Income property - any good resources for start ups?

[mbonder]

Keep in mind 67k in 1981 dollars is 170k in 2011 dollars before you're cashing in that "300%" return...

That's exactly what I was talking about earlier. Is it worth 30 years worth of repairs and hassle from renters for a mere $70k? I think I'd rather just put my money in the market and get the same return with none of the hassle.

Now if I knew I'd be making exponentially more than that, maybe 3x or 5x that $70k it becomes a much more intriguing thought...

[mjimport]

As "jross" recommended in page 1 here, biggerpockets.com has great info on how to determine viability. Cash on cash ratio is one, from what I'm told, 15% cash vs investment is a good number, but less than 5% is no go. Also I've been told that landlord should use the "50% rule" which says your expenses usually average out to 50% of rent revenue.
But if this is true I'm not sure how anyone makes money, unless it's a straight flip investment.
I was looking at a house that would have made zero profit if using 50% rule, but showed great cash flow sing the COC ratio (20% +). So basically there is no equation that will tell whether to pull the trigger or not, some of it always comes down to your gut.

[tim88325is]

Oh yeah, I tell people that Ancient Aliens or Finding Bigfoot is way more realistic and plausible than gut renovating a kitchen in 3 days or whatever....

[george graves]

Just an FYI, those TV shows of people flipping houses, they often fake the numbers. They won't clear $30k on a flip as they say. It might be much less - and sometimes in the red. So why do they agree to do it? Cause the production company is giving them 50k for just shooting the show over 3-4 weeks, and sometimes fronting the money.

[tim88325is]

That is true, I did use the adjusted numbers for the S&P though.

I am really not trying to argue either way but am in the same boat as the original poster, considering a rental property versus other options. I can do the maintenance but not entirely sure I want the hassle.

My family has done well with shorter-term rental properties in the past, sometimes even doubling their money in less than 5-6 years, all pre-housing bubble.

What would be a comfortable cushion for a rental property? 20% per month after fixed costs?

Two units rented at $600 each with a $1000 mortgage taxes included = $200 a month to save for future expenditures? That could get sucked up very quickly if the property is deteriorating.

Thanks for all the ideas.

[Hansel]

According to Census.gov, the median home price went from $67K in 1981 to $240K in 2011 or 358%, the S&P 500 yielded a 287% return, if all dividends are reinvested this bumps up to 777%.

Keep in mind 67k in 1981 dollars is 170k in 2011 dollars before you're cashing in that "300%" return...

[tim88325is]

Depends on the investor too.

If you are inclined towards banking and checking the stock market, maybe a low fee index fund is better. If you know how to paint, do plumbing, electrical, etc. and have the flexibility to cater to issues, no reason why an investment property wouldn't work out if purchased correctly.

Central PA is world away from the greater NYC metro area. Who cares what the mortgage interest is, it is never going to get better than now anyway and what are the options if one is not already independently financed? The renters will pay it, you are leveraging their income to build assets for you.

http://www.realtor.com/realestateandhomes-search/Williamsport_PA/type-multi-family-home

According to Census.gov, the median home price went from $67K in 1981 to $240K in 2011 or 358%, the S&P 500 yielded a 287% return, if all dividends are reinvested this bumps up to 777%.

[ColdAccord]

Have you had a home inspection done? If there are any issues, you may be able to have the seller take care of them and roll cost into the mortgage. Or perhaps the situation qualifies for a 203k where you can get your repair costs rolled into the mortgage. It's always best to borrow high and roll everything into a small monthly payment than pay thousands out of pocket for repairs. Even if you have a huge cash reserve that money could go towards other projects instead.

Commercial is more difficult to find tenants for than residential. The less expensive the property, the more at risk you are for bad tenants.

An LLC is a good idea, to cover your ass. My buddy was getting his roof done, one of the workers fell and broke his legs. Roofing Co. had an insurance lapse, so guy sued my buddy and settled for some big bucks from him. Good insurance saved his ass.

If it's in a rough neighborhood talk to your councilmember and see if there are any grant programs available.

I'm renovating a 7 untit 16,000 sq ft building right now. It's a huge headache. But it should pay off well in the end.

[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.

[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.

[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.

[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.

[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.

[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.

[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.