Thursday, March 18, 2010

Big Update

Wow..It’s been almost three months since I started the process of setting up a self-directed IRA. Time flies! I am approaching the end to setting everything up, I believe. Probably half of the delays were my fault. First, I filled out the wrong paperwork – I filled out the Traditional IRA application instead of the Roth IRA application. I didn’t catch that until the account had been opened, so then we had to close that account and restart the process using the correct forms. Then, Schwab, where I had the assets I was funding this IRA with, refused the request to transfer funds out. It took three tries. The request kept getting rejected because the paperwork from the new IRA custodian didn’t specify “Roth IRA” in one location on the paperwork. Once we got that straightened out, the transfer went smoothly. But each rejection took a couple of weeks, so we lost a lot of time there. After the funds are transferred to the new custodian, the next step is the creation of an LLC. The IRA will then purchase all the shares of the LLC, thus giving me, the LLC manager, control of the LLC funds.  Well, I checked with my account rep and he told me the fund hadn’t arrived from Schwab yet. Turns out, he was checking the old traditional IRA account that we incorrectly set up initially. Once I pointed this out, he checked the correct account and saw the funds had been transferred. Last week, he started the LLC creation process. I checked the Arizona Corporation Commission’s website this morning and found that the LLC was created yesterday. The next step in the process (and the final one, I think) will be to open and fund a bank account. I believe I will be getting a letter from the LLC custodian to take to a bank that will allow me to open a bank account in the name of the LLC. I’ll contact my account rep later today and find out the next steps I need to take.

Had an update on the Houston apartment complex. I missed the semi-annual conference call, so I only have the info in the monthly reports to go on. It looks like the economy is finally catching up to the Houston market and more jobs are being lost there. Occupancy for January went up slightly and early February also showed some gains. Occupancy is at 90%. Total cashflow was negative $911 in January, the first time the property has had a negative cashflow since we bought it. Management expects cashflow to remain low for the first quarter of this year. This property continues to outperform other similar properties in the area however. The overall market occupancy is 84.8%. The submarket we are in is running 86.6%. As mentioned earlier, we are at 90%, so I feel management is doing a pretty good job. Rent concessions are actually about $200 below budget for the month of January. Higher insurance and real estate tax escrows continue to adversely impact the bottom line. Management was looking into obtaining new insurance and hopefully that process will be completed soon.

On the hard money loan front, things are running smoothly. I have two loans that will likely be paid off soon – hard money loan #4 and #10. Loan #4 was a loan on a motorcycle to a former co-worker of mine. He was recently laid off (about 1 year after I was also laid off) and he is selling the bike. He thinks he has a buyer for it now. The property for loan #10 has been on the market for about 3 months. The owners have it priced a bit high. We knew going into this one that their estimate of the value of the property was probably too high, but even using our lower estimate, the deal still looked good. Now it’s just a matter of the owners coming to the same conclusion on their own. We estimated the property was worth $320,000 and loaned $192,600 in the deal. The owners started out listing the property at $378,600. They have lowered it now to $348,600. They have the property fixed up nicely and have staged the house so it shows well. Even so, they’ll probably have to lower the price again. They are current on payments though, so I’m not worried.

Loan #11 is progressing as well. We had to evict the previous owner to get him to leave, but that process only took 1.5 months, which is relatively quick. The property needs paint, carpet, tile, and some minor flooring work. It should be set to go on the market in 3 weeks. This is the property bought by my partner’s wife, so I’m sure things will move swiftly.

And lastly, my wife and I took a little trip to Las Vegas last weekend. We got a deal from the Wynn for 3 free nights plus $300 in free play and took advantage of it. When we got there, my wife wanted to play the $300 credit on a $5 video poker machine. She sat down and, on her very first hand, got this:

Amazing!! The rest of the trip sort of went downhill from there, but it was a heck of a way to start! And it was nice knowing that we were playing with their money for basically the entire trip.


DK said...

Hi Shaun, Lady luck was with you on your trip to LV ! I'm a regular on your RE Blog- following your RE journey. I need to bounce a couple of thoughts off of you. Not sure how to email you. I'll ask one quick question right here:
-Is it advisable to form an LLC and place ur rental income property in the LLC ? This is just one SFH. Obviously benefit is a buffer to personal assets but LLC has ongoing cost associated.

The other questions relate to judging the cash flow and the ideal balance of how much to put down vs. sacrificing cash flow by borrowing more.

Let me know if you have a way for me to email you ? I'd like to share numbers for this investment and get your opinion.


Shaun said...

The LLC question is one that comes up often. The typical advice I give is don't let the lack of an LLC stop you from getting started. If you are a new investor, wait until you have a couple of properties before putting them in an LLC. Of course, it also depends on your state too. Here in Arizona, LLCs are low cost to set up and there are no on-going fees for them. In California, the yearly fees are quite high. So it depends on how much income your properties are producing to determine if it is worth it.

Then there is the whole issue of the "due on sale" clause and how to get your properties into an LLC without triggering that. Again, laws vary by state, so you'll need to consult a real estate attorney where you are investing.

As far as emailing me, I deliberately don't put it on the site to keep down on the amount of spam I get. Comments are moderated, so if you want, leave a comment here with your email address. I won't publish the comment, but I'll see it and will be able to email you.

I wrote about a good real estate calculator I found here:

You can use that to try out different scenarios.

Storage Man said...

WHAT INCREDIBLE LUCK! You make me wish that I was at the casino right now!

Tod Maffin said...

Congratulations... reminds me that I really need to start one myself.

Although I think Vegas is somewhere I really need to stay the *@&#^ away from! lol!


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