Is this a deal or a trap? - Posted by Sean (TX)

Posted by Judd on July 25, 2002 at 01:15:27:

You are thinking ahead, concerning DS part II. I own a rental in Killeen which went down over $20K in value during Desert Shield/Storm. I was fortunate that my tenant was not deployed, and did stay in the house. Killeen was a ghost town, and judges will not enforce payment on a lease during conditions like this. Whether the possible upcoming missions will hit Ft Hood with the same impact or not is hard to tell, but you are at least considering the impact. have your friend analyze his financial situation to see how long he could make payments if 3 of the apartments went empty for 5-6 months. Then determine his comfort level with that.
Killeen is a great area to buy rental properties, but the resale market is very tough. As you probably know, constant overbuilding keeps values from moving up very fast, and new properties can be aquired for the same as older ones.
Looking at the numbers you listed, $650/month, these must be real nice apartments, and located well, as this is at the upper market level in my opinion (of course I could be wrong on this, I’m currently in Afghanistan).
My last comment is on the cash flow/your friend living there. If your friend has the intent of living there, the military will pay more than the $650 lost rent for his housing. In effect he will not be losing the rent. He could even possibly get a roomate and split the $650. I would not tell VA that I was going to move into a property, unless I actually planned to do so. while it may not come up as an issue with VA, it IS a character issue called integrity. Do people do this and get away with it, yes. But it is dishonest.
You also have a ? by the insurance. The only way to know is to get a quote from an agent. Get this in writing. According to my property manager in Killeen, the insurance rates recently got jacked up concerning rental. Increases of up to 50% with no claims on the policy.
We are not supposed to list businesses, but if you email me I can highly recommend a property manager in Killeen. I have used the same one since 1989 and been very pleased with their service.
Good luck on your friend’s investing.

Is this a deal or a trap? - Posted by Sean (TX)

Posted by Sean (TX) on July 20, 2002 at 24:20:18:

Howdy Folks,

Need some experienced advice. I’ve got a buddy who is an Army Officer looking at buying a 4-plex in Killeen, TX (near FT Hood). The post is scheduled to receive 2,000 new families in the next 2 years and the post is not planning to build new housing to cover the new folks coming in. The city just broke ground on a new international airport with the associated new businesses and staffing opportunities.

Decent empty rentals in the city are scarce and he wants to provide a positive cash flow for this, his first REI venture. He will not live in the 4-plex after the first 6 months. He’s required to live there for a certain period because he wants to use a VA loan. Since he is planning to use a VA loan (7.5%), it’ll cost him less than $500 to take ownership.

Purchase price $183,000
Rent $2,600 ($650 x 4)
Prop manager fee $260

Monthly Principal & Interest: $1,293.55
Monthly Real Estate Taxes: $169.58
Monthly Hazard Insurance: $80.17 (is this too low?)
Monthly Mortgage Insurance: $148.00
Total Mortgage Payment: $1,691.30

The builder is offering to become the property manager of this new construction property. Property comes with a 1-year everything warranty and a 10-year structural warranty. The builder also guarantees that the other 3 units will be rented under 1-year leases when my buddy takes possession.

One of my concerns is that all leases in the area have military clauses allowing soldiers to break the lease if Uncle Sam decides to do Desert Storm - Round II.

Since he’s buying from the builder, I suggested that he might want to mention to the builder that he’s bringing in his own realtor. The idea being that the builder (who is acting as the realtor) won’t want to lose half of that 6% realtor commission and will probably settle for a 4% commission and thus drop the purchase price by $3600.

Is there enough flex in here to make this a worthwhile deal? I mentioned Ed Garcia’s 3/4 occupation guideline to him and it just barely has a positive cash flow at 75% occupancy. Since it has a warranty on new property, he is estimating very low maintenance costs for the first year.

If you would take this deal, how would you take possessionto limit liability and maximize profits? LLC, LP, C-Corp, S-Corp? In a trust? A suggestion was made to form a C-Corp to own and hold the building and another to rent out the apartments. Then the rental corp could pay premiums to the holding corp and deduct it as an expense, thus turning the rent into passive income and subject to less taxation. Is this true and does this make sense to you experts?

He’s excited about getting into REI but doesn’t want to get burned. So I guess the bottom line here is in the title: Is this a deal or a trap?

I know this has been long and thanks for your patience in reading this all the way through. Thank you in advance for any advice you can provide.