Author Topic: N00b questions  (Read 1996 times)

snacky

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N00b questions
« on: August 15, 2016, 12:44:38 PM »
Hey there folks

I'm facing a long term disability situation, and the disability money I get through work might not last as long as my inability to work, so I'm diversifying my income streams. A buffer against disaster, as it were. I'm looking at buying a duplex and getting into landlording. landladying. World domination, one residence at a time. my questions:

1. When people run a business they keep the business and its finances separate from their personal finances. Is this the common practice with having an investment property? Do you keep the two as separate as possible or merge them and have the rental house costs become your personal expenses, rental income as your income?

2. Related to 1: If you use the HELOC on your primary residence to make a down payment on the investment property, do you use personal/ household revenue to pay it back asap or is it the sole responsibility of the investment property? I've looked at the formulas and guides on this forum and elsewhere, and it all makes sense except that the down payment $ isn't mentioned. The places I'm looking at meet the criteria in terms of cashflow, if the down payment isn't factored in. Depending on my approach to paying it back, the down payment could be a small increase in monthly investment property expenses, could consume all revenue from the rental, could cut into my  personal finances - or anywhere in between. What is a reasonable approach?

I think that's actually all my questions for now. I will no doubt have more as the situation develops.

Thanks in advance!

snacky

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Re: N00b questions
« Reply #1 on: August 15, 2016, 05:29:19 PM »
Question 3: Would you start out with a single family home or a duplex/ triplex/ multiplex?

Landlady

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Re: N00b questions
« Reply #2 on: August 16, 2016, 11:03:50 AM »
Hi snacky!
I'm sorry to hear about your disability situation, but sounds like you're going to make lemonade your plan! I think I'm in the situation that you'd like to be in so I can answer your questions 1 and 3 from my personal experience over the last 8 years or so that I've been a Landlady. :)

I started with a big duplex that I converted with my husband's house fixing skills into a triplex. We buffed and puffed the old place and moved tenants into two units while we lived in the third. We were just breaking even in the beginning, but now we're seeing $10k in rents each month.

Then 5 years later when we were planning to have a kid we bought a duplex so that we could have a bit more space for a kid. Again, we made this our primary residence and rented out the other side. We were breaking even at first once again because the previous owner didn't raise rents. Once we had our first tenant change we started making real money on it.

Skip to present we are building a house and all 5 units are rented out making us a total of 50k a year after we take out all expenses--hopefully enough to semi retire on eventually. It has been the single best wealth builder for us. I remember being scared at the time we were buying properties thinking we were getting in over our heads, but it all worked out and now I'm patting my past self on the back saying 'thank you'. I'm sure you'll do the same!

Anyway, to answer your questions...

1. Yes, you'll want to keep your rental finances as separate as possible from your personal. You should open checking accounts for each rental property you acquire. I keep about $10k in the account for emergency situations, but that's probably excessive. You can pay yourself whenever you want if your rents are doing well and earning you income. You'll also want to put your rental business into an LLC when you can. But if you plan on refinancing or expanding your empire, an LLC may prevent you from doing so because the bank will only look at the LLC's standing, not your personal credit. That's my understanding anyway - I'm not as experienced in LLCs as some on this forum.
2. I've never done a HELOC so I can't comment.
3. If I had to do it over again I would look for a duplex or triplex with as little sqft as possible - even studios would be preferred. The less space, the more money per sqft you'll make. :) And of course if you have enough down payment and credit to get a multiplex that sounds awesome!

Goldielocks

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Re: N00b questions
« Reply #3 on: August 17, 2016, 10:03:38 AM »
You don't have to keep the finances separate.  Most people with only one unit don't, but there is a lot of book keeping to stay on top of, so realize that separating them is actually much easier.

At a minimum, you will want a separate credit card that you put the incidental purchases onto, and keep a receipt book or log with you / in the car, to track all receipts and expenses / checks you otherwise use..

Obviously, reserve $$'s for your taxes, and / or remit taxes quarterly to make it easier to pay up.

snacky

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Re: N00b questions
« Reply #4 on: August 17, 2016, 10:48:02 AM »
That is good to know. Thank you both for your responses. I appreciate it!

4: How do you collect rent? I don't know anyone with a chequebook or that writes cheques. Cash seems silly. How is this done?

I went to see a duplex today.
One unit is 1/1, tiny but the space was used well, very clean and organized. The other was 4/2, a roomate situation with a dog and cats, well maintained and clean. Both units have their own laundry. Both were in good condition cosmetically and there were no structural issues other than an elderly roof. The roof is Patrick Stewart old, not Betty White old.
My realtor is a friend and neighbour and he's an experienced contractor. we spent over an hour going over the electrical, plumbing, foundation, etc. I feel confident that he is on my side and knows what to look for. There were no red flags.
I like the location, the numbers, and the apparent low maintenance of the property. It's the first place I've seen, but there are very few available that fit my parameters. I'm a n00b when it comes to landlording, but I've bought property 3x in my life, so I like to think that I'm not naive or stupid about these things.
What else should I be asking? It seems good, but not unbelievably so (that would make me think that there was something I was missing, as unbelievable things tend not to be real)
I don't want to jump in and use all my savings without seriously considering it, but all I see from here is upsides. Someone talk some sense, please.

tonysemail

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Re: N00b questions
« Reply #5 on: August 17, 2016, 12:31:54 PM »
I think it's a very good idea to get familiar with the legal ramifications in your area before buying a rental property.
A book like this worked well for me.
You should hit the library and get a book relevant to your area.
http://www.nolo.com/products/the-california-landlords-law-book-lbrt.html

You'll also want to put your rental business into an LLC when you can.

Your story sounds great Landlady!
The LLC is a mixed bag and I've seen conflicting advice on the forum for rental property.
When managing it yourself, there is not as much liability protection.
After all, as the property manager, you're still on the hook for negligence or failing to understand the law.

bpleshek

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Re: N00b questions
« Reply #6 on: August 26, 2016, 02:26:59 PM »
Snacky,

Others have answered your real estate questions, but once your work based disability is gone, you may qualify for disability through Social Security.  My wife was making nearly $65k/year in her job before a car accident and subsequent complications rendered her permanently disabled.  It took about 18 months before the approval was made and they back dated the start date 6 months(if i remember correctly the first year didn't count but we got 6 months while waiting counted) so her first check was quite a bit.  Now it is only about 2100/month, but any extra income is welcome when you have a situation like that.  It might be worth investigating.

Good luck.

Brian

snacky

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Re: N00b questions
« Reply #7 on: August 26, 2016, 02:37:44 PM »
Hello kind folks

Well, disability has an ongoing problem with bureaucratic bullshit and so I had to let this property go. I've decided to put the investment property on the backburner until next April, when my house will be paid off and I'll be in a better position to make a move.

Bpleshek, I am canadian. Different system, but similar ideas. I'm working on it. Thanks!

Hasta April

arebelspy

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Re: N00b questions
« Reply #8 on: August 27, 2016, 07:32:43 PM »
I've decided to put the investment property on the backburner until next April, when my house will be paid off and I'll be in a better position to make a move.

From having read about your situation in your journal, I think this is a smart move.

It's a disappointment, I'm sure, but better to be safe than overextend yourself.

In the meantime, if you think real estate is something you will be pursuing in ~6-8 months, that means now is the perfect time to learn!  Check out some real estate investing books from your local library.  Read about best landlord practices.  Check out the stickied list of books in this subforum on real estate, and read them.  Listen to real estate podcasts.  Those sort of activities.

Learn as much as you can before you dive in, and hopefully you'll avoid some of the big mistakes new real estate investors make.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

snacky

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Re: N00b questions
« Reply #9 on: August 27, 2016, 08:28:58 PM »
Thanks, ARS. In the spring I'll be better situated to buy (or not buy) a rental. This specific property was particularly appealing because it represented a solid plan B. If all the ahit hit all the fans my kids and I could live there in relative comfort, sell our current home, and not have to leave our neighbourhood. That set of features isn't common, but maybe by not buying it I prevented shit from hitting fans quite so soon? Anyways, it's done.