Topic: Rental Property Investment Analysis (Read 2650 times)

Okay, fun research on LLC's.  They are pretty easy to create and maintain -- initial filing, and one annual filing per year.  And it must have its own bank account, which is used to collect rent and pay expenses, and transfer profits to you.  The account doesn't need to be used for 100% of business operations, but it does need to be used 0% for personal finances.  Any money that you want to use for personal finances can simply be "paid to you" by the LLC.   I'm pretty sure that's just a fancy way to say "write yourself a check from your business bank account".  

$100 filing in MD to start, but $300 annual filing fee after that.  It's not a deal-breaker, but it is doubling my insurance costs.  But I assume it's at least tax-deductible...?  

Having done some research on this now, I stumbled across one article that was rather blunt about how to really minimize your liability exposure.  This is some serious LLC magic:


I'm sure it's not quite that simple, but I'm sure it's not too far out, either.  This kind of reminds me of sandboxing security-sensitive software -- your goal is to completely isolate it, so that no matter what goes wrong, nothing can escape the sandbox.  In this case, you can try to continuously transfer all the value of the LLC out of the sandbox... to you.

This is a bit extreme, but it's educational.  Given just how unlikely it is for this kind of thing to crop up and overrun my insurance, I don't think I need to play these games.  But if it turns out to be easy, why not?  

As long as there is only one owner, you can "pass-thru" the finances to your personal tax filings.  If there are multiple owners (such as husband and wife), you'll have to file it as a separate entity.  Apparently, you can avoid this by having one person be the sole proprietor and give the other the "right to survivorship" in the event of death of the first owner.  

Corporations sound complicated and scary.  I always assumed they come with endless paperwork and generally require lawyers or endless research to deal with it.  It sounds like I will have to do some research on LLCs to see what it takes, and I'll be pleasantly surprised about how easy it is.  I wonder if it also allows me to take certain deductions I otherwise wouldn't be able to (such as passive income losses, which can't offset ordinary income if you make more than $150k/yr, unless you are a real-estate professional -- this is not modeled in the spreadsheet, btw, because the purchase/rent ratio is so favorable, I rarely have to worry about annual cash losses; equity losses are handled entirely separately).  i.e. now that it is owned by a corp, I wonder if all losses become deductible, etc.  Perhaps, if Romney becomes CEO of the US, he will make conditions more favorable for us small businesses... though I suspect most tax changes would be geared towards benefitting the already-successful multi-multi-millionaire crowd...



Thanks.  And part of the reason this is attractive is because it seems like it should be very little work on average for 8% return (under reasonable circumstances).  If it looks like it's going to be much higher than that, then we just pay for a mgmt company to deal with it.  Free time (for things like Armory) has always been high on my priority list.



Excellent advice jgarzik.  I will have to keep in mind the social aspect of this.  Being the nerd that I am, social confrontation is not my favorite activity, but I think I can handle it.  I will be sure, if I carry through with this idea, I will get a unit in one of the buildings on the other side of the association   Still walking distance, but don't have to run into the tenant on a daily basis.

Your plan makes sense to me and I doubt it will be much trouble.  Opening a business acct and forming an LLC on legalzoom should be a snap if you were nervous about liability plus there are plenty of good boilerplate rental agreements and contracts you can use for your tenants.

In my opinion it is good to protect yourself as much as possible, however many people seem so paranoid of worst case scenarios they miss out on potentially good opportunities.

Hope it works out and doesn't steal too much time away from the good works your doing on Armory of course.

Disclaimer: IANYL, nor may I provide tax advice.

If you want to avoid all the craziness of accountants and lawyers (now), form an LLC. They are laughably easy to form. From a legal standpoint, you get the benefit of limited liability. That way, if anything does come up in the future (completely regardless if you have been doing everything correct or not), your personal assets are not at stake or at issue. From a tax standpoint, the IRS has made it as easy as checking a box on your individual 1040. The LLC is a "disregarded entity" in the eyes of the IRS, and its income is reported as your individual income. I do not know what you forego in terms of being able to claim deductions of the business; talk to an accountant.

JFYI...  we currently own two single family homes, right next door to each other.  We are trying to sell the smaller of the two, but renting it out has crossed our minds.  Many of our friends are landlords, too:  young, a little bit of financial headroom, own 1-2 properties.

The main thing that stops us?  Being landlords to our neighbors.  Two data points:

1) My story:  About a decade ago, when I was a renter, I lived next door to my landlord, who seemed a very reasonable fellow.  Late one night, I heard banging on our door.  It was the landlord's girlfriend, who had just been beaten by the landlord.  We protected her, called the police, who came and carted the landlord off to jail.  The next day, the landlord was out... and served us immediately with eviction papers.  It was a fraudulent eviction, I called our sexy attack dog lawyer, and things got legally nasty for a while.

2) Friends' anecdotes:  As a landlord, they say, you will eventually evict someone.  It is inevitable.  Therefore,

• Follow eviction procedures in the lease to the letter.  Do not give second chances, accept partial payments, etc. or they will bite you in court.
• If you rent to friends, remember you may have to evict that friend.
• If you live near the property, you have to live near someone who hates you, for kicking you out of "their home."

So go for it... as long as you are not next door neighbors to your renters.

One of the primary motivations behind this was that the property would be next door.  This dramatically cuts down on "unknowns", since I've already lived in the same HOA for 2+ years.  I know all the fees, what the construction is like, what problems are consistent across many units, how much it costs to replace appliances, etc.   I recognize there is potential headache associated with property management, but I'm minimizing the amount of headache by being right there and knowing so much about it already. 

Also, I know some other people who flip/rent properties, and have good contractors they use for these things.  I really can't imagine needing to pay 8% for professional management of this single property.  Plus, I'm part time at my real job, which gives me lots of flexibility to deal with issues.  The other benefit is that I am near a lot of really high-quality work places -- it's not unlikely I can find someone at my work (5,000+ employees) to rent, which gives me a good chance of smooth sailing...

But once I got 2-3 or three properties, I think it makes sense for management. 

Also, I do recognize the whole liability thing, and obviously I want to avoid it.  I just wonder if there's not going to be a bigger headache dealing with intra-state corporate laws and incorporation, to avoid something that is about as likely as winning the lottery.  Yes, super-nasty things have happened to landlords.  But I can spend my whole life worrying about that, and then get killed by a drunk driver tomorrow.  But maybe I'm underestimating the likelihood of something like that happening...

Part of the appeal for us was that I thought this could be done, not only in the same complex as we're already in, but without hiring lawyers, accountants, or doing endless paperwork for incorporating and complicating the hell out of my taxes.  The more stuff we throw on top, the less interested we are in pursuing this.  But, maybe it's fantasy to believe that we can pull this off (safely!) without all that mess.

I was just talking about this the other day in https://bitcointalksearch.org/topic/real-estate-investments-in-bitcoin-112121 I will follow this thread to see where it goes! Very Very intrested

I own some rental property and actually have been actively looking to acquire more very recently.  Your spreadsheet looks pretty thorough (the one I made for myself was a bit less detailed so I might steal this one in the future, thanks!).

According to my own experiences for ~100k properties you will want at least $1500 in rent revenue to cash flow well.  Properties around 150k should gross 2000+ at least.

For me what counts is that the property will still cash flow even after HOA, warranty and property management fees since the idea is to grab many of these to generate passive income without sucking up too much of your time.  You can oversee a lot of properties that all make you money easily if they are all managed by a professional, however managing even a single property on your own can potentially suck up a lot of your time and be a big headache not to mention liability.

In my area while there may be some single family homes that would fit the above criteria they wouldn't cash flow much.  The real winners are 4plex multi-family units for this (and more units if you can qualify for a commercial loan).  I would strongly recommend you look at affordable 4plex properties in the area and run the numbers on them.

About 1.5 years ago I bought a 4plex for under 100k and am renting each unit out for around 600.  Those types of deals have dried up quick in my area but it looks like I can get a similar property now for 130-150k ish which would still be decently profitable.

Good luck man.

The problem as I see it is that the legal system isn't deterministic.  Doing everything right seems to be a necessary condition for not getting screwed in court, but not a sufficient one.  Defense in depth seems to be the key, be a responsible landlord, but don't assume that your tenants are going to be responsible back.  Losing in court may not be likely, but it sure would suck if that wiped you out.

Nevada's corporate laws are very lopsided in favor of asset protection, and ease of use.  There are costs to be sure; the trade off is one that you have to decide on your own after researching the implications (tax and otherwise) thoroughly.  I've seriously considered setting up a Nevada corporation to own my car for me, if that gives you some idea of my personal feelings on the matter, but I can see how just about everyone else would consider that overkill in light of the meager assets that I would be protecting.

S-corps are generally preferred for federal tax reasons, but they have limitations in ownership that might matter when setting up a more complicated structure.  As in, I think that all shareholders must be US natural persons, not other corps or trusts or whatever.

This HOA is very good.  They charge a little bit more than neighboring associations, but they maintain very good reserves, and still have plenty leftover for other stuff (such as replacing the pool!).  It was one of my criteria when purchasing, and so far I haven't been disappointed.

The liability is a valid concern.  And while I recognize that "crazy shit can happen," I question how bad it can get.  The tenant has to prove that I was aware of the problem, a record of notifications/requests made to me, and that I was negligent in repairing it.  My understanding is that if you make every reasonable effort to address it, it's no contest.  Even if such shit happens, most of these landlord insurance policies cover quite a bit.    It's dirt cheap (relative to everything else) to increase a "standard" landlord policy to $500k coverage of such events.  Sounds like it's worth it!

I originally posted this in the Armory thread, because I was explaining why I neglected Armory for a week.  But the subsequent discussion is very off-topic for that thread, so I'll continue it here.  The link to spreadsheet is in my first post, but here it is again:

Spreadsheet for analyzing rental property investments.

The numbers that are pre-filled in are extremely representative of the 1100 sqft condo currently on the market that inspired this discussion.  kjj's first response was very much tailored for a single-family home.  I think it was excellent advice in general (which this thread can be about), but not so applicable to my potential situation.  Read on below and contribute your advice!  Especially, if you have any actual experience with rental properties and the taxes.

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Original posting:

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