In a podcast I recorded recently, I gave my take on the question I get asked almost daily: “Before I start buying investment homes, should I create an LLC?” I begin by stating that this is a legal question and should be posed to a lawyer.
The 30-Year Fixed Rate Loan
As a non-lawyer, I point out some issues: We talk about the benefits of getting the fixed-rate 30-year loans. These loans are referred to as “FNMA loans” ( since they follow the FNMA – Federal National Mortgage Association guidelines). The FNMA loans will not be given to a new LLC. They will be given to an individual with income, a credit score, etc. Thus if you create a new LLC and buy the property in the name of the LLC, you will likely be giving up on one of the most powerful pillars of single-family rental investments: the 30-year fixed rate loan.
Also, again, speaking as a non-lawyer (always fact check with a lawyer), an LLC has protective qualities only if it adheres to being a completely separate entity from you. It needs its own bank account, checks, (checkbook) books (bookkeeping or software like Quickbooks) etc. If there is a shortage in the LLC, you cannot just transfer money to it. That would be commingling funds and may destroy any protective qualities the LLC might have had.
In addition, lawyers have been telling me that court cases indicate more and more that for meaningful protection, you need to have a multi-member LLC and not just a single member one.
A single member LLC is liked because it is a “pass-through” entity. That means the financials of the LLC flow through to the owner’s taxes and no separate tax return is needed for the LLC. However, a multi-member LLC needs its own separate tax return, K-1’s issued to the various members (and who is that other member, by the way?). That means more costly accounting fees and time spent.
In addition, some states require (besides a tax return), a yearly fee. California, for example, charges $800 per year per LLC.
I also mention that when you buy a home for $180,000 and put 20% down, you have a loan of $144,000. If a lawyer considered suing you and looked at this home, it would be unattractive – since the lawyer may not be a real estate professional, and he or she would assume that selling a $180,000 that has a $144,000 loan on it, will yield virtually no money after commissions, expenses, and perhaps selling quickly (it is not always an ideal time to sell). Thus the very existence of the mortgage is already a good protective measure.
Knowledgeable lawyers I know recommend using insurance as the first line of defense. Get good liability insurance on the home, and get umbrella insurance to cover up to your entire net worth.
Recently, I interviewed one of the best lawyers I have met on this subject, Brett Lytle, partner at McDowall Cotter out of the San Francisco Bay Area. Brett is also one of our expert guest speakers at our quarterly Expo once or twice a year. The podcast interview can be found in the Member’s area on our website: www.icgre.com/members
In a Fortune Magazine article by Chris Morris, published in February, it is reported that in January 2019, there was more inventory available and houses sat on the market about a week longer than in January 2018.
As of January, there was an available inventory of 1.59 million homes overall, versus 1.53 million in December 2018. Of course, the article is lacking by treating the entire country as one monolithic real estate market. Needless to say, there are hundreds of markets, and they don’t always perform in lockstep.
Nevertheless there is a subtle shift, even in mentality, that is more favorable to buyers as opposed to sellers, who until recently reigned supreme. Since we are primarily buyers (and then we hold for the long term), a buyer’s market is a positive for us.
It is interesting to note, and one of the reasons I am posting this blog based on an article several weeks old, is that while in January 2019 sales were flat, in February 2019 sales surged up, but then dropped only slightly. This is likely to continue to lower rates and sellers having to adjust expectations. Overall, we can see that while there is a shift towards buyers in many markets, the market is still hovering near a relatively stable point. With the low interest rates and more friendly sellers, this becomes a positive for the investor.
We like to buy brand-new homes. Clearly, the sellers for us are builders. Some builders don’t want to sell to investors. Our market teams successfully convince the builders that it pays to work with our investors, as they get good volume from us. As the mood changes, these very builders may become more receptive to working with buyers, and perhaps even offer more incentives.
As we head into spring, there is a saying, “…spring is in the air.” And that is not the only thing being felt in the air. There seems to be a persistent notion that the “real estate market” has been going up for too long and is due for a correction. People also point out that the last big recession started in 2008, and perhaps the “cycle” is indicating that the new one may be upon us.
Of course, there really is no “real estate market” in the United States. There is the Phoenix market, the Dallas market, the Kansas City market, and the markets in every other metro area, such as Los Angeles, San Francisco, and so on. Not every local real estate market behaves in the same way others.
All markets do not experience a boom
Even during the major boom of 2004 to 2006, not all markets went through the boom. Some entire states “sat out” that of that one. Similarly during the big recession, between 2008 and 2011, not all markets tanked. In fact, most of the markets that tanked were the ones which had boomed before.
Some states did not move down very much, even during the recession. This is an important point. If the San Francisco Bay Area (for example) does go down and corrects for its fast rise over the past few years, it is not “an automatic” that affordable markets like the Sun Belt states, (like the markets in which we invest) will do the same.
During past recessions, the rentals actually were better than usual. The reason is likely that if a tenant had been saving up to buy their own home, during a recession they are likely to shelve those plans till better times. Thus, even more people rent than during stable conditions. Even if a downturn hits, the investor would likely benefit by just sitting and doing nothing, letting the loan balance pay down and get eroded by inflation, while enjoying lower vacancies.
How the Dodd-Frank bill helps
In addition, measures taken by congress after the last recession, like the Dodd-Frank bill, have mitigated the unbridled risk in lending that existed prior to the 2008 recession. My belief is if and when a downturn occurs, its magnitude is likely to be lesser than the last time.
One of the riskiest things, ironically, is that people delay buying solid investment homes, especially with today’s fantastic interest rates. I have met people from my past who never got started because there was always a recession around the corner, or a boom, or some other news item. Some of these people can be quite regretful 14 years later, realizing they could have changed their financial future but didn’t.
We will discuss this and many other issues at our 1-Day Expo on May 18th. I will also address this topic during our first webinar tomorrow–our official launch of the Members area on our website! Learn all about it and get on board at icgre.com/MEMBERS. Join us and stay informed!
Our ICG 1-Day REAL ESTATE Expo took place on Saturday, March 9th. It was a huge success; thank you to everyone who joined us. Throughout the day, we had 750+ attendees, with over 550 people in the main room at the same time. Great energy! Some of the attendees were KQED donors, who purchased the Remote Control Retirement Riches with Adiel Gorel Master Package. The donors received two tickets as part of their donation to KQED. It was an honor to have KQED members at the event, and what a thrill to explore our tried and true method with so many new folks. There was a good mix of investors: brand new investors, very experienced investors, and everything in between.
Market teams, property managers and expert guest speakers
The questions from the audience at the ICG Real Estate 1-Day Expo were excellent and I enjoyed answering all of them. I had the main market teams present, and some of the property managers within our national infrastructure there as well. Scott Webster from All Western Mortgage described regular FNMA (Fannie Mae) 30-year fixed-rate loans (some at just under 5%, which, for investors, is a low rate). He also described loans available to people who can’t get the FNMA loans, by virtue of owning more than the FNMA limit. He also outlined loans available to foreign investors. The attendees enjoyed the three expert guest speakers: CPA Joshua Cooper talked about the Opportunity Zone and other tax issues. Joyce Feldman talked about using insurance as the first and probably most important line of defense, and Lucian Ioja talked about optimizing real estate investing in the larger context of financial planning.
New offering on our website
Many new investors joined our QUICK LIST, to whom we send property sheets when we get them from the various markets. Those who joined the list will also receive event invitations and updates, throughout the year. (You can also join us, by texting QUICKLIST to 57838, or by emailing firstname.lastname@example.org and request to be added.)
I also introduced the NEW Members Area on our website. The Members Area will be an exciting treasure trove of information, offered in two tiers. It will be fully populated with podcasts, FAQ’s, and other useful information. It is a work in progress right now that we are truly excited about. There will also be webinars on specific subjects offered, as well as special one-on-one “Connect for Success” meetings with Adiel Gorel. We enabled people to join the membership area at a special discounted rate, as an “early member” which is good until April 10th only.
If you were not able to attend the ICG Real Estate 1-Day Expo you can still take advantage of our early member discount. Just use the code MARCHEXPO at checkout to receive 20% off, only available until April 10th. Also, for our early members (at either level), you will be able to attend two LIVE webinars that I will be recording before the “official” May 1st launch.
Everyone’s “membership clock” will only begin to tick on May 1st. Thus, by taking advantage of this discount you are getting a “backstage pass” as we get all our content loaded, and your payment will cover the time starting May 1, 2019. We are excited to have you join us, and will be working diligently to provide useful content to help you secure a strong financial future.
Next Expo May 18th
Many of the attendees from the March 9th Expo registered for the next 1-Day Expo, on Saturday, May 18th. We will have a new market available, three expert guest speakers, and of course loads of Q & A. You can register now for the May Expo here.
In a recent article on CNBC by Diane Olick, it is reported that weekly mortgage applications have risen by 5.3%. It is quite likely driven by the low rates, which may now last longer than previously expected. In general, purchase demand is weakening in the more expensive markets due to affordability issues.
Homeowners’ interest rates on mortgages are now about 4.65%. Investors always have higher rates, but can still get rates in the relatively low 5’s, which historically (for investors) is one of the lowest rates in the past few decades (only higher than the mid 4’s from about a year and a half ago, but much lower than most historical rates over the past few decades).
For us, as investors in new single-family rental homes in the Sun Belt states, demand for mortgages is up, and so is the demand for housing. Yet price increases over the past year have not been sharp. This makes some large metro areas in the Sun Belt affordable and sensible to the investor.
I have said countless time how special it is to get a 30-year fixed-rate mortgage which never keeps up with the cost of living (neither the PI monthly payment nor the remaining mortgage balance). Thus, inflation constantly erodes the real value of our loan, while the tenant’s rent is paying it off. To be able to get such 30-year fixed-rate loans at today’s rate is an extra special gift (for reference, when I started buying homes in the 1980’s, rates on investor mortgages were about 14%).
Investors should buy in the Sun Belt
Investors will be well served to buy new, good homes in good metro areas in the Sun Belt, getting a 30-year fixed-rate loan if they can (FNMA only allows 10 per person or 20 for a couple where both spouses can independently qualify). Many of our investors have exceeded that threshold. However, those of you that still can get these great loans, would be wise to use them.
Reach out to our office to schedule a time with me if you would like to discuss this further at (415) 927-7504 or email email@example.com.
I am often asked about the potential dangers of hurricanes, tornadoes, and other natural disasters in regards to investing in single-family rental homes.
Every state/city in the U.S. is subject to (some type of) natural disaster risks (with few exceptions). Along the coasts, hurricanes happen, in the middle of the country, there are tornadoes, in other states, we have wildfires, earthquakes and more.
How insurance handles property damage
Pay attention to is how insurance handles damage from such events. For example, despite hurricanes being more frequent in recent years, their coverage by insurance is still quite good, so that minimizes risk greatly. We are always here to help you assess the fine print, too.
Tornadoes are more narrow in scope and thus usually don’t even hit homes in the major metropolitan areas at all, despite striking parameters. For example, Oklahoma City does have some tornadoes; over nearly 15 years, our real estate investors bought over 1,200 single-family homes and not one home purchased has been hit by this natural disaster.
Joe Pryor, our main Oklahoma City broker, has not seen any homes hit by a tornado that he knows, and he has lived there for decades. Even if that were to happen, insurance coverage is very good. The insurance premiums in Oklahoma City are quite low, indicating that the insurance companies themselves must consider the risk to be minimal.
Questions about tornadoes and hurricanes
The irony is that most questions about tornadoes and hurricanes come from people who live in the San Francisco or Los Angeles areas. Now, these are areas with real risks – earthquakes – which are poorly insured. In fact, one would need to be pretty brave to own an expensive home in the San Francisco Bay Area, where earthquakes can cause severe (if infrequent) damage, while earthquake insurance is usually very incomplete, with relatively poor coverage.
Feel free to post questions about your concerns and let’s discuss. What concerns you may just concern others. You may also email me at firstname.lastname@example.org.
A classic question I get when talking to a would-be real estate investor is: “Shouldn’t we buy a home to live in first before buying investment homes?”
The answer is – it depends on where you live.
When considering owning your own residence, there are various layers of reasoning. Some are logic and numbers-based. Some are emotional, traditional and familial.
Owning your own home can be associated with safety, security, having “arrived”, satisfying family members’ aspirations, the stability of having a (hopefully) permanent place to live, and so on.
Of course, everyone has a different set of emotional considerations when it comes to owning a home. These vary from person to person and, needless to say, are hard to quantify.
In this post, I will address the logical, numbers-based approach to the question of whether to buy your own home as your first real estate move, or rent and buy investment homes instead.
The numbers tell the story
If you are considering buying your own home, the price of the home matters, the rent required to rent that same home matters, the local property taxes matter, the mortgage interest rates matter, dwelling insurance rates matter, and even the new 2018 tax law weighs in.
If you live in a market where property taxes are relatively low (say, between 1 and 1.7 percent of the home price per year), and insurance rates are reasonable, then if you are considering buying a home under about $400,000, that should be a “no-brainer” as your first step. Between $400,000 and $500,000 would still be a reasonable range to consider buying the home. In such a market, once you step up to the $500,000 range and above, the math may well start to turn as you climb higher in price, in favor of renting a home in the area in which you live. Following that, owning rental homes in more optimal markets makes sense.
Watch out for high property tax and high insurance rates
In markets where the property taxes are high (like in Texas and Oregon), and insurance rates are high (Texas again, for example), the “no-brainer” number may shrink to $300,000 or so, while the range above which you may consider renting your own home while buying affordable investment homes in other markets, will likely be $400,000 or above. This is because with high expenses for property tax and insurance, (which as a homeowner you would be paying) the overall numbers and logic “turn the corner” faster.
Certainly, in expensive areas like the San Francisco Bay Area, Los Angeles, San Diego, New York City and others such markets, it is usually far more logical to be a renter, while owning rental properties in affordable markets, where rents are actually quite high as a percentage of the home purchase prices.
Our next quarterly expo is December 1st near San Francisco Airport. Email us at email@example.com and add “Read your blog post” in the subject line and come as my guest. We will get back to you with registration information. Learn more about the event at icgre.com/events.
September 8th we had our quarterly ICG 1-Day Expo. It was spectacular.
Market Teams and Lenders
The market teams from relevant U.S. metro areas were present. The property managers were there too as always. Our main brokers and some of the builders (who construct the homes) came to the event as well. What a treat!
We had lenders specializing in both the conventional 30-year fixed rate loans, for investors in all 50 states. Lenders were in attendance who can make loans to people who are over the limit to get the regular (standard loans), as well as issue loans to foreign investors for U.S. rental homes.
I conducted lengthy Q&A sessions and gave the opening keynote speech and a couple of seminars. At the end of the day, there was a recap of the expo. During the breaks and lunch, I talked with investors, answered questions and enjoyed their company.
Expert Speakers and Hundreds in Attendance
We had a CPA talk about the new tax law and how taxes are optimized for rental home investors. There was an expert who discussed getting college grants for our kids (or grandkids), as many of us still need help (and think we earn too much to qualify). Our last expert spoke on the new structure of reverse mortgages, which has become highly regulated and different than we have previously known. It is useful to understand how all of this works as many are ready to make use of the reverse mortgage, and those of us not quite there learned a lot too.
Hundreds of people were in attendance – one of our best expos to date because it was a wonderful mix of seasoned and brand new investors. We also had many new people who had just been exposed via the PBS Special “Remote Control Retirement Riches with Adiel Gorel.” Also in attendance were veteran ICG investors. The mix was very useful, as the mere questions asked were a great source of learning for everyone. Our veteran investors love talking to people and helping them learn more about the process and to share their experience. It is like a family reunion every quarter! Many investors come to share stories with each other that have been investing for decades – they like to reconnect. The best part is learning how their lives have evolved and to see their dreams coming true for their future.
People All Came Together
The market teams were available in an airy, spacious and enjoyable space all day, to answer any questions and interact with investors new and old. They brought property offering for us to examine.
The day was highly enjoyable! People were from all over the San Francisco Bay Area, and many flew in from other states to attend the event, which was near the San Francisco Airport.
Many of the attendees have already registered to attend the next Quarterly ICG 1-Day Expo on Saturday, December 1, 2018. We will have a brilliant attorney to discuss Asset Protection, LLCs and other structures, and the correct way to implement it while avoiding common mistakes. We will also have an expert on credit optimization, so that we can qualify for the best rates possible, using special procedures which will be outlined. We are still evaluating several exciting experts to choose the third speaker.
In addition to the most relevant market teams, updates and so on, there will be a NEW MARKET introduced on December 1st.
Everyone reading this blog can register for free, just contact us at firstname.lastname@example.org and in the subject line write: “Read your blog, please sign me up for free on December 1st!” You can register up to three guests (also for free).
Looking forward to seeing you!
Many would-be rental home investors waste years before getting started. Some of the reasons for that are: too busy, fear of the unknown, the all-too-known paralysis of over-analysis, and lack of information. Conversely, the notion that they might never have enough information or money, and need to spend more time researching and studying before they act. Exacerbating this phenomenon, many new investors make what we call “rookie” mistakes when they finally do get going.
The most typical rookie mistake is believing that low-quality homes in bad areas in lesser cities will provide better “cash flow” (foreigners like to call it “yield”). While cash flow may appear to be better ON PAPER for such lesser properties, life doesn’t happen on paper. In real life, these bad properties usually end up wasting even more years of the investor’s time (and also the investor’s money).
Get started on the right foot
There are ways to get started fast (and correctly). They are: buy the right type of property (s), get the right (type) of financing, and use the proper management. Using these simple steps, the new investor can get off to a good start regardless of how much time or knowledge they have.
Remote Control Retirement Riches
On my Public Television special titled “Remote Control Retirement Riches with Adiel Gorel”, which will be airing through the weekend and into early September on Public Television stations across the country (KQED-TV in the San Francisco Bay Area, for example) this coming weekend, August 24th and 25th, I cover these points. Of course, I cover many other important related topics as well.
In the package I have created to the people who pledge to help Public Television, I have included two newly-written books, an extensive video course complete with motion graphics, three booklets, a quiz and a newsletter. The package also comes with the DVD of the show, as many may miss the showtimes.
One of the booklets I have written Is called “Making it Happen”. It targets the exact barriers preventing an investor from getting started correctly. This booklet also contains a self-quiz defining your readiness.
This booklet, coupled with all the other extensive information, and the PBS Special itself, which hits the important points, should get anyone up an running in no time. I will also happily support any investor, as we have already changed the lives of thousands, and I believe in continuing to change lives for the better.
For a partial list of the Public Television stations’ showtimes, please click here.