One of the most asked questions I asked of me, or I see on other forums, is how to hold rental property. Should it be an LLC, S-Corp, sole proprietorship, etc. I cannot speak to all the benefits of each method, but I can speak to what I have done with my properties. You may want to consult an expert (i.e. not me) to determine what is best for yourself.
Here is the way I hold rental property, and the reasons behind it.
A few months ago, I wrote a piece about another investment property purchase I was considering. If you want to make money as a landlord in real estate, you must be able to purchase rental property at a discount. As it turned out, that property never materialized, probably for the best. I was going to be a partner on a $1.4M property, put up $100K+, and be a partner on a $1M loan. I did not want to get stuck on a large loan, with limited mechanisms to get out.
As it turns out, all good things come to those who wait. Here is a recap of my recent investment property purchase. Remember, if you buy via the MLS, you are probably paying too much.
At one time, I was just a working stiff. I still am, for now. Working a 8-5 job, sometimes on-call, weekends, and trying to climb the corporate ladder. I was a member of a hot shot team that was selected for future management. When you are climbing your way up, you have a tendency to make a lot of people happy, and some not so happy.
It’s fun when you are making a lot of money; but you know the money train cannot last. At some point, a merger may knock you down, a layoff, a boss that you cannot satisfy, or some other reason that you may not even understand.
Regardless, you need to make sure you are prepared. An emergency fund comes first, then becoming debt free, then bringing in other forms of income. I already had the first two, when I started investing in real estate. Here is how I knew I finished the journey to be financially secure.
For those of you who follow my Blog, you know that my properties are very close to my own home. All are within a few miles; the furthest is seven miles away. It may not always be that way, and sometimes you will need to manage your properties from a distance. Even if your properties are close, if you move, perhaps to a retirement location, you will need to know how to manage out of state rental property
The secret to managing any property is to have great tenants. Great tenants can think ahead, and can anticipate issues before they occur. They take action to avoid having a problem.
Regardless of where you live in relation to your properties, you need to be able to manage them effectively. Whether they are 7 miles away, or 700 miles away, you need to set yourself up so that you do not have to be on-site as often.
My recent trip to Florida will illustrate an example that can help.
Are you holding the proper rental property asset allocation?
My investment account has finally recovered from 2007. That’s right. My investment account has finally surpassed my account balance record set way back in October 2007, over eight years ago. (It actually passed the mark a few months ago, and I just got around to writing this post.) It was only just about $50K higher in 2007 that it was back in 2000 or so. My current 401K, which is nearly as high as my investment account is today, was at $0 in 2003 when I started at my current mega-corp, as I have always converted my previous employer 401Ks to an IRA, and a Roth wen i could afford to pay the tax hit.
If you do not have the proper investment allocation, you could be in for a large surprise in your quest for financial independence. Being financially independent is not just about having a large amount of money. It is about multiple income streams and redundant sources of passive income. And living below your means. Here are a few insights into what I have done to become financially independent.
If you’re a new rental property owner/manager, or if you’re just not comfortable handling tenant disputes or confrontations, then you might get panicky just thinking about having to confront tenants about issues that arise.
My boyfriend has this problem. Apart from his current rental which began just a year ago, he has no prior landlord experience, and watching him learn how to handle issues has reminded me of how terrified I was when I first started. When I had to handle my first tenant complaint over the phone, I remember my hands shaking because I was so nervous. I’m an introverted person, so I hate talking to strangers anyway. But this was going to be even worse: I wasn’t just introducing myself to someone I didn’t know, I was going to be fighting with them over money! Yikes! Maybe most people are braver than I am from the get-go, but I felt like I was going to throw up. Good way to start a phone call, right?
If you have been following along, you know that my rent collections are outstanding; this month I had trouble. My renter bounced a check. I have not had a truly late payment in several years, other than the one tenants that I inherited when I purchased the building.
I have had a few payments after the first, but always received before the late fee kicked in after the 5th, and have not collected late fees, or even waived them, for rent paid on or after the 6th in a long time.
However, I recently had a check returned to me from a payment that was not honored by the bank. My renter bounced a check. Yikes! my mortgage is due and I am short rent.
Never underestimate the amount of headaches you can have with rental property appliances. When my boyfriend moved in with me about a year and a half ago, he decided to rent his place out for some extra rental income. Because we were combining households, we had no need for his washer and dryer, BBQ, or refrigerator. He figured that he’d be a nice guy and offer those items to potential renters for their use while they remained renters.
If you have ever contemplated becoming a Real Estate Investor, there are things that you must understand. Once you cross the line, your life will never be the same. You will have crossed to the ‘dark’ side of making money. A 2% savings return will look paltry. Of course, just getting back your initial investment might also look like a windfall.
Things you take for granted now, will forever be gone. But you will persevere, for you know that the fruit will be there to harvest at a later date. Sooner or later, you will be able to pick the fruits of your labor and enjoy them. And no one will tell you that you have to wait until you are 62, or 65, or 67 or 70.
Your view on other properties will change. How much can you buy it for, how much can you sell it for. A distressed house on your own block becomes an opportunity, not an eye sore. A friend with money may become a partner, not someone to envy. A junk toilet sitting in your backyard becomes a trophy, not a piece of junk (not right away anyway…).
When a new large store is being built, you hope it is a home improvement store, not a clothing store. You look at all the colors of paint on the color wheels, and know that only one or two would you ever buy. You realize that many of the paint colors should be illegal to sell.
How have your views, on anything, changed once you became more involved and in tune with the activity? Have you ever thought “I will never think or do something like that”, and then a few years later you want to “think like that”?
Are you maximizing revenue from your real estate investments? If you have rental property, there are literally hundreds of ways to make extra money. I often thought if I had 20 properties to take care of that it would be a full-time job for someone, possibly me. In addition to the rental income, at a time I was running a small lawn care company, trying to generate enough money to live on. That mowing, plowing and miscellaneous maintenance also generated capital to kick-start my seed money for real estate investing. Never underestimate the power of saving money, or the ability of a side gig to create a lot of extra capital. Every hour you spend making money for yourself, is an hour less you have to work for someone else.
Now that I have my rentals, I always look to save money or generate new revenue streams from my tenants. I am not looking to gouge them, but for ways to leverage my skills and their money.
Here are a few tips that I have either done, or have thought about doing. Actually I have implemented all but one of them, although not every one on every tenant. Most are common and not rocket science, some are not.
If you have ever wanted to quit your full-time job, and wondered how it would be possible with only a few rentals, this could be a way to help with your ticket out of the drudgery of working for a boss.