don’t forget the tenants that move in and don’t pay any rent because they know it will take months to evict them. So they ride free and then on to stiff somebody else. OH NO! Never had this problem my friend…I’ve always been able to accomplish an eviction within 14 days, in NY anyway. Goodness sakes. If I had to wait THAT long, well, I have some “connections” that for a small fee, will be glad to put the fear of god in a severe asshole. Fortunately, I’ve never had to call upon them, and hope I never will, but it’s nice to know they’re there.
I would go so far as to recommend you find some similar “connections”…if it’s the case that you really can’t get people out sooner, and you come across another individual who’s that willing to take adavantage of another human being (yourself), then that individual needs to learn a lesson the hard way. You simply do NOT treat people like that an expect to get away with it, and this kind of response is the only thing these kinds of people respect, as I’m sure you already know.
Either way, figure out SOMETHING…I’d do everything in my power to make his/her life HELL if I didn’t have these connections. Good luck, and I hope you don’t have to deal with it again. Using “connections”, as you euphemisticly put it, is about the quickest way to jail, bankruptcy or both, that I can think of. Tenants know that and would welcome and encourage you to use force. Ever see “Pacific Heights”?
January 1, 1970
Question: Which is more damaging to ones character: Filing for bankruptcy after several bad debt charge-offs; or settling on the bad debt charge-offs and not filing for bankruptcy. Which one is perceived as more responsible? Seems to me that not filing for bankruptcy leaves the door open to be accused of being a deadbeat while filing for bankruptcy appears as if circumstances were beyond my control. What are your thoughts? Thanks!
Answer: Here in the US, once your bankruptcy is discharged, you are deluged with pre-approved credit cards, can get a car loan immediately (albeit at a high interest rate), and most people can get mortgage loans in 2 years or sooner. I disagree completely.
Lenders of today, unlike those of past years, don’t care that you are making the effort to pay your debts. They make lending decisions based on computer models and credit scores, and often a human doesn’t even see your application (other than the data entry clerk who types it into the database).
There are several problems with slowly paying off your debts. First, there is a substantial expense in doing so. You could spent tens of thousands of dollars in payments over a number of years, with the interest, late fees, overlimit fees, etc. continuing to accumulate, or file for bankruptcy, pay the creditors nothing, and move on.
Second, your credit rating will stink while you are making these payments, which often takes 3-5 years or longer. During this time, many people won’t be able to qualify for a loan (car, mortgage or other) at *any* interest rate. The impact of a bankruptcy filing diminishes each month after the discharge is entered.
Given a choice of paying a higher interest rate and being able to get a mortgage or car loan for less, or not being able to borrow at all, I think most people would opt for being able to being able to get the loan.
As far as my “telling a complete story” and “advertising for his business,” you might want to look at the archives of this newsgroup (alt.bankruptcy) to see whether I have told posters the “complete story”. My “advertising for the original poster’s business,” as you call it, isn’t too good–I have no idea where he lives, and it’s 25 to 1 against the possibility that he even lives in a state where I’m admitted to practice, even if he decides to file.
January 1, 1970
Question: dear friends, my wife and i have a friend who was recently turned down for a loan to buy a house because he filed bankruptcy after his first marriage. we were wondering what are his chances for getting a loan? his wife doesn’t work so he’s the breadwinner and his income is 70 or 80,000. they have a little girl, their family values are excellent, he’s so intelligent and as a husband and father follows solid morals–what a sad process homebuying must be if they can’t qualify for their own home!
Answer: There are several programs which as sponsored by FHA which would most likely suit your friend. As long as the bankruptcy was discharged over 3 years ago, he can get funding for as little as 3% down. If it is less than 3 years, I would recommend that he look for an investor owned property that he can lease with the option to buy, and set up terms that are favorable to both parties. Also, with a good income he could look for a FSBO who is willing to carry a note, or who wants to sell the note at a discount upon closing.
These are just several ideas “off the cuff”. I would be happy to provide more detailed assistance, if you wish. If your friend’s credit has been perfect since the bankruptcy has been discharged and his income is verifiable, he may have several options. If your friend would like me to discuss his options with him, e-mail his name, address and telephone number so I can get specific information and be able to help him based on his specific circumstances.
January 1, 1970
Question: I am looking into 8 properties and plan to purchase 1 as my first investment property. Two factors that I must consider are the value of the property and the cash flow. I have read about many methods for determining property values but nothing on setting a rent amount.
My cash flow will be determined by the amount for which I can rent the property. This is a very important number and I have no idea how to get a range.
How can I determine the amount I should expect to able to rent a property for?
I’ve chceked the newspaper but have found very few homes in the area of the ones I’m looking at.
Answer: It’s only fair for me to explain how such transactions end up happening, and why people should beware of advertising making such claims. Even when they are true, there are other circumstances involved in the transaction that contributed to the final closing price of $1.00.
One cannot lie about property purchase prices, they are public record. I purchased two properties for $1.00 each, 4606 S. Grand, 63111 and 7803 Pennsylvania, 63111 both within the City of St. Louis, both with existing tenants in place, both at $350.00 per month. Albeit one was a deadbeat and hard to collect from, but the other always paid promt.
I met an investor who was getting tired of being a landlord and wanted out of the business. All of his properties were paid for, and I think depreciated down to zero. A couple had new furnaces, and a couple of others had new roofs.
Someone had made him a fairly decent offer on a 6×5 apartment complex, which would leave him with 5 two-story SFR’s and 1 one-story SFR. He was not to happy with selling them off individually, so I made an offer to him to buy all six 50k below his asking price, and agreed to close on all six at the same time. After negotiations were completed, the final purchase price for all six properties ended up at 120k or 20k for each property.
However, it is very hard to get financing on amounts below 25k, so instead of financing all six houses, we only used four of them to obtain mortgages. Each of the homes were appraised and mortgages were secured for 70% of the appraised values of the top four of these homes.
Needless to say, this means the purchase price for each home had to be a set or fixed amount, comperable to the loan being placed on that property. Although we had an original contract to purchase 6 houses for 120k, a new contract had to be written for each individual house, showing the agreed purchase price. Since the first 4 houses used up the full 120k agreed purchase price, the last 2 houses had to be deeded over to me for $1.00 each to make it legal.
FWIW: The as-is appraisals for the 6 properties combined, exceeded 170k, if cosmetically renovated without any upgrades, the appraisals would easily cross 200k. If I upgraded only the bathrooms in each, plus cosmetics, the appraised value of these properties would exceed the 250k mark without a problem. Updating the kitchens would increase it a little more.
I had originally planned on putting about 20k into the purchase, which in essence I did. But a partial cash-out was obtained on one of the dollar homes as soon as it matured, so I recovered my initial investment. So, after the maturation period, I owned six occupied rental properties, some with tenants now over 18 years, at no cost to myself, that generates after debt service a positive cash flow of roughly 1/2 of the collected rents. Insurance, Taxes, Maintenance, Utilities and a Reserve set aside for future major expenses, like roofs or furnaces, consumes about another 1/4 of the collected rents. So roughly 25% of the collected rents transfers to my hip national bank as personal income, with no cash investment of my own.
I couldn’t really call this a no money down deal, because I did make a down payment, that was recovered shortly after closing.
I couldn’t really say I walked away from closing with cash in hand, because it was a year later when I decided to pull a little cash out of the other dollar home.
The only drawback will be when I sell, $1.00 is the basis for two homes that are both now under lease options, each contract is for over 28k and they were both placed under lease option contracts as is, with the buyer doing all the work. Renovated, both houses should appraise at 35k or over for the new owner, if they exercise their option to purchase. If not, they don’t get back the extra 50 dollars per month being applied to their down payment from the rents paid. And I will have collected $400.00 per month rent on homes that were renovated by the tenants. Less some permit and inspection costs, not to mention a couple of small fines from the city, because work requiring a permit was done and an inspection called for and made (and passed), but there was no permit for the inspector to sign, so a 10 dollar permit was obtained with a 40 dollar fine. Still cheaper than replacing a deck yourself, right!
I regularly buy houses for between 3k and 5k that only require about another 5k to bring them up to code. Or roughly 12k to 18k to completely renovate. Most appraise at or over 50k when completed. Occasionally I get a white elephant that renovation costs near the 25k mark and I can only get around 45k out of them, but that’s still at my expected 15k return. So perhaps they aren’t a white elephant at all.
I recommend staying away from homes the city will sell for a buck. They already have made thorough inspections of the property and know every little detail about it, and have flagged every single permit that is required to repair the home. Nothing at all will be grandfathered, and everthing must be to current code standards. Basically this means only a total gut rehab will appease the city. And these homes are in areas where you cannot recoup your expenses.
I don’t know about the rest of the investors on this forum. But I myself do not consider any investment home purchase a good deal, unless, after all expenses, including an age calculated Reserve set aside, there is at least a 25% (of collected rents) clear profit. Or more easily figured, 50% after debt service.
I’ve mentioned Reserve a couple of times in this post. For new investors, a Reserve account is monies set aside to cover future known maintenance expenses. The required Reserve amount I keep is based on 3 things, the Roof, the Furnace/AC (AC if applicable), and the Siding (if applicable) or Major Exterior. Things like Doors, Windows, Gutters and Hot Water Heaters fall under normal maintenance expenses. I use a fairly simple formula that applies to all houses. New Roofs 20 years, Existing Roofs 15 years less current age, Furnaces/AC 15 years, Siding/Exterior 10 years.
Without getting bids, you can find out roughly what it will cost to replace the roof, furnace, siding, etc. by comparisons. Add to this 5% per year for inflation until the time of expected replacement. Then calculate how many months from the current month to the time of expected replacement. Deduct this amount from your collected rents and place it in an interest bearing reserve account, as it grows, purchase CDs (Certificates of Deposit) to earn greater interest. When it comes time to do a replacement, you have the money on hand and do not need to borrow to have the work done. It also becomes a nice nestegg for emergencies.
Although we all carry hazard insurance. Few investors know that their insurance will double if they have even a small claim, or be cancelled and will cost triple if they have two claims. In the state of Missouri, hazard insurance increased 34% across the board this year, due to extensive claims in Kansas City for hail damage, which also affected us here in St. Louis. An unexpected 34% increase in insurance, especially when you own several properties, is a very bitter pill to swallow, and has forced many investors to sell their properties well below market value, many for just what they owed on them, and has driven quite a few into bankruptcy. So that emergency nestegg is an important asset to any business.
January 1, 1970
Question: My wife and I and in the process of buying our first house and are currently evaluating specific custom and semi-custom builders. We intend to build and have been visiting the builders sales centers, looking at models, etc. It seems as though that each builders brochure and propaganda seems to rate itself the highest in each field. This is true for the smaller custom firms and the large production builders. Now, I’ve done the talking to folks in each neighborhood thing and everybody I’ve talked to says their builder is the best. I get the idea that they are validating their decision when I talk to them. VERY seldom have I gotten a response such as “Yes, I spent $300k for this house and, boy, it is a lemon!! I didn’t do my homework and made a bad decision.” Also, I’ve gotten the Natl. Assoc. of Home Bldrs. (NAHB) publications and guess who it is published by – the builders themselves. And guess how you GET INTO the NAHB..You pay dues. Now here is a organization that makes its builder members pay to get into and publishes a magazine about those builders. Very seldom have I seen any articles that say anything bad about any builder. (Would you bite the hand that feeds you?) So where do I go for inbiased, credible, information that is truly independant??
Answer: I am an exclusive Buyers Agent in the North Central Texas area who helps many of my clients build homes (about 40% of my business).
I agree that it very difficult to obtain unbiased data about builders. My first advice to all my clients is that they should read “Your New House” by Alan and Denise Fields (Windsor Peak Press ISBN:0962655627 $11.95). This book really wipes aside all the fog put out by the trade associations and helps you see all the hoops you have to jump through to build a house. IT IS NOT THE SAME AS BUYING A RESALE PROPERTY. Please consider reading the book.
The next thing I do is put them in touch with a consumer group which tracks bad builders. Here in Texas, a prospective builder needs to do nothing more than hang out a shingle saying “Builder, bring me your money”! If your state requires licencing of builders, check with the state. Check the bankruptcy records. Again, here, builders often go bankrupt one day, keep all the money they have been paid, and open up tomorrow as a new name. I refer my clients to Sick of Bad Builders, who keep such records.
Do a credit check on the builder. It won’t help much, but it may point out the worst ones. If they won’t let you, you don’t have to take them your business.
Don’t ask subs. They depend on the builder for their income. Many times, even if the builder treats them poorly, they won’t rat.
And, last but not least: (This may seem self-serving but it’s not) retain a competent exclusive Buyers Agent. There are not very many of us around, but we can really help you avoid those boobytraps and misinformation that’s out there. You have probably noticed that not everybody in these newsgroups has a very high perception of agents. There are many agents who have contributed to the bad image we have. In many cases the complaints are absolutely true. Find someone with high ethics and moral values. Find one who truly represents the best interests of only one side. If you can’t find a competent ag
January 1, 1970
Question: Can anyone give me ideas on ways to obtain a mortgage if I’ve had a previous bankruptcy?
Answer: Be happy to! First, don’t feel all is lost for ever. You can re-establish your credit rating and get a loan. Here are the guidelines.
1- Get some credit, somewhere. Although secured credit cards are available, try for some unsecured credit. Auto loan, department store etc.
2- NEVER, never be late on any payments, ever! Just one 30 day late and the whole game is over.
3- Continue establishing credit and give it a year, two would be better. Then apply with a lender and have a really good (and I do me good) explaination of WHAT, WHY and WHY THIS WILL NEVER HAPPEN AGAIN letter written.
I have had many folks approved for a home loan that have had a BK.
January 1, 1970
Question: Other than the obvious choices of bankruptcy and foreclosure, what might be done by the borrower to force postponement of a foreclosure sale?
Answer: 1) if a couple, have one party declare bankruptcy 2) attempt to renegotiate the loan 3) “sell” the property, and contact the lender to see if the lender will approve the assumption of the loan by the new purchasers 4) transfer the property to a straw buyer 5) do a chapter 13 bankruptcy 6) write a letter to the foreclosing attorney pointing out defiencies in the foreclosing process. 7) bid on the property at auction
i believe that your Internet access is Clarknet in Maryland, so the following are about foreclosures in MD:
In MD, more than 70% of the foreclosure auctions do not occur when first scheduled.
there are more, i assume that the property is in MD, but be aware that declaring bankruptcy does not mean losing your home-it might mean exactly the opposite.
January 1, 1970
Question: A friend of mine is considering buying a house in northern California, in the San Jose area. He can only afford an “adjustable rate mortgage”, i.e. one with a fixed rate for the first three years and a floating rate afterwards. I think this is a bad idea, because with interest rates likely to go up and house prices likely to go down, he might have serious difficulties paying or refinancing his mortgage three years from now. What do you think?
Answer: I think your friend will have lots of company.
It will be interesting to hear the rationalizations those people come up with when the s*** hits the fan. Perhaps we should start a “rationalizations” thread so we can send them good rationalizations to make them feel better while they go through bankruptcy. I bought two properties in Northern California, one in 1990 and one in 1993, and in those days people told me it was a bad idea. But it turned out to be a very good idea, because prices just kept on going up and up. Nowadays a lot of people are still saying investment in California is a bad idea. True, things could be different, who knows. Anything could happen. While it the premise that interest rates may go up in three years may be true, the argument about house prices going down is not. San Jose/Silicon Valley economy is rebounding but more importantly the real estate market is based on the basic fundamentals of supply and demand. The fact is that there are more buyers in the area than sellers most of the time since the area has high paying jobs, great weather, and interesting in many ways to live in. The fate of the area is tied to innovation and innovation pipeline is still flowing. More than one fifth of the world venture capital is the area etc. Innovators from through out the world are still coming to Silicon Valley to launch their products and companies. The doomsayers have been saying that the housing market will crash in Silicon Valley for the past four years. They have been wrong for four years but more importantly they have missed many profitable opportunities to own real estate in San Jose/Silicon Valley. Who knows may be they will continue to miss the point or they may get some wisdom and start getting to know the real estate market better and clear their misinformation that they disseminate freely to friends and others.
January 1, 1970
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