Lazy Man and Money

Should I Put My Investment Property in an LLC?

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That’s a question I asked myself years ago. I wish I was wise enough to answer it…

… NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO, NO!!!

Or as Al Bundy from Married… with Children once said, “Run hard, run now, run silent, run deep, run like Mexican water through a first-time tourist, but the key word here is ‘run!'”

I could go on about how I feel, and I will, but before I go any further I need to pause and stress something. Much of this is an account of my situation and how I personally feel. Your situation may be different… and your answer may be different. Perhaps you’ll be smarter than I was and get professional advice before jumping in.* In any case, I wish this was one of the 1.31 million personal finance articles I’ve read over the last 15 years or so.

I was going to suggest that no one should put their investment property in an LLC, but I talked with a few people and it seems like there may be some valid reasons to do it. Let’s cover a few of those reasons first.

Why Put Your Investment Properties in an LLC?

My wife and I were looking to simplify our finances. Whenever we needed money for repairs it would come from our checking account or a credit card. Since I love to rack up credit card bonuses, I put the expenses on a few different cards. We’re not the most organized people when it comes to having receipts. Come tax time, it’s a nightmare to put together all the numbers.

It turns out that organizing your finances is NOT a good reason to put your investment properties in an LLC. It can work well for internet publishing like Lazy Man and Money, but real estate is unique. I’ll explain why in the next section.

One reason why people may put investment properties into an LLC is that it can afford some legal protection in the event of a lawsuit. What kind of lawsuit? I’m not sure, but I’ve read that it can be someone visiting the property falls over a deck railing and gets injured. (Presumably, if it is someone living at the property, they have their own insurance and you have landlord insurance.) Because this involves lawyers and specifics of the law, I’m going to defer to your legal counsel to help you with how this can work. The people I know simply get umbrella insurance. One more thing that I’m looking into is protection from liability claims.

While I like legal protection and insurance as much as the next person, I have a limited budget for it. Umbrella insurance is fairly cheap and that’s about where my budget is.

Another reason to put investment properties in an LLC is that you can give some of it away in pieces. Maybe somewhere down the line, we’ll give the properties to our kids. I think we could give away a little at a time, so they wouldn’t have to deal with a big estate tax bill. That’s something that we’d have to tackle with our financial advisor(s). Once against see the “*” citation below. For now, we’re not interested in this. Our 6-year-old lacks the maturity to manage real estate… and probably will for at least the foreseeable future.

Finally, if you are investing in some commercial properties it may be easier if you are a corporation. (We’re not interested in this.)

Why Not to Put Your Investment Properties in an LLC?

I never figured there would be a negative to putting real estate in an LLC. Lazy Man and Money essentially works the same if it is in an LLC or not. My earnings are the same. My hosting costs are the same. I have two additional costs. At tax time, I have to pay more to the tax preparer. I also have to pay the state filing fee. I have a lawyer who automates most of this (at additional cost) and it’s about $1000 a year more than when it was a sole proprietorship. That’s not insignificant, but I’ve learned to live with it.

Real estate investing is different than internet publishing. It often depends on lenders and banks. Banks and lenders complicate things. For example, we’re in the middle of buying a new property, the first since we put it in the LLC, and it is a mess. I couldn’t work with the typical bank lenders because I need to use the “corporate division.” That process is a lot more difficult. It’s harder to track down the lender. They want incorporation documents. It’s a lot more hoops to jump through (which is significant because getting a mortgage is already a hoop-jumping intensive process.)

The first surprise was when we got our lending term sheet. Mortgage rates for 15-year-fixed loans can be as low as 2% now. We know that as investors we going to have to pay an extra 0.75% more. That’s just how it works with investing. What we didn’t know is that the LLC triggering the corporate loan adds another 1%. The rate jumps up to 4%. It’s still decent, but the “LLC tax” that doesn’t give us any real benefit is starting to get costly. In addition to that higher rate, the loan is not fixed. It readjusts every 5 years. What does the lending market look like in 5 or 10 years? I don’t know, maybe the rate will be 6% or 8%. We are very fortunate that we aren’t borrowing much money and can hopefully pay it down quickly.

The LLC nightmare gets worse. We registered our LLC in Massachusetts even though we live in Rhode Island. That may sound odd, but all the properties are located there and my lawyer practices there. We’re trying to manage properties closer to Rhode Island, so we are selling them off there and buying here when it makes sense. Our Rhode Island bank at the last minute decided that we need to register with Rhode Island which is an additional annual filing fee. It also almost caused the deal to collapse.

Finally, it’s looking like we’ll have to pay our tax preparer to file in two states now doubling the tax preparation fees. The annual fees to states and tax preparation are going to be around $2000, I believe. We used to pay a nominal fee when it was included as part of our normal taxes.

Some people may say that $2000 isn’t a big deal, but I’m a person who celebrates finding chicken at $0.69 a pound. I save up for years to buy a $1300 television. It’s significant especially with the potential of more expensive loan terms.

Lesson learned: a real estate LLC can cost you.

* Whenever I try to get professional advice it doesn’t go well. I’ve spent the last month trying to get a CPA who can help with some advanced future tax-planning questions. Most seem to want to manage all your finances at a cost of hundreds of dollars a month. I had a few ask about my investable assets because taking over that aspect is part of the core of what they do. Maybe I just haven’t found the right people.

Further reading: Bigger Pockets – Why You Should Skip the LLC When You’re House Hacking

Should I Move?

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Should I move? That’s the question that many people are likely asking themselves these days. If not, maybe they should be asking themselves that question.

Nearly 8 years ago, my family moved from the San Francisco Bay Area (aka Silicon Valley) to Rhode Island. We had lived there for 7 years and it was a difficult decision to leave all those friends behind and start a new life. I had never lived in Rhode Island, but I lived in Massachusetts for the first 30 years of my life, so I figured it would be relatively easy. I won’t get into all the specifics, but it hasn’t been easy at all.

[Editor’s Note: This article was started last week. The focus is on a move within the United States. After the death of Ruth Bader Ginsburg, I’ve seen some talk on social media about moving outside the United States. That’s a topic that I won’t be covering here at this time.]

I’ve been talking with some friends from San Francisco and they’ve sent me some crazy pictures about the wildfires there. The sky was simply red all day. Their rooms were dark orange. My memory of the area couldn’t be more different. The Bay Area had the best climate in all of America. It was about 75-80 and sunny almost every day. No one needed air conditioning because it only got hot for 2 weeks in the summer. My only complaint was that you didn’t get all the seasons. You’d have to drive a couple of hours to Lake Tahoe to go skiing.

Nowadays, I don’t regret our decision to move across the country. In fact, some of my friends are looking to move to New England as well. I don’t blame them. Who wants to live in fear of wildfires and extremely poor air quality?

Of course, the wildfire problem isn’t only in the Bay Area. It’s millions of acres in multiple states all along the west coast… and of course, that’s just the fires. I hope they prepared for an emergency ahead of time.

I’ve been talking with another friend of mine (who writes as Kosmo on this website) about a natural disaster that hit close to his home. The Midwest derecho leveled Iowa in August. He was lucky to have missed most of the damage, but millions of people lost utilities. Last week he told me that they cleaned up 250 million pounds of tree debris and it was still going on.

It barely made the news as this Washington Post article notes.

This made me reach out to a couple of other friends (completely tapping out my network):

  1. I have a friend in Jacksonville, Florida, who roughly represents the southeast portion of the US that has to deal with hurricanes. This year the storms are so bad, they literally ran out of names and had to start going with Greek letters of the alphabet. I asked about her long-term plans. As I guessed, she has plans to move in the future. The hurricanes are just too much.

    If you live in Alabama, Lousiana, or another state in the southeast, perhaps you’ve had similar thoughts?

  2. Arizona has always been a very hot state. However, it seems to just get hotter and hotter with more and more days over 100 degrees every year. I contacted Abigail from I Pick Up Pennies who lives in Arizona to see if she is thinking of moving. While she isn’t a fan of the extreme heat, good friends and a low cost of living make it bearable.

To spare you any further gloom and doom, I won’t skip over thoughts of flooding and rising sea waters.

All of these thoughts are presented in much greater detail in Propublica article on climate change. It is a long read, but well worth it.

It’s hard to read that article and come away with any conclusion other than people in the United States will start moving to Maine and Vermont. While those states typically get feet of snow at a time nowadays, the snow may be more moderate over years of climate change.

What does all of this have to do with personal finance? There are a lot of places with expensive real estate that may not make sense over the long term. In my own area, Newport, Rhode Island has many million-dollar

Should I move?
If your city looks like this, it is time to move.
properties on the coast. It’s not like we have the money to buy them. However, if we did, we’d have to think long and hard about whether it would make long-term sense.

What are your thoughts on climate change? Do you think you’d consider relocating in the next decade or two due to climate change? Let me know in the comments.

Reviewing the Profit/Loss of Our Condo Sale (and Subsequent Purchase)

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rental property investmentThis is a continuation of yesterday’s reveal: our tenant texted us that she is breaking the lease.

Almost exactly 7 years ago we purchased our investment property. Our oldest child was almost a year old and our other child would be born 4 months later. It was quite an interesting time in our life.

Now we are looking to sell the condo. Today I thought I’d take you through the numbers.

We ended up paying $95,000 for the condo. My wife had previously bought in the same complex, so we knew that they typically range from $140K-175K. However, this was 2013, and there was still a big housing slump. When the market got hotter, we were able to get $16,000 a year in rent, which is extremely good for a $95,000 property.

During that time, we were paying condo fees. We also got a condo assessment of around $15,000 – ouch. While the condo looked great on the inside, the whole exterior of the property needed replacing. At least it looks great now. We had to do the typical maintenance inside, but it was all minor stuff.

In the end, we put $23,750 (or 25%) as a down payment. We are expecting it to sell for $170,000. It may go for less, but that’s what the comparables are. It seems that the properties move fast, within a couple of days. We started ours a little higher and haven’t gotten any bites in the first few days. I don’t expect the final numbers to change too much, so I feel fine with using these as projected numbers.

I’m terrible at keeping track of all the expenses that we had to put in for maintenance. I could pull taxes for seven years, but I’m much too lazy. For the most part, we’ve been able to cash flow about $200 a month while paying down a 15-year mortgage. We’ll have to use that as rough measure of ongoing costs.

(Side Note: Thanks to 2020 being what it is and COVID, there’s a war brewing between landlords and tenants. The full story on our three rental properties is that this the only good one. The other two my wife and I bought when we were single to live in. My wife’s military transfer and housing collapse made landlording the best viable option for us. Those properties have recently only matched the price we paid after 15 years. So I view the numbers of this probably as representing a successful attempt at dollar-cost averaging.)

I’m hoping we can get about 172K, which would give around 160K after closing costs. If it sells for less and we get $155K that not a big deal. We owe the bank $45,000 for their part in financing the property. That would mean that we paid $23,750 for around $110K-115K of profit. However, as I mentioned above, we did have a big condo assessment. We took a loan on that and it seems that will be the buyer’s responsibility. We may end up needing to make a concession at a lower price because of that.

Hopefully, we’ll be able to roughly say we spent around $25K to make $100K. That’s a good rate of return. Thanks to the Rule of 72 (done twice), we can see that quadrupling is about a 22% annual return (72/3.5 for the first double, and the same for the second double).

The stock market has done well in the last 7 years too. It was certainly more passive (as it always is.) However, it “only” averaged 9.5% over the same time. That’s was enough to double your money, but I’ll take a quadruple to a double any day.

What will we do that with that $100K in profit? If you read yesterday’s article, we plan to buy another condo. This allows us to use a tax vehicle called a 1031 exchange. A 1031 exchange allows you to sell one property and buy another and avoid paying taxes on the profits.

We have a property in mind, but we couldn’t move forward before we listed the current property. We also have to rope in some lawyers, especially a 1031 exchange specialist, and our mortgage company. Each of these steps has about 5 sub-steps of paperwork and red tape that is simply tedious. It would be nice to make an offer, but all those pieces take several days, or even a week to get in place. It’s slower in a COVID world.

If we are able to get the condo we have our eyes on, we’ll pay around $205K for it. We’d put the $100-110K net proceeds towards it and get a 15-year mortgage on it. That would give us a mortgage similar to what we have now, but hopefully able to get $1800 a month in rent. The numbers would be much better at the old place, but this place would be closer and easier to maintain. That’s a lot less stress for us, which is the big driver to sell.

I’m disappointed to have to go back to waiting for 15 years to be mortgage-free when we were 8 years away. We could get a 10-year mortgage or make larger payments to be mortgage-free faster. The 10-year mortgage rates don’t seem enticing. It’s painful for me to pay off a mortgage at 3.5%. That’s the kind of interest rate that I want to keep long term.

At the same time, I’m excited to move to a property that I feel has more room to appreciate and will be easier to manage.

There’s one additional x-factor of all of this to consider. Our kids are able to be a part of the process. At ages 6 and 7, almost all of this is going over their heads. However, this is a review of a Teen Titans Go! episode that they’ve seen many times. So far, they are dreading everything about this process. I don’t blame them – it’s adult stuff and not fun for kids. However, sometimes kids need to suck it up and do things that aren’t fun. I like them getting some exposure to this now. It builds character, right?

Perhaps someday they find this article and realize that real estate investing is exciting after all.

Tenant Text: “We’re Breaking Our Lease”

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broken leaseThat’s the text my wife got a couple of weeks ago. As a landlord that’s the worst way to deliver (arguably) the worst news. You just know that your life is going to be chaos for a few weeks or more.

However, because it’s 2020 and the world is upside-down crazy, it was the best-case scenario – given the circumstances.

Our tenant chose to move out of due to financial hardship. Based on her occupation, I think she still has steady work, but it’s not the kind of thing I would begin to question. I’m actually surprised that we haven’t had to cross this bridge with one of our three tenants already. With COVID and high unemployment, there’s a lot of financial hardship going around, and we are in a position to help (to some extent).

We could have talked about reduced rent, but she had already moved out when she sent the text. She had already paid for last month’s rent giving us almost all of August to find someone new. Given the laws in MA right now, she could have stayed there. We couldn’t evict her. We’d have to scramble to talk to our mortgage lender and see what our options were before we begin to deplete our emergency funds.

This is a best-case scenario for us given the circumstances.

We could have immediately looked for a new renter, but my wife thought of something different. What if we took advantage of the sellers’ market and sold it?

The property is a couple of hours away. Without a property manager in the area, it’s hard. We’ve lost a few whole days to some minor fixes. I realize that we should be able to get a handyman, but we’ve been through a half-dozen and something comes up such as them retiring or move far away.

I was originally thinking that we should keep it. We are seven years to owning it and being able to pocket around $10,000 a year. When my wife brought up the idea of getting a different property closer to home, I started to warm up to the idea.

We could do something that I always wanted to try: a 1031 exchange. That’s when you sell one property and buy a new one within 45 days. Why would anyone purposely choose to subject themselves to this special kind of hell? If the new property is more expensive you don’t have to pay taxes on the gains. (As always, check with your tax attorneys, we are contacting a 1031 lawyer to help us with it.)

Since the property has appreciated quite a bit, a 1031 exchange is very useful. We’ll be able to keep that equity working for us instead of giving it to the taxman.

I’m keeping this short for today. Tomorrow, I’m going to dig into some of the (projected) numbers of the gains of the property as well as the potential purchase of the new property.

Should I Refinance?

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Quick Housekeeping Note

If you’ve enjoyed reading Lazy Man and Money this year, or any of the previous 14 years, please nominate me for a Plutus Award. I’ve never won, but I was nominated for a Lifetime Achievement Award several years ago.

I’m not sure what category is the best fit, because I certainly do family, financial literacy for children, real estate, investing, underserved communities (mostly through my MLM content), side hustle, and traditional retirement. I just don’t specialize on any one particular area.

If you want some kind of reason why you should nominate me here’s a brief 14 year history of this blog. I may have been one of the first FIRE blogs… and probably the longest-running one. What’s missing from that article is all the years that I fought the MLM/pyramid scheme industry. I like to think that my 12 million page views have maybe impacted a billion dollars in people’s financial lives. (I don’t know if it’s true, but it sounds like it could be, right?)

I’ve kind of wondered what it would be like to walk across the stage to receive a Plutus Award. I kind of feel like this could be my year… simply because there will be no stage to walk across.

Now let’s get back to the original question

Should I Refinance?

Should we refinance?There are a lot of questions that people have asked during COVID-19. One of the ones that may have been overlooked, for obvious reasons, is that there are historically low-interest rates for mortgages. That leads to the question, “Should we (or you) refinance?”

Before I get into our situation, mortgage rates are around 2.74% for a 15-year fixed (our preferred option) or 3.17% for a 30-year fixed according to Bankrate. I’d like to think that most people would be better off refinancing, but a variety of circumstances may make it not work for you. For example:

  • You might not have the best credit to get these best rates.
  • From what I’ve read, banks aren’t very eager to refinance during these uncertain times
  • You might already have a great rate. After all, mortgage rates have been low for a while.

If you have a rate that’s .50% or .75% above those rates that I mentioned above, it might be smart to do an internet search for a mortgage calculator. That will give you an idea if it’s even worth moving forward. If so, it may be time to call some banks. I prefer local banks for mortgages because they know they stand a good chance of getting your other business.

Side note: I completely understand if you are busy managing work and kids during this time. If someone had even suggested that I do anything more a couple of months ago, I would have bit off their head. Things have settleed down with school being out. Hopefully, like me, you have a little more time to move forward with projects and financial things like these.

Our Refinance Situation

We refinanced our home in 2012. It was a particularly great time to refinance. We hit the interest low getting a 2.75% rate on a 15-year mortgage.

You might be thinking… “Umm… that’s today’s rate.”

Yep. On the surface, it wouldn’t make a lot of sense to refinance to the same rate. However, we’ve been living close to paycheck-to-paycheck for a while with 3 investment properties (that don’t make money until their mortgages are paid off), kids’ private school, saving for retirement, and our general costs of living.

This creates a lot of stress. It’s not end-of-the-world stress, but I feel like I worry about money more than I should.

Refinancing would allow us to lengthen the payments over a longer term. On one hand, we’re more than halfway through our 15-year mortgage and only have 7 more years left. On the other hand, refinancing it over another 15-years would lower our payments of $1,061 according to one mortgage interest calculator.

While it’s tempting to have an extra thousand dollars a month, it would mean that we wouldn’t be mortgage-free until 2035. By that time, we’ll all be vacationing on the moon, right? (I’m joking.)

The calculator also said that we’d pay $13,161 more in interest. Yikes, that’s an expensive decision.

In this case, it’s just what the guidelines say… it doesn’t make sense for us to refinance. I was fairly sure that was going to be the case, but it can’t hurt to kick the tires every now and again when the opportunity arises. This is certainly one of those opportunities for many people with mortgages.