25 Feb Real Estate Q&A: Vacation, Location and Foreclosure
Today, we’re going to talk about some of the real estate questions I’ve been getting through the blog. Remember, if you ever have a question about real estate or other types of investing, make sure you leave a comment! I collect these questions and will answer them on the vlog once or twice a month.
The first question I have is from John.
I live in the state of Pennsylvania and have purchased a vacation rental property in the state of Tennessee. I have set up an LLC like Billy recommended. I am finding out that being an LLC is becoming a lot more expensive. I need to establish a business in the state of Tennessee. Because I am an LLC, it requires I have a registered agent, which is a $99 annual fee and a $300 fee versus a $20 fee. Are all states this way? Other people I’ve talked to who own cabins in the area are not an LLC and have not had problems.
If you only have one property besides your primary home, it’s probably smarter for you not to be an LLC. Hold that home as a second property instead. Your homeowner’s insurance on that particular property will protect you enough. And you already get good, built-in tax incentives on that property that you can talk to your accountant about. They’ll know how to set you up in that situation.
So if you’re going to have one vacation property on top of your primary property, then it’s not necessary to have an LLC. But if you’re going to grow your business beyond that one vacation property, then I’d recommend getting an LLC. I do some specific teaching on this in the Real Estate Mastery program when I talk about legal matters in real estate.
Also, yes, most states are this way. You have to have a registered agent to go into most states.
You had mentioned earlier that you like for people to invest in areas with one million people or more. My wife and I live in a small town in Iowa and the largest town near us is 25 miles away. It has a population of around 85,000. You also said that you recommend owning 5 rentals before taking on a property manager. We currently own only 2 but are planning on purchasing this year. Do you recommend currently buying near where we live on these properties to get to the 5 self-managed ones, or should we branch out to a larger area of one million people or more now and use a property manager?
That’s a great question. And the truth is it depends on the return you’re making on your real estate. I always advise that you buy property not further than an hour from where you live. If you’re going to go into big time real estate investing, it’s a bit different. I had property in five different markets in the US, from east coast to west coast. But I can tell you that’s a lot of headache and a lot of heartache.
But you can still build plenty of wealth and have high levels of financial independence simply by learning to buy correctly in the area where you are. You’re looking for that 1%-1.5% gross monthly rent against what you paid for the property. What I like about these small towns in Iowa is that you can buy a property a lot of times for $50-$60,000. The return can be very positive there. Based on your explanation, I would start looking right around where you live.
With the five self-managed properties, I only mention that so that you learn enough about management of your own property before you hire a property manager. If you’ve had several properties for a while and you already know some things about what you’re looking for in property management, then two properties is fine. Hire a property manager. It’s a lot less headache that way–as long as you’ve taken the time to learn how to manage the property yourself!
Would you address owning properties that are not in my area, owning out of state?
Again, for new investors, or those who don’t have the ability to travel as much, you need to own within an hour of where you live.
I’m looking at a couple of properties and one of them is a foreclosure. My question is, how do you negotiate with a bank on a foreclosure? I will have it checked out of course, but I was thinking do they mark these up? The bank has dropped the price $9,000 in the last month. They’re asking $40,900. Thinking I could fix it up while I live in it, then rent it out or rent it as a vacation property. It’s just across the road from the lake. The lake is a hot spot in the summer. ‘
Well first of all, if the house is across the street from a lake, it sounds like it’s got a good location. In that kind of property, you have the benefit of doing short term (weekly) rentals or a long term rental. In both cases, you’re probably going to get a better return on that property than if it were located somewhere else!
When you are writing an offer on a foreclosure, I like to see that the foreclosure has already been listed with a real estate agent. I don’t like to buy foreclosures at the county steps. Typically, the bank is there bidding against you in that process. I’ve had it happen many times.
If I know the bank is holding it, then I usually come in with some kind of strong financial offer. I don’t mean a high price. I mean that I’m either paying cash or I have proof that I have the money to close on this property quickly. You can do that with a pre-qualification letter (not just a pre-approval letter), either from a mortgage company or with a line of credit from your local bank, or with a HELOC on your primary home. Show that you actually have the cash to close quickly on this property. Banks pay a lot of attention to that with foreclosures. The contract you would write is no different than you would write on a normal home. The foreclosure doesn’t really change anything other than you want to go in with a strong cash offer.
Again, feel free to leave your real estate questions and I’ll answer them in another vlog! Thanks for watching.
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