I'm a A True Newbie!!! HELP!

Hello everyone!

I have been reading these forums and it has been extremely helpful. I have some really newbie questions, so please bear with me. Quickly for background, my three sisters and I want to buy a rental property and split all the responsibilities and income evenly. We all live in southern CA and two of us are homeowners and 2 of us live in an apartment. None of us are rich financially or real estate investing experience. Two have good credit, two do not and one sister is a stay at home mom while the rest of us all have jobs. We have at the most, $25,000 between the four of us to buy something and the rest will have to be financed. We are looking for something that we can rent to cover the mortgage and we are of a buy and hold mentality.

  1. Do we create an LLC before we do anything else?
  2. As an LLC can we get financing?
  3. What do you recommend for newbies in our situation? How do we start slow and conservative and build a foundation?
  4. We feel we can only afford something out of state but is that crazy for newbies to start with an out of state investment?

For any and all of you who did not have very much capital to begin with, where do we start? We feel we have to start somewhere but we are very scared. I know it is crazy that two of us are still renters and looking to buy an investment property, but we simply cannot afford a property in Los Angeles. Any advice would be greatly appreciated!!! :help

I’ll offer some advice, take from it what you feel pertains to your situation.

  1. Creating an LLC isn’t necessarily a step that has to be taken immediately. When you go to the bank you can borrow from the residential lenders or the commercial lenders. If you fund your deal on the residential side they won’t care either way. Commercial lenders will probably want to see that you have at least setup a company. LLC’s are created because of the liability protection and the pass through tax advantages when compared to a corporation. Because there is 4 of you you may want to explore different ways of forming your company. For example an S corp. will allow you to have stock/shares and you could each own 25% of the stock which will make it easier to transfer ownership of the company when the time comes for that, and it will.

  2. So assume you’ve taken the step to setup an LLC and you go to the bank and get your property or deal financed. Your LLC will have what is called an employer id number (EIN). Essentially, this is a Soc.Sec.# for a company. The bank will loan the money to the LLC and the title to the property will be in the LLC’s name but the bank will make each one of you personally guaranty the loan. So if you default, they’re coming after you. This is called a recourse loan. Non-recourse loans are made to the business only and there is no personal guaranty.

  3. You are going to have a million different opinions as to how you should start given your situation, and here’s the route I would take. I would start with a duplex, maybe triplex since there is 4 of you and you can kind of share the mgmt. responsibilities and see how this biz works. If you can find something for let’s say 250k. The bank will give you 80%, which is 200k. So you have to come up with 50k from your own money, equity in other properties you own, or (the route which you should take) seller financing. Make an offer to the seller that you can get 80% from the bank, you’re putting up 10% of your own money, the 25k, and you want the seller to finance to you the other 10%, or 25k. Or you could find a seller who will finance you the 20%, so that you can keep your 25k, but chances are the bank will want to see you put up something since it will be your first deal. Offer to put 5k in a CD if they do this.

  4. I don’t know the SoCal rental market that well so this is purely speculation. I do know prices are outrageous and personally I don’t understand how anyone can afford to live there, let alone buy properties that cash flow. Anyways, if you can buy local you better stick to that. I actually wouldn’t recommend to anyone, anywhere, to buy out of the area on their first deal. This opens up a whole can of ‘what if’s’ that you don’t want to get involved with if you’re not experienced, and even if you do have some deals under your belt. Namely, management. That’s just another expense, plus prop. mgmt. companies are nototious for not being so great at their jobs.

My first deal I did just as I described to you what you should do. I spent a year or two reading up on the business and working as a prop. mgr. and then when I felt like I was ready and could properly evaluate the property I made an offer. I asked the seller to hold 20% and he agreed. After that deal I had instant equity which I used to buy another, and that’s how it started. I was diving into this with no job at that time so I had to create cash also. If you buy low enough you can borrow more than the purchase price and get that cash at closing, but that’s another technique you’ll learn down the road.

So that’s my 2 cents, keep in mind these are real general numbers and situations, they can become complex, but nothing too difficult. Just make sure you evaluate the property correctly and then make you’re move and don’t look back. Good Luck.

I think when the 4 of you begin a partnership like this, it’s important to “plan for the divorce” before you set up. You have to have an exit strategy should you decide the partnership isn’t working. Since you’re all family, you have to make sure this doesn’t come between you. my personal feelings are to stay away from business with family. Everything and I mean EVERYTHING has to be spelled out in writing and signed by all in regards to responsibilities, profit sharing, etc… There is nothing more important than family. Nothing. Having said that, I think it’s important that you all read as much as you can on REI. This is a great site with a lot of helpful members. Before you jump in start looking at properties. You have to absorb as much info as you can on REI. I don’t mean the info-mercial guru stuff. Read books. One I recommend is " The Millionare REal Estate Investor by Gary Keller. This book goes into great detail on the how’s and why’s of REI. It also has proven models developed by over 100 millionare REI’s across the country. It’s also easy to read. Another is 'The ABC’s of Real Estate Investing" by Ken McKelroy. Join you local REI club and/or landlord associatio. Usually the members are very helpful and you can gain valuable contacts. During this time, it’s also important to raise as much money as you all can. Then you want to asemble your team. All your education and networking up to that point should guide you to do that. Establishing education, capital and a team will give you the best shot succeeding. Remember that success in REI is neither quick or easy. It requires a lot of hard work and dedication. Good luck to all of you. :beer

Girls, you’re putting the cart before the horse. You don’t need an LLC right now. What you do need is to slow down before throwing your money away. Take a smart and conservative approach to this business and you’ll be in it for the long run. Turn this into a speculative venture and you’ll be out of business before you even get started.
You need to narrow your focus and your choices as to how you want to begin acquiring properties. Then, once you’ve done that, become knowledgeable and educated in that area before spending your money.
Good luck!

Hello All,

I say you need to take a step back and develop a game plan before you buy anything. Decide what type of property you want to buy and the type of tenants you want. Think about emergency cash issues such as when the renters are not paying but you have expenses that have to be paid right away. Think about who is going to work on the weekends to fix stuff or clean up the grounds because you are all trying to save on expenses. Think about who in your group is really cut out for this type of investing. I say that because everyone loves to come to the party and have fun but not everyone likes to clean up afterwords. Property investing is hard ass work and will require more time, money, and energy then you have in the beginning. Yes it is rewarding but only when you decide who is the boss and then things will get done. I got into it five years ago as a second career and now I own a 16 unit complex in Nashville that I run on my own along with a full time job as well. Are thier hard times? sure, but the cash flow is awesome because I bought it so cheap and I put in the hard labor and sweat.
Oh and one last thing, plan on one of your business partners bailing out at the first sign of trouble. It always happens.
Good Luck

I don’t normally recomend an LLC, but with 4 partners, I think this is a case where an LLC is needed.

If one of the sisters makes a mistake that gets your partnership sued, the rest of you will have loses limited to the actual LLC and not lose everything you own.

LLCs have to be very carefully maintained, or you lose any protection that you had with them. Consult with a lawyer about whether one would work for you, and how to maintain your LLC. An LLC obtained off the internet is cheap and also completely woorthless.

Then you never say to aanyone that the LLC is for asset protection. You always say it is used as a tool to manage the partnership and management.

If you are going to have rentals, study the landlord tenant law and the fair housing laws, and the Ameericans with disabilities act. Mistakes there are where you get sued, and it is really easy to make a mistake, because some of those laws just do not make any sense at all.

you have a number things going against you, but here’s some thoughts.

  1. Four-way partnership is very difficult and even more so considering you are all noobs. The concept of an equal partnership is well…a nice concept but reality will likely be far from it. What is likely is one or two people will do most of the work, efforts ,ect so you should probably plan on setting it up that way.

  2. Finding stuff that will cash flow in SoCal is extremely difficult. Moreover, areas that MIGHT yield a breakeven sitaution are pretty much in a price-free fall situation. However, to go out of area adds an extra layer of complexity and difficultly.

So, yes, you will definately need an LLC and a quite detailed operating agreement. A cookie-cut, off the Internet on is probably not a good idea.

A duplex would be a good route to go if you find one at the right price. In a weak market like this asking for Seller carry-back is a very good idea, but I think its unlikely a lender is going to want to see a CLTV above 90% on an investment property. Note, you need to go talk to a few lenders and get some basic parameters from them before looking.

Lastly, focus on an area and then go look at 10, 20 or maybe even 50 properties. Get the comps going back 12 month or more. IMHO, understanding your marketplace is the key to real estate. Understand the value of a property and what that value might in the future is more than looking at what is listed for sale down the street or what something sold for last month.

Also, I would strongly consider professional property management unless you have an experienced landlord/prop mgmt who can mentor you. Yes, it cost money, but one mistake like missing some red flags on a tenant application can cost you far more than you will pay in property mgmt.

Thank you all of for your help!!! I went ahead and ordered a couple of books and will start cracking the books. I know this sounds really naive, but my sisters and I are EXTREMELY close and most likely, we will all push to help each other and we all want to do this very badly. We all know how hard it is which is why we did not do this years ago.

I read many posts on this site and it seems most do not live in CA. It is just crazy expensive here and I live in Santa Monica (close to the beach) which is why I rent. Even most decent 2/3 BR condos start at close to $1MM here. As for a house in West LA? Forget it. Most of my friends pull in 6 figures and still rent. Only the married ones own houses and even they live more inland. For LA standards, my rent is cheap and I have a roommate. My rent is around $1,700 a month split between 2 people.

Do any of you have properties out of state?
Do most of you own property relatively close to your own homes?
Also, am I REALLY asking for trouble by starting with an out of state property? I don’t see any other options.

I think you will start seeing a lot of me on this site and I really appreciate all those that responded! Thank goodness for those who are willing to share their experience and knowledge!!!

Thanks again!

I don’t own any properties out of state.
My properties are all within a 5-10 mile radius. (I invest in student housing and there are 30,000 kids in a 2 mile radius housing, you should check out this niche)
YES, you are asking for trouble by starting with an out-of-state prperty. I think every person who replied here agreed that’s not a good idea. Unfortunately, you are in a bad geographic area for rental properties, unless you’re doing high end. If the only way you can get started is to invest out of your area you better do a real thorough check into the prop. mgmt. firms in that area. Not every single one of these is bad, but there’s a bunch who kind of ruin the name of the good ones. This will up the importance of making a good deal though, because you will have to pay that 5-10% fee. Good luck.

Don’t forget to check for local REIA meetings. I have met some very active investors in So. CA when I have attended conferences in the LAX area.

Chris

Don’t kid yourself. Conflict and differences in opinion is part doing business (if you think otherwise, you never dones serious business deals). Thus proper and extensive, frank discussions up front with potential partners coupled with a really good operating agreement is ncessary.

As for looking for rentals, you need to look in neighborhood you would not live in yourself. I’m NOT suggesting to buy in Compton, but maybe consider stuff up in SF valley (?) or older neighbors like Alhambra, Montebello or further east like Fontana or Redlands. Even then it will be extremely challneging to find something to work (I have not bought a rental in SoCal in 4 yrs due to the run up in prices). I would recomend to look for REOs and probably duplexes. I would not recommend to mess with foreclosures as that is a very competitive market and also carries much higher risk. Plus to buy at the courthouse you need Cash and I mean like you need cashier’s checks in hand (not run to the bank to get a loan). Also, when driving around, look for FSBOs. Some times you can drive a really hard bargin with those Sellers and push them for a sizeable carryback.

Just some thoughts
Mike in SoCal

Mike,

Why would you suggest REOs in southern CA?

you need deep discount to make the numbers work; a lot of MLS seeler have their heads in the clouds as to what their property is worth. Even looking at REO, you will likely need to make quite few offers to get one to stick. Most houses that end up on the courthouse steps are going back to the beneies (lenders). As that inventory starts to pile up, they will get more motivated to take low offers from buyers who can demosntrate up front that they are qualified and can close the deal.

Im still new at this.

Do you think, without using ur crystal ball, that prices will go down tremendously in southern CA?

Hello:

Does anyone here own investment property in SoCal?
Since SoCal is so expensive, isn’t it a good time to be looking now that prices are dropping? I know they are expected to drop much further which is why I want to start looking now as by the time I actually get a deal inked, it could be months and months from now.

Lastly, for all those who started like me in a very expensive part of the country and very little capital for the down payment, how did you do it? Finally, can anyone from the West LA/South Bay area recommend a good invstment club that doesn’t meet at 6pm? With traffic, I really an organiz. that meets around 7pm. Thanks!

Be very careful about rent control in your area. Do not buy anything in a rent control area if you intend to rent the property out. You might be tempted, because they are cheaper. All you are getting is a great big huge lower priced headache.

How do you do it in expensive areas, sntk? You start small and you save every penny you make with the real estate and do bigger and bigger deals until you actually have enough cash to invest in your area.