You’re buying a rental property and, in the process, inheriting tenants. What now? Can you go ahead and start raising rent? Not so fast. Before making any rash decisions, you might want to implement tenant estoppel agreements. These legally binding documents will help you and your tenants get on the same page. And Ashley and Tony are here to break them down!
In this edition of Rookie Reply, we talk about the best practices when inheriting tenants. We also touch on LLCs, umbrella insurance, high-limit liability policies, and other ways to protect yourself. For those who are looking to buy a new home, we discuss working with a realtor versus doing the legwork yourself. We also get into loans, how soon you should get pre-approved, and how to vet hard money lenders. Finally, we talk about property managers. What are their fees, what do they bring to the table, and when do you absolutely need one?
If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).
This is Real Estate Rookie, episode 274. You can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you’re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone by the username of NaftaliB and Naftali said, “Great show. Thank you, Ashley and Tony. I really enjoy listening to the Rookie Podcast. You guys provide so many great tips and insights and provide a true path for rookies to start investing in real estate. Keep those episodes coming.” For those of you that are listening that are part of the Rookie audience, if you haven’t yet left us an honest rating and review, it would mean the world to us if you took a few moments to do that. The more reviews we get, more folks we can help and helping folks is what we love doing here. Isn’t that right, Ashley?
Yes. Yes. Today we have a great rookie reply episode. Don’t forget, you can leave us a question in the Real Estate Rookie Facebook group and we may answer it on the show for you today. We talk about an estoppel agreement, which is … And also about lease agreements as to when you inherit tenants, when can you actually raise the rent? We go into getting a pre-approved for a loan, when is a good time to get a pre-approved when before you’re thinking of buying? Then also, another very common question that we get, LLC or putting a property in your personal name, which we break it all down for you.
All right, so the first question today comes from Simon Woznika and Simon’s question is, “Hi all. I’m going to rent out my first rental property soon and I was wondering if I should go with property management or do I just rent it out to someone myself? What would you recommend? How much of the income would such a company usually take? What would they do that I couldn’t do myself?” Simon, this is a fantastic question and I think that a lot of new investors probably go back and forth on this same idea, the same kind of challenge as well. When it comes down to property management, there’s really three things that I consider. It’s time, it’s desire, and it’s ability. Okay? First you got to ask yourself, do you have the time to manage a property on your own? If you have a super busy W2 job and maybe a bunch of family commitments or community commitments and you just can’t fathom trying to eek out another however much time you need to manage your property, then maybe hiring a property manager makes sense.
Second is ability. Do you have the skills to manage? Essentially it’s like an ongoing project that you’re managing, right? Like taking in maintenance requests from your tenants and making sure those get completed in a timely fashion. If there’s payment issues, that you’re managing that, that you’re staying on top of the leases, and there’s a lot that goes into being an effective property manager and you have to ask yourself, do your abilities line up with what it would take to be a successful property manager? Then the last piece is desire. Do you actually want to do all of those things? Or even if you have the time, even if you have the ability, do you actually have the desire to do those things on a daily basis? Because if you don’t, it can really take the fun out of being a real estate investor if you’re forcing yourself into this box of activities that you don’t thoroughly enjoy. The first thing I will look at, Simon, is time, ability, and then desire. Ashley, I know you’ve got a lot of thoughts on long-term property rental management. What do you have for Simon?
I think the biggest thing is make sure that you can what the fair housing laws are, the rules and regulations, the laws in your area, in your market, because that’s where you can get into the most trouble. First of all, do you want to pay for the convenience of having somebody take over your whole property? The thing to remember though is even if you hire a property management company, that does not mean you are automatically a passive investor. You’ll have to do some asset management too, such as going through your owner’s reports every month and seeing what you’ve been charged for, what’s going on with your property, if tenants aren’t paying or late fees being collected, things like that, and just overseeing your property management company. Take that into consideration if you’re looking to be completely passive or just you might as well do the work yourselves. Think about that too.
I recommend exactly what Tony said, think about how much time you have that you can actually put into it. I did start out self-managing and it worked great until I got overwhelmed and I just didn’t want to do it anymore. I think look into if you can build out the systems and processes that can help you move it slowly and definitely focus on those in the beginning. For that first property, document everything, make every checklist you can. As you keep adding properties, it’s just a smooth process and doesn’t cause any more headaches or any kind of bottlenecks to your property management company that you’re using for yourself for self-managing. The income that a property management company usually takes, if you have a big portfolio, you can usually get a discount on that, but for somebody that only has one or two, the most common I am seeing right now is around 10%.
Then there are always additional fees. Ask what those fees are upfront and make sure that you’re adding those fees in so it’s not just 10% is what they’re taking out every month. You can look and see if they require you to do a yearly inspection where they charge you maybe $150 to go through the unit and just being proactive about it, but it’s maybe a requirement that they have that you do this inspection on your properties, things like that. Look into any other type of fee that they may have and then run your numbers based off of that. Even if you decide that you are going to self-manage right now, when you are running your numbers, when you are analyzing a deal, put in the property management numbers, put those in so that if any time you decide that you no longer want to self-manage, you can make sure that the deal still makes sense to you.
Ashley, so a couple things you mentioned like learning laws, I think that’s a super important thing, especially for newer investors because, and even more so if you’re investing not in your own backyard. If you’re going out of state, you definitely want to make sure you have a good understanding of that. Talking with either other local property management companies or real estate attorneys and that specific market who can tell you, “Hey, what are the things I need to do as a landlord to be compliant in the city?” There is I think another benefit to potentially hiring, Simon, a property management company for your first property, even if you don’t plan to use them long term. What you do is if you hire them, you now have an inside look at how a professional would manage those properties and say you use them for six months to a year, whatever it is, during that time period, your goal isn’t just to pay them so that you’re hands off, your goal is to understand what their systems and processes are so you can essentially copy and paste those into your own business once you get things up and running yourself.
How do they handle rent collection? What do they do if there’s a lease violation? How do they handle late payments? What if there’s disputes between people who are … If you have a multi-family, between the person in unit A and the person in unit B, how do they handle renewing the leases? There’s so many nuances that go into managing and property and if you can see how a professional handles those things, when you go off to get that second property. Now maybe instead of hiring that property manager, you can take all the system and processes you learn from that first property and apply them to the second one. I do think, Simon, that for a new investor sometimes there is value in paying that 10% or whatever it is so that you can get indoctrinated into the right way to manage a property.
Then kind of the last question, what would they do that I couldn’t do myself? For that question I think really the resources that they have available that you may not, and just the convenience. Do you want to receive phone calls or messages or do you want to have to call a vendor or find a vendor? Do you have a list of resources that you can go to if their toilet is plugged? Do you have a plumber that you can call that would get there in a timely manner? Things like that. That can be a huge resource and convenience that they can offer, than you can. Also the fact that they have the systeming tools built in place to list your property for rent on a ton of different websites and maybe just not Facebook Marketplace, like you would be able to do.
Software in place to make it easy for your tenants. I 100% definitely think that you can get the software in place and set up all these things a property management company has. And it’s more, I think the real resource and benefit property management company is the convenience and just hopefully less headaches by having them deal with it and just that they’re professional and they know how to handle certain situations, and then just the resources and the people they have in their network to help you with your property to perform even better.
But I think, and you touched on this a little bit already, Ashley, but just because you are hiring that property manager doesn’t mean you become completely hands off and there still is a level of involvement you need to have. I think the only true time that you can be a passive, passive investor is if you are either a private money lender for someone else’s rehab or project or if you’re passively investing into a syndication. Those are the two times where literally all you’re doing is putting up your money and then a few months or maybe a few years, if it’s a syndication, you get all your money back with a nice big fat return. But every other form of real estate investing, whether it’s long term, short term, whatever else it is, you need to have some level of active involvement to make sure that that property is profitable.
All right, so question number two comes from Joaquin Hara and Joaquin’s question is, “When you purchase a property with a tenant already in the middle of their lease, can you increase their rent or do you have to wait until their lease is up?” Ashley, you love to talk about the estoppel agreement and how that impacts landlords who are buying properties that already have tenants in place. Just for those of you that were confused like me, if you want to know how to spell that, it’s E-S-T-O-P-P-L. Look up the word estoppel. Ash, you want to break down kind of what that is and as a landlord, how you have to kind of abide by the leases that are already in place?
Yeah, so an estoppel agreement is given to a tenant. Usually I prefer to give it before the tenant or before you purchase the property, so before you close on it, but you can give it to the tenant after you close on the property too, if the previous owner doesn’t want to, they don’t want anybody to know they’re selling or something like that. But really it’s to verify everything in their lease agreement. You definitely want to do this before you close when there are no leases in place and it’s just the owner telling you, “Oh, they pay me $400 a month in cash” or, “They don’t have a lease agreement month to month.” You want to make sure the tenant is on the same page of that verbal agreement and the tenant isn’t all of a sudden going to come out with a lease agreement saying, “No, I actually only paid $300 per month. I don’t know why he told you 400. Here’s the signed copy of the lease agreement that he gave me.”
That’s definitely one way to protect yourself is having them fill out, you get all their contact information. It’s really just to verify that everything in the lease agreement is the same, that the owner and the tenant is saying. You can ask who owns the appliances, who’s paying the utilities? Because even though there’s something in a lease agreement, it doesn’t always mean that both parties are agreeing to the lease agreement. Maybe it says in a lease agreement no pets, but the tenant has a dog in there and the owner just doesn’t know or anything like that. It’s just a way to find out some information that’s about what’s going on in the actual unit and about your tenant and really helps you run your numbers too, because I also always ask, “Are there any repairs that are needed inside of your unit?”
Yeah, but I think we can probably say this is a blanket statement. Obviously Ash, I haven’t invested in every state in the United States, but I want to say most states probably have some type of protection that says if you purchase a property where there’s already a lease in place, you cannot just tell that tenant, “Hey, because I’m the new owner, your rent is going up by $500 per month.” There are usually some sort of protections in place for tenants to say if there’s a legally binding document that’s already in place as the new owner, you have to honor that existing agreement and can’t just jack up the prices on the tenants that are already there.
Yeah, and so make sure you’re finding out when that lease agreement is up before you close on the property so that you know how long you’re stuck into the lease agreement of them paying that maybe below market rent, but make sure you know, too, your local laws as to how much notice you have to give them before their lease is up to actually increase the rent. In New York State, it’s kind of like a step up period. If they’ve lived there for less than a year, then it’s 30 days notice. If they’ve lived there for more than a year up to I think two years maybe or something like that, it’s 60 days and then over two years it’s 90 days. Make sure you know how much notice, because you also don’t want it to get into the situation where you don’t give them enough notice and now you’re having to wait even longer after the lease term is up.
I think one more thing to notice too is that you can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you’re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. Just don’t think that there’s no negotiation that you can, if you both mutually agree to break the terms of the contract, then go ahead and you can go ahead and do that. It’s not like you have to stay into that lease agreement if you both want to mutually get out of that lease agreement too, or to change the rent.
Cool. Well, let’s hop to our next question. This one comes from Sarah Lima and Sarah’s question is, “Do you use a realtor when you buy an investment home or is there any instance where you don’t? I’m new, no realtor type education and I’m looking at buying from a wholesaler but not sure how to do this. Do I contact a realtor and then all three of us work together?” Sarah, yeah, I think Ashley and I both have purchased real estate investments where there are no realtors involved, and you definitely don’t have to use a realtor to execute a real estate transaction. If you’re looking at buying from a wholesaler, oftentimes they don’t have realtors involved. I can tell you how I’ve done it in my home state of California and Ash can kind of give her insights on the New York side. There’s some similarities but some differences.
If you are working with the wholesaler, and this is how we do it in California, typically we use escrow and title as the intermediaries to facilitate that transaction. If the wholesaler is telling you to wire funds directly to them, I would 1000% not do that. You want to make sure that all of the money that you are sending in for this deal is handled by some sort of third party. Again, typically for us in California, that’s title and escrow that we work with to coordinate that. The way that our transactions usually work is if I’m buying from a wholesaler, we execute our own purchase agreement. Either the wholesaler has one or our escrow company can provide one for us. And that just like you would if you were buying with a realtor, constitutes or I guess outlines all of the fee details of that transaction.
The earnest money deposit, your due diligence period, when you guys plan to close, and any other agreements or provisions that you and that wholesaler have agreed on as part of that real estate purchase agreement. You sign those documents and then when you need to submit your earnest money deposit, you’re not sending that to the whole seller, you’re sending that into title and escrow and they hold those funds during the escrow period. When you’re actually closing the property, if you’re paying with cash or maybe you have a hard money lender, those funds again get wired into escrow and then title goes through and make sure that the title’s clean, that there is no encumbrances or any kind of issues with the title of the property.
And as long as the property turns out clean, escrow and title then release the funds to the wholesaler. They get paid out and then you now get your proof that it says, “Hey, I actually own this property. All of the paperwork is filed with the county” and it’s a true legal transaction. That’s how we do things in California. We oftentimes purchase properties with no realtors involved. What does it look like on your end, Ashley?
Yeah, so in New York you have to use an attorney to close a real estate transaction. I just hire an attorney like you would even if you are going through a real estate agent. The attorney, most likely if you’re using an attorney that’s knowledgeable in real estate closings, which you should, they will be able to guide you, walk you through the whole process. It’s fairly easy. They’ll drop the contract for you and then you can send it to the seller. Once it’s signed, you send it back to your attorney and then they pretty much handle the closing from there, they’ll work with the seller’s attorney to facilitate the whole closing. They work directly with the title company. I’ve never had to speak or talk to a title company before, which maybe it slows down the process, maybe it speeds up the process. I don’t know.
But I do know closings take a lot longer in New York than they do in other parts of the country. Yeah, I recommend hiring an attorney. Even if your state doesn’t require one, you can hire someone from the title company or an attorney, but somebody to help you facilitate. But you can also hire a real estate agent and just say, “Hey, can you just help me? I’ve already got my offer accepted. I need a contract drew up. Can I pay you a flat fee to just draw up this contract for me?” That’s one option that you could do, too.
Awesome. Let’s jump down to the next question here. This one comes from Carl Anthony and Carl’s question is, “How do you decide what hard money lender to use? Is there some kind of ‘Yelp’ or review system somewhere?” Carl, I am so glad you asked. If you go to the Bigger Pockets website and Under Network, one of the drop-downs is Hard Money lenders and there’s a collection of featured hard money lenders. You can also search for a hard money lender by state, and if you click on one of those hard money lender’s profiles, you can see public reviews that were left for that hard money lender. Then you can also just search for that hard money lender’s name inside of the Bigger Pockets forums. And oftentimes there’s different posts that people have talked about where you can hear other people’s experiences with hard money lenders.
Going to the Bigger Pockets website, again, under Network, look for Hard Money Lenders. I don’t even know, there’s a massive database of hard money lenders there. Another great way to find hard money lenders is to ask other investors in your local market, so Carl, I’m not sure what city you’re in, but if there’s a local meetup or there’s a local Facebook group or just any kind of place where investors congregate, I would go there and just ask like, “Hey, are there any hard money lenders or can you guys recommend any hard money lenders?” I feel like at almost every meetup I’ve been to at least one hard money lender at that event because they’re also looking for new clients and new ways to get their deals funded. They’re always out there networking and meeting folks as well. BiggerPockets.com is a great first place to go.
Then I would say going to somewhere like an in-person meetup is a great second step, but once you find these companies, some of the things you want to look for because not all private or not all hard money lenders are created equally, you want to ask questions about, “Hey, what are your rates look like? What does the interest rate you’re looking to pay?” What kind of points are they going to charge you, right? That’s where hard money lenders typically make a lot of their revenue is by charging points up front. Even if one hard money lender maybe has a lower interest rate, if their points are exceptionally high, the overall cost of the debt could be more. You want to make sure that you’re evaluating the total cost of the money and not just looking at one metric by itself.
Other things to look for are what kind of LTV are they going to provide? Some hard money lenders, if you’re a first time rehabber or a first time flipper, they might only go up to like 60% LTV, whereas others might go up to 75 or 80% LTV depending on your experience. You want to ask as many questions as you can about their loan product and what the total cost of that money is, and then use that to start comparing one hard money lender to the next.
Also, the thing I would recommend asking about too is their customer service. Are you going to be assigned a loan officer? The hard money I did the past year, it was like 20 different people involved for each question. There was somebody else that had the answer, and it was just an awful experience for me. I recommend if you can work with a company that has, and I think Lodha Capital was a sponsor at the Bigger Pockets conference this past year, but I ended up working with them on a loan and we lost the deal, but they were amazing. I had one loan specialist I was working with where another company, it was just every day was somebody else emailing me. And even my attorney was like, “I don’t even know who to contact anymore at this point. It keeps changing.” Then after the loan was closed, they hire a third party service to actually service the loan.
They’re the ones who would send my statements and then collect my payment. When I talked to the person that was servicing the loan, from the specialist there that was assigned to my loan product, stated that there was no online access, that this hard money lender did not provide for that. Anytime I wanted to look at what my loan balance was, I would have to wait for my statement or I’d have to email. And I just feel like that is something that is so outdated that you can’t log into some kind of online system, see what your balance is, check your payments, things like that, check the due date of your loan, things like that.
That was another thing that I really would’ve liked incorporated into the loan product. Then the last thing was too, with they’re always having tons of people, different contacts that were going on, somehow my insurance policy was sent to them multiple times, and I ended up getting twice notices in the mail that I did not have insurance on the properties that they were lending on and that they were going to put their own insurance in place where they had already been sent twice already.
It just was very unorganized and a very poor system. I think besides what you’re paying, I think I would’ve paid more to go with somebody where I didn’t have these constant headaches of trying to get in contact with someone or trying to figure out these things or them to mess things up. When we closed on one of the properties, it was a Friday, we sat at the closing table for three hours because the young 22 year old kid that they assigned to work on my thing did not know anything about title work. And we actually had a title attorney come to my closing because my attorney had predicted this was going to be an issue, and it was three hours and we ended up not closing until the following Monday when we finally proved that we were correct and they were wrong.
That whole weekend, we had contractors lined up, we had ready to move on our properties, and we had to wait until the following Monday. I think not only just what you’re paying for the hard money, but talking to other investors that have used them as to how much of a hassle is this actual company and is it worth my time? Because I would’ve rather paid extra for somebody better.
I think it’s also interesting, Ash, that you said that that hard money lender didn’t actually service the loan long term. I feel like usually the hard money companies that I see, they’ll kind of keep that on the books because it is such a short period of time. That is interesting.
Yeah, as far as the servicing of the loan as to they kept the loan on the books, it was just the payment was collected. It was almost like just a third party company verifying I had the insurance in place, that I was making the payments, but the loan was still on their books. They just actually didn’t deal with the collecting of payments and just the backend stuff of it, like the admin stuff, I guess.
Got it. They were like a payment collector for that hard money lender?
Almost like a property management company, I would say.
All right, well, let’s jump into our next question here. This one comes from Caleb Murber and Caleb’s question is, “When is the best time to get approved? I’m thinking that I’ll be trying to purchase and house hack a duplex in April or around that time. I’m wondering when the right time would be to get pre-approved. Should I wait until I have my down payment? Should I not wait at all? Should my credit be above a certain score? Yeah, what should I do?” Caleb, I think that the pre-approval is something that you should probably do sooner rather than later. And here’s the reason why I say that. I think an important part of being able to shop for the right properties and identify the right markets is understanding what your purchasing power is. And when I talk about purchasing power, there’s kind of two pieces to that.
There’s the capital that you have access to or that you have available. How much money can you put towards down payments or and rehab and startup costs and all those other things? But the other piece of your purchasing power is what amount of loan can you actually get approved for? And if this is your first time ever buying a property, you may not have a good sense of what loan amount you can actually get qualified for. Let’s say for example that you’re super excited, you choose your market, you start analyzing deals, and maybe the average price for the properties that you’ve been looking at is $400,000.
But say you go to get pre-approved once you finally get this property under contract and then you realize you can only get approved for $200,000, now you’ve wasted all this time and energy identifying this market and analyzing these deals at a price point that you can’t actually afford. I think that getting that pre-approval earlier in the process will help you narrow down and focus on the properties you can actually afford purchasing. That would be my advice, Caleb, is have that conversation sooner rather than later. What are your thoughts, Ashley?
Yeah, and I think the best, and they’ll be able to guide you as to how much you would need to actually close on the property, like what would be your down payment amount? If you don’t have that yet, just be open and honest. “How much do I need to save? This is the type of house I want to purchase” or, “This is how much I’m thinking of spending” too. They can let you know because you can estimate what the closing costs will be. Or you can think like, “Okay, I want to buy $160,000 house. My down payment is going to be three and a half percent. I know my mortgage amount is going to be this, amortized over 30 years. This is what my monthly payment is. Yes, I can afford that.” But when you’re closing on the property, you’re going to have to show reserves, you’re going to have to show what your closing costs are. You’ll have to pay those closing costs up front.
I think just sitting down with the lender and knowing what those things are can be a huge advantage ahead of time instead of waiting until you find the perfect property and you put an offer in and then find out that you can’t even get a loan for it because you don’t have the amount of money that you actually needed, even though you could afford the monthly payment.
All right. Let’s move on to our last question here. This one comes from Elsie Talwar, and sorry, Elsie, I hope I got your name correct there. But this question is, “LLC versus high limit liability plus umbrella insurance. This would be my first rental property. Which one of these makes the most sense?” We’ve kind of chatted about this in the past before about the differences between going with an LLC versus maybe keeping some of the stuff in your personal name and what the kind of liability protections are. When you talk about putting a property into your personal name versus an LLC, from a tax perspective, it doesn’t really matter. If you have a property in your personal name, you can still recognize the income and expenses that are tied to that property as income for your LLC, right? The deed and the mortgage have no impact on your ability to recognize that as business income.
There are no major tax benefits of doing one versus the other. Where you really get the benefits is from a liability perspective. From an LLC, if you have the property deed to an LLC, if something happens, there’s some kind of claim against that property, instead of someone being able to come after you personally and saying, “Hey, I’m going to take Tony and Ashley’s assets,” if you set things up correctly, they can really only go after the assets the that the LLC owns. Now, if you for whatever reason decide to get the debt in your personal name or the property in your personal name, either because the type of debt that you got or whatever the reason was, there are still options to protect yourself from a liability perspective. And that’s what we did in our business because a lot of our debt is in our personal names or in our partner’s personal names.
And what we did was we got an umbrella policy, and I want to say that umbrella policy has up to $2 million of liability protection in addition to what our homeowner’s insurance covers as well. For us, we have a few layers of protection. We have the homeowner’s insurance as layer number one, and then we have the umbrella policy as layer number two above the homeowner’s insurance. And for us, that kind of gives us the peace of mind that $2 million should cover the vast majority of liability issues you would see on a property, and that helps us sleep better at night.
There are costs associated with setting these LLCs too, LLCs, too. You have your LLC creation costs. You have to maintain those every year. In California, I think it’s like 800 bucks, you have to file a tax return. There’s QuickBook files, there’s more things you have to do as you create more LLCs. I think you have to weigh the cost versus benefit of how much risk am I exposing myself to and what is the potential reward of having that LLC? That’s how we set it up, Ash. I don’t know what you guys doing in your business.
Yeah, so the first thing you should just look at is if you were sued, what would people be able to take from you? What is your net worth? If you had to liquidate everything to pay this lawsuit, how much would there be? If you rent an apartment, you don’t even own your own house right now, you don’t have a car or you have a car, but it has very little equity in it, and you just bought a brand new car and if you sold it, you’d probably make less than what you actually owe on it. Look at what your assets actually are, because if you are sued and there’s nothing to take, or maybe you have $20,000 in net worth or something like that, and most of the time an attorney is not going to waste their time going after and suing you because there’s very little that somebody could actually take from you in a lawsuit.
Think about that because one of the biggest reasons for getting an LLC is for that liability protection from your personal assets or from other assets that are in other LLCs. I have a business, the liquor store. The liquor store is in a different entity than the building the liquor store is, and I learned this from another investor who any business he has is in its own LLC. Then any building that it’s in is in its own LLC, and that just gives you that liability protection separate from each other. When you’re putting properties into an LLC, if you all of a sudden have a million dollars in equity, it may be time to start opening another LLC and building properties into that LLC, so you’re spreading out the net worth.
If that one LLC is sued, you’re not getting the $5 million is up for grabs from somebody that that you have in equity, instead maybe spreading it out so there’s a million in each of those LLCs, so they’re only going to be able to come after that million, and you still have your other four million in equity for the LLCs. But just starting out, think about what your personal assets are and how much is actually available for someone to sue you for? The next biggest thing to look at is how do you want to finance this deal? The 30 year fixed rate, low interest rate, lowest interest rate you can get today, but doing that, then get the umbrella insurance policy on if you put into your personal name. You can always go and refinance it later on and put it in a commercial mortgage where you’re deeding it into an LLC.
There are several investors, including myself, who have bought a property in our personal name, got that personal mortgage, and then deeded it later on into an LLC. And since I have remained 100% owner of the property, my personal name, and also 100% owner of the LLC, my due on sale clause has not been called, I’m still making payments on the property. Banks are not in the business of foreclosing on homes. The property is still being paid, tends to not be an issue, but look through your mortgage contract and see if you are, what the due on sale clause actually entails. But I’ve seen a lot of mortgages changing the language where if you remain 100% owner that they will not call the due on sale clause.
Yeah. Elsie, just hopefully that gives you some insight. There are a lot of factors to consider there, but luckily even if you decide not to go with the LLC, there are still ways to protect yourself as the owner of that property. Yeah, I hope that was helpful.
If you guys would like to ask us a question, you can leave us a voicemail at 1-888-5-ROOKIE, and we may play it on a Saturday Rookie Reply or on Wednesday as a voicemail recording for our guests to answer. Thank you guys so much for listening, and don’t forget to join the Real Estate Rookie Facebook group where you can also leave us a message onto there, but I can almost guarantee that before we air the podcast episode, you are going to have a ton of answers and responses to your question within the Real Estate Rookie Facebook group.
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