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sd2734
16 Posts
Member Since: 04/01/2008
Stroudsburg, PA
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Posted: 18:53 on 05-03-2008
Hi,
I am in the process of purchasing my first rental property. I have never dealt with a rental before and I've got plenty of a questions.
Should I put this rental (if I go ahead with it) in a LLC or under my name?
How do you guys think the current crisis will affect the Price of Rental houses and also the Rent Levels?
Any suggestions and/or advices to this Landlord in training will be greatly appreciated.
Thanks,
Simon
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d_random
1079 Posts
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Greensboro, NC
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Posted: 23:32 on 05-03-2008
Buy this book, 'Every Landlords Legal Guide'. It is a must have if you are managing your own properties:
http://www.nolo.com/product.cfm/ObjectID/A5659B5E-99B5-455F-B162622144C09F45/catid/5944A0DA-71B3-49EA-BF5D300558FB66A9/213/178/
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mlawre
42 Posts
Member Since: 05/07/2003
Dallas, TX
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Posted: 00:21 on 05-09-2008
For starters, this site is a great place to get free information on this kind of stuff.
These kind of questions are case by case, built upon your financial situation, personal comfort, and location. There usually isn't one answer, but the best one is the one that you've weighed the options and that you find you are most comfortable with.
The main benefit of an LLC is to hedge yourself from losses that would carry over to your own personal finances. But the way I see it, if someone wants to come after your finances, an LLC isn't going to stop them.
If you want to separate your own finances from the rental property and plan on keeping good accounting, an LLC might be what you want. Also, it seems to me it's easier (or more tempting) to 'fudge' a little more with taxes if you mix it with your own finances.
The down sides to LLC: 1) It costs $. 2) Don't think that you will be able to get loans thru your LLC until it has established credit thru your own personal guarantees. 3) Depending on what state you're in, you may have to deal with franchise taxes, have at least one partner, deal with splitting or renewing the LLC.
As for the market, that's a local and sublocal thing. In Dallas, there is no crisis (the market is actually booming). Even if there is a history on the rent rates of your particular property, you don't really know what it will rent for until it is in your hands and you (or manager) market it because your abilities and comfort level in renters will be different.
My overall advise would be 1) don't rush anything you don't have to. 2) be conservative on your estimates on profit and cash flow. 3) Don't be greedy when establishing your rent rates. An empty rental property will eat into you profits way faster than a negative cash flow. 4) If you're 1st generation (i.e. you are financing most of it), realize up front that you're not going to get rich quick. You are investing in something that your heirs will be the ones who likely reap the larger benefit.
All the best
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ypochris
1968 Posts
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Lansing, MI
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Posted: 08:57 on 05-09-2008
mlawre gave a great response, but I want to elaborate on the last statement.
When you purchase rental properties, especially SFH's, and use 100% financing or close to it, your cash flow after all long term expenses will be small. But every bit of cash flow added to your income makes life that much better- the key is to add lots of little bits that come in every month.
Your heirs are not necessarily going to be the only ones who benefit from your efforts, however. Yes, investment in rental properties is not a get rich quick scheme; it is more of a retirement plan. But in addition to the immediate cash flow you should get if you buy right, there are at least five other considerations:
1. Rent increases- over time, rents go up, but your payments do not. A $25 rent increase may be a small percentage of the total rent, but it is a much larger percentage increase in your cash flow.
2. Principal pay down- a portion of your payment goes to principal, and this portion increases every month. This is in fact income, and if you desire you can access this money through HELOCs, etc.
3. Appreciation- Although it is hard to beleive in the moment, properties appreciate over time. There is also the "forced appreciation" you create through improving the property and increasing the income stream (getting a high rent).
4. As the dollar drops, the ease with which you can pay off your loan also increases- this is also a form of "appreciation". In Germany after WW2 or Argentina in the '80s, you could have paid off your loans for less than the price of a postage stamp. Purchasing rental property allows you to borrow large amounts of money without having to pay out of pocket interest, allowing you to "short" the dollar in a big way over a long term with little risk or expense.
5. Don't forget the tax benefits! Once you own a bunch of rentals, your depreciation allowance will always exceed your income, so you will pay no income taxes until you sell the property and have to recapture the depreciation. But the recapture rate will likely be lower than your current tax bracket, and money paid later is worth less than money paid now.
So there are a lot of ways that you will benefit in the moment. Of course, 30 years down the road, when the properties are paid for, the income from even a few rental units will be enough to live on! And you can bring that day much closer by using your cash flow to pay down the principal on one of your properties once you have finished your buying phase.
Chris
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d_random
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Posted: 10:29 on 05-09-2008
Excellent reply Chris. I am always impressed by your depth of knowledge of the business.
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sd2734
16 Posts
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Posted: 11:55 on 05-09-2008
Thank you all for your advises.
Code:
| 5. Don't forget the tax benefits! Once you own a bunch of rentals, your depreciation allowance will always exceed your income, so you will pay no income taxes until you sell the property and have to recapture the depreciation. But the recapture rate will likely be lower than your current tax bracket, and money paid later is worth less than money paid now. |
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Chris, I thought that once the two years of ownership are up, one is off the hook with respect to paying Income Taxes. Does that mean that if it is a Rental, one has to pay Income Taxes on the Profit from the sale even if it is after more than 2 yrs of ownership?
Also, if I place the Rental under a LLC will the mortgage still appear on my Credit.
Regards,
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jimandlacy
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Regency, VA
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Posted: 17:23 on 05-09-2008
Well said Chris!
From a long time multi SFH rental investor.
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mlawre
42 Posts
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Posted: 01:06 on 05-10-2008
Chris,
Nice to have an experienced guy keep us positive and make everyone feel good.
SD,
If you personally guaranteed the loan, it doesn't matter who has the title. The bank and therefore your credit is still accountable. One thing to also keep in mind is that the bank will hold a lien on the property and generally they don't like you switching titles without letting them know. If you do it could trigger a due on sale clause in your mortgage agreement.
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sd2734
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Posted: 10:26 on 05-10-2008
So, even though I am no longer gonna be on the Title (the Property will be within my LLC) my credit report will still show the Mortgage?
Anyone to clarify on the Tax treatment of a Rental?
Do I have to pay Income Taxes on the Profit from the sale even if it is after more than 2 yrs of ownership?
Thanks,
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loon
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Posted: 18:47 on 05-10-2008
Even with an LLC, I recommend carrying a million or more of liability, not much extra. And be sure to screen, screen, screen your tenants, and always run credit. I use www.CitiCredit.net, a few hoops but then you're set. If you haven't dealt with deadbeats and depressing stories before, landlording is a great way to get your feet wet. Nip it in the bud by being very careful. You'll know what I mean a year from now. Good luck!
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ypochris
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Posted: 10:38 on 05-11-2008
"Do I have to pay Income Taxes on the Profit from the sale even if it is after more than 2 yrs of ownership?"
You are thinking of the exclusion for a primary residence. For a rental residence, you will deduct all of your expenses plus depreciation (about 3.64% of the basis you have in the property excluding the land value) from your rental income. This generally results in a loss, which you deduct from other income.
When you sell the property, you will pay 15% capital gains on any profit (assuming you have held for over a year) and the depreciation you have claimed will be "recaptured" at 25%.
Of course if you use the rental as your primary residence for at least two of the five years prior to the sale, then you can use the primary residence exemption.
This is of course a vast simplification, the IRS has a publication on rental housing you should read.
Chris
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