Income property - any good resources for start ups?

[mjimport]

I won't let a few unknowns keep me from going after something, but I will learn more than I ever need to know about the industry as I move forward.

Heck, I never thought I would be living in central PA in the industry I am in, but I saw an opportunity, with plenty of risk attached, and jumped in. By God's grace, it paid off tremendously.

Thanks for all the advice!

Edit: This reminded me of a Richard Branson quote:
"If someone offers you an opportunity you're not sure how to carry out, say yes, and figure out how to do it later"

[apm]

so it turns out the deal is at least financially feasible for me to buy this property.

One catch is that we have been told the current landlord has no annual lease contracts for the tenants, they pay month to month. On that note, now I'm wondering if he even collected security deposits.
I see this as a significant risk, but do you think that is a deal breaker? How easy do you think it would be to implement an annual, or at least 6 month commitments from the tenants? Is it possible to retroactively collect security deposits?
One tenant has been there for over a decade, not sure how she would react to a new landlord with new requirements.

I actually bought a rental house almost a year ago with this very similar situation. They were paying month to month, no security deposit and I let the house closing be like that.

I trusted the current tenants since they've been living there for more than 4 years. 3 months later they gave me headaches until finally they moved out. Took few months also before they got out of the house. They need 90 days notice after living there over a year per local laws.


Didn't pay 2-3 months rent, garbage everywhere, it was awful. I paid about $500 just to clean their left behind.

Lessons learned, don't assume put everything in writing and think about your move long and hard and don't always bank on your emotion and treat it as business to protect yourself and your assets.

My friend has been doing rentals for almost 20yrs and paid off the quadruplex last month. But he still got some deadbeat tenants..guess what... He assumed, thinking he knows the friend of the tenant. He bailed out and owed him $2k..didn't get a dime.

I have a few rentals currently and want to get some more...it's a lot of work and stress, but very rewarding as well. The rental house that I renovated increased 2-3 fold in value in a year's time if I sell it at today's market.

If you have time and money and still young, I'd say go for it. If the price is really really good and you're handy.

[mbonder]

I honestly would tell the current owner that he needs to give the current residents their notice so that they are gone by the time of the closing. That way he has to deal with it and you don't. Make sure to do a final walkthrough so that if they screw with something you can always force the current owner to fix their mess before you take ownership.

You may need to eat a month's worth of rental income, but you can bring in your own vetted renters on your terms with proper contracts and security deposits. In my mind, it's worth the initial money lost to have that kind of peace of mind.

[mjimport]

Yes I'll definitely make sure that issue is resolved prior to taking ownership.


Have any of you set up LLC for dealing in rentals? Reasons for doing so or NOT doing so?

[jrossowvue30]

Yes I'll definitely make sure that issue is resolved prior to taking ownership.


Have any of you set up LLC for dealing in rentals? Reasons for doing so or NOT doing so?

Definitely set up an LLC for many reasons. Insurance, taxes, personal liability, etc. You can set up an umbrella insurance policy with an LLC, that covers and protects you way more than just traditional home owners insurance. You can also set your LLC to be taxed as an S-corporation which allows you to save yourself some on pay role taxes every year depending how you plan to pay yourself. Also, should anything happen and someone wants to sue you, if you have an LLC you are protected so you don't loose your personal assets.

[mbonder]

Yes, set up an LLC so that you are not personally liable if someone sues you.

[GasBuggy]

Consider setting up your LLC in Montana, no sales tax on car purchases, no annual inspection.

[mjimport]

I see alot of recommendations supporting LLC, but as I'm investigating, it becomes much more difficult to justify the financials going with commercial loans and what goes along with it. I have also been told a few times this last week that for my scenario it is not as necessary.
The thing that gets me thinking is that, at least initially, my LLC would consist entirely of personal asset/ equity anyway. So financially, I could get tagged anyway in "worst case" scenario.

What would be the issue of just purchasing an umbrella policy for those "worst case" liability scenarios?

Also, with relatively low "profits" of under $10k (after writing off expenses, repairs, etc.) what tax benefits are there for LLC vs personal?

And yes I am also consulting with industry experts/forums but I always trust R3V!

[M-technik-3]

My rental is a break even on some months and other months its a profit. Just depends on how many times I have to venture down to fix some goofy thing she goofed up. Last week it was the thermostat as she locked up the unit. Grr.

We are debating selling it. Taxes went up on it it again and we have not seen jack squat in improvements for the town.

[jrossowvue30]

The short answer is no, you do not need an LLC. My biggest concerns are that if you have other people living on your property you are open to someone "slipping" and getting "hurt" and they could sue you personally if you aren't protected by the LLC. The way you pay yourself is also different if you are an individual or partnership vs. and LLc and that can affect the amount you pay in taxes at the end of every year.

Yes financing can be more difficult as an LLC or tricky if you were to get a mortgage as yourself then transfer the property into the LLC.

You can buy a umbrella policy without being an LLC.

It totally depends on you.

*Disclaimer: I am not a tax expert or professional. What I do is based solely off the research I have done for myself and feel this is best for me and my business.*

In my case, I have an LLC but I am in a bit of a different situation that you would be as I am a flipper and not a holder. My biggest reason to have the LLC is because I have it set up as an S-corp for tax purposes to avoid double taxation (pay role tax or self employment tax). Since I only own the properties for a few months I am not able to consider it a capital gain, the IRS sees it as self employment if I do not pay myself from the LLC as the owner/employee. Having my LLC set up as an S-corp allows me to pay myself a "salary" (I use that term lightly here), which for me it is say $20,000/yr. I can then take the rest of the profit as owner profit distributions which are pay role tax exempt. In essence yes, I am still paying the full 15.3% self employment tax because I am paying it as the LLC and the employee on the $20k/yr salary but I am also only taxed to the normal tax bracket (28% because I'm single) on the profit distributions. That is huge when you back the 15.3% out of the bulk of my profit.

Also, unless you live in Montana, are going to own properties in Montana or just want to dodge paying personal property taxes on your cars DO NOT set up your LLC in Montana.

[mjimport]

My rental is a break even on some months and other months its a profit. Just depends on how many times I have to venture down to fix some goofy thing she goofed up. Last week it was the thermostat as she locked up the unit. Grr.

We are debating selling it. Taxes went up on it it again and we have not seen jack squat in improvements for the town.

Ouch, sorry to hear that. Hopefully the long term is beneficial to you as short looks to be PITA.

[mjimport]

In my case, I have an LLC but I am in a bit of a different situation that you would be as I am a flipper and not a holder. My biggest reason to have the LLC is because I have it set up as an S-corp for tax purposes to avoid double taxation (pay role tax or self employment tax). Since I only own the properties for a few months I am not able to consider it a capital gain, the IRS sees it as self employment if I do not pay myself from the LLC as the owner/employee. Having my LLC set up as an S-corp allows me to pay myself a "salary" (I use that term lightly here), which for me it is say $20,000/yr. I can then take the rest of the profit as owner profit distributions which are pay role tax exempt. In essence yes, I am still paying the full 15.3% self employment tax because I am paying it as the LLC and the employee on the $20k/yr salary but I am also only taxed to the normal tax bracket (28% because I'm single) on the profit distributions. That is huge when you back the 15.3% out of the bulk of my profit.

Also, unless you live in Montana, are going to own properties in Montana or just want to dodge paying personal property taxes on your cars DO NOT set up your LLC in Montana.

Thanks!, that's the kind of info I need to research more, although I don't believe there will be an overwhelming benefit with such low profits expected. I would absolutely transfer to LLC if I decide to acquire another property or get into flipping.

[tim88325is]

Just some random thoughts...

Have you purchased a house before? Know what to look for when working with an inspector?

I am in PA as well and compared to other parts of the country, our houses can be a lot older than say Flyboy in Houston, where everything is less than 50 years old and houses don't even have basements, just slabs. Less age, less problems.

LLC stuff for protection may be more needed in different parts of the country. A person renting a $500 place in Coal Country PA is probably less likely to sue than a person renting a $4k place in NY of NJ.

Rentals may not be more about immediate monthly income but rather purchasing a place, having the tenants pay it off for you, and in 30 years you have a wholly-owned property that then produces monthly income or to liquidate.

[mbonder]

The problem with that idea, however, is that you need to make sure that several factors go your way for that to be a worthwhile investment:

-The value of the home outpaces the interest on the mortgage you'll have as well as inflation.

-Your rent is more than the cost of your mortgage/insurance/taxes/fees on a monthly basis by a fair margin so that you can set money aside for repairs as well as build wealth in case your property doesn't fulfill point #1.

Depending upon where you are, you might not be able to make both of these work. For most mortgages in our current climate, if you take a 30 year mortgage and pay it off in 30 years, you will have spent nearly double the original mortgage amount to purchase that home (even at today's low rates).

For instance, the total cost of a 30 year $110k mortgage is something like $205k. So, the hope is that the property will be worth double in 30 years what you paid for it. If you are in a metropolitan area, chances are that you won't have to worry about this, but if you are in middle america, you might have more of a problem.

Add on top of that 30 years worth of tax payments and you need to recoup far beyond double to make that investment worth it.

Which is why unless you are in a metro area, it might be better to simply invest your money in a low fee index fund that mirrors the S&P 500 or something similar as you may still be losing money in the end even if you have solid renters for the 30 years that you own the property.

[mjimport]

Yes there are many variables to consider and almost all of them become more or less critical with each region, making it quite difficult to obtain and apply expert advice.

If you apply good business sense though, and monitor your performance each month/quarter, you will know quickly if it's going to be worthwhile. I think alot of people hold on too long and try to justify the future based on sunk costs, and I'm not just referring to real estate.