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Okay, I am definitely new to the real estate investment game, but I do have a game plan. The question to ask is, is it a good plan. Hopefully, someone out there will be able to tell me.

Basically what I want to do is buy one single family rental to see if this landlord thing is up my alley. I thought I would take out a second mortgage on my residence and use some of the money as a down payment on one of the HUD houses listed for bidding on their web site. I would form an LLC to purchase (protect my assets). If that worked well, I could continue buying and financing to draw equity. I do not anticipate this as a monthly income thing, but rather as a way to use a small amount of cash and have the rent pay the mortgage. My gain would be the equity on the back end (either sale or refinance).

Seems to make sense to me, but sometimes what seems to be and what really are can be two very different things. Any thoughts would be very appreciated.
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This is a great plan. In fact, I have used this technique myself. Here are some things to consider...

Try to get the house for no money down. If you use your 2nd to acquire and repair, make sure you can get an appraisal such that you get all your money back, hopefully in 3 months or less. You will find that trying to refinance for more then you paid if you have had the house less then a year can be tricky, but it can be done. Check around with your mortgage brokers ahead of time. It's called a "no seasoning refinance" and it's the greatest thing ever invented.

HUD deals vary over time. When they are pushing no money down deals to owner-occupants, it's hard to find good deals though HUD. All the owner occupied customers get the good stuff. Investors get the scraps. Again, this may very from area to area and may not apply to where you live. Just be sure to shop around. Not all HUDs are deals.

Look into bank-owned real estate. The ones in bad shape sit around until bought by an investor. These can be good sources for deals and, best of all, these are usually listed with an agent, so they are easy to find.

Finally, you can find deals by hunting for motivated sellers (this is my favorite method). Look at houses in foreclosure, vacant houses, run down houses, houses with out of state landlords, etc. This is where the goldmine is...

Also, before you become a landlord, invest in some type of training or find an experienced landlord and pick their brain. A few simple tricks can save you a world of headaches. Managing my properties is so easy it's boring. I never get calls!!!!!! I guess that leaves me time to surf the net....

Mark

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Also, before you become a landlord, invest in some type of training or find an experienced landlord and pick their brain

And don't forget rule numbers 1 throught 10.

rule number 1: Screen your tenants.
Rule number 2: Screen your tenants carefully.
Rule Number 3: Screen your tenants thoroughly
Rule Number 4: Screen your tenants even if you think they are OK
Rule Number 5: Screen your tenants always
Rule Number 6: Screen your tenants without fail
Rule Number 7: Screen your tenants under all circumstances
Rule Number 8: Screen your tenants especially if they wave money under your nose
Rule Number 9: Screen your tenants even if they seem clean and well educated.
Rule Number 10: Never ever ever violate rules 1 through 9.

Now, I have 4 businesses. The biggest one is my real estate business. However, I also do commercial software development (I have a website where I sell my product - which is a top flight property management software package, but I won't talk about that here at TMF). I do technical consulting, mostly computers and networks.

And, I own a tenant screening service. So here is how you screen a tenant.

First, make them fill out an application that asks for, at a minimum, the following:

(1) Full Name;
(2) Social Security Number
(3) Current Address
(4) Time at current address
(5) Current Landlord's name and phone number
(6) Employer
(7) Employer's phone number
(8) Their income
(9) ALL - that means EVERY - address they have lived at for AT LEAST the last 3 years, with LL names and numbers, and dates they lived there.
(10) Names of EVERYONE to occupy the rental

The app must also have on it a release permitting you to do a complete background check on the applicants, and all applicants age 18 and over must sign the application.

Then, check the DRIVERS LICENSE or STATE ID of every applicant age 18 or over - NO EXCEPTIONS, NO EXCUSES. When you look at the ID, make sure that the picture matches the person who gave it to you. Then verify that the name on the ID is the same (including middle initial) as the name on the application. For women, this often involves careful questioning. MAKE SURE you have all the last names for the person that you can obtain. The address on the drivers license MUST BE one of the addresses listed on the application. If the Social Security number is on the ID, match it against the one on the app. Finally, compare the signature on the ID to the signature on the application.

Charge the applicants $25 or $30 per name (nonrefundable) for an application fee. This is not unreasonable; a screening service will charge you at least that much, and if you do it yourself, you will put some time into it. Also, this is your first line of defense; if the applicant has a bad history, they usually won't pay the fee since they know they will lose the money and won't get the place. If they are bad guys, you don't want them anyway.

Then, you should turn it over to a good tenant screening service for evaluation. Make sure they are thorough. If you wish to screen the applicants yourself, here is what you do.

First, go to the local courthouse and search the eviction records to see if they have ever been evicted. If they have been evicted, you need to evaluate why. While you are there, check court records for criminal convictions. Then go to the tax office and pull property records on all addresses listed on the app. Make sure that the owner listed on the app is indeed the current (or previous) owner of the property. One of the most common scams is to list a friend as a landlord. If you have cause to suspect this might have happened, then check the records to see if the friend has ever been evicted or arrested. You will wind up knowing a lot.

Second, go to the police station, and pull arrest records on them. This will usually be enlightening; many arrests never make it to court. So by looking at these records, you will learn if your applicant is troublesome.

Then, go to the credit bureau and pull their credit report. You can use this to determine whether they are a deadbeat or not. Bad credit is common among tenants; learn to decide WHICH KINDS of bad credit raise red flags. For instance, I tend to ignore medical collections; it is expensive and if you are ill, you have to have the service. I don't consider non payment of medical bills to necessarily indicate moral turpitude. However, bad checks to grocery stores is a major red flag, and I routinely reject those who get jewelry store credit cards, run 'em up, then default. In my book, that is no different than theft.

Now, get on the phone. Call the present and previous landlords. Get references. Ask set questions; "Did they live there? did they pay on time? did you ever give them an eviction notice? did they cause damage? would you rent to them again?" Never forget the "would you rent to them again?" - often, your other questions don't pick up something and that last one is your clue.

Call the employer. Do they really work there? Is the employer really an employer?

If anything makes you in the least bit suspicious, criss cross phone numbers. You can do this at www.infospace.com, among other places.

When you are done with all this, you will know who you are dealing with. It won't guarantee you that you will avoid a bad experience, but if you don't do it you are certain to have some extremely bad experiences, and by doing this you will certainly filter out 99.9% of the bad guys.

A good screening service will do all of these things for you. If you are not set up to do it routinely, you will find it to be a terrible nuisance and will be inclined to take shortcuts. Shortcuts will cost you many thousands of dollars in evictions, lost rent, and repairs. So don't take shortcuts.

My screening service (this is NOT a plug - we are strictly local in the three county area here in Ohio) maintains eviction, arrest, and property ownership records on site. We also keep complete records of everyone we have ever screened - so the second and third and fifteenth times we screen them we can see what they said the earlier times. We keep records on landlords as well, so we know who they all are (as best we can know - we know of several thousand of them in the area). So when you come to us, we have the data to quickly tell you what you need to know about the person, and all the previous landlords, and so forth. Of course, we know who all the bad guys are.

Any good local screening service will have this kind of data - and some of it is only data that you get by running a screening service. This is the argument in favor of using a service rather than doing it yourself.

But ultimately it doesn't matter, just so long as you do it.
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Oh yes. Musn't forget.

There will be a property management association in your area. Find them. Hook up with them. It's well worth it.
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Thanks guys. Great info. Almost makes this thing sound doable. Will do some research over the next month or so, and probably post another dopey question or two before pulling the trigger around Sept or so.

Thanks again.
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you seem to be pretty knowledgeable. perhaps you can also answer my questions...

I am also just starting out and thinking about buying a duplex. cost is $150,000 and i can get it with a down payment of $4250. The mortgage is $966 and the monthly income (before expenses) is $1625. I would not live in it and would rent out both sides. If it goes okay, then I would get more involved in this type of investing.

I have heard that to protect myself, I should start a C-corporation. I'm just not sure when I should do this. Do I set up the corporation, then put my money into the corp and then use that to get financing?

Should I just get this one duplex in my own name and then get it added to my regular taxes at the end of the year?? It might push me into the higher tax bracket so I'm concerned with that. Could I keep it in my name and then sell it to the corporation?? Someone said I might not be able to get a loan to my corporation unless it has been around for 6 months, but the only reason I would open the corporation is to purchase/maintain the real estate...

Any advice you can give??
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I have heard that to protect myself, I should start a C-corporation. I'm just not sure when I should do this. Do I set up the
corporation, then put my money into the corp and then use that to get financing?


Why would you want to do that? You would give up your personal tax deduction, incur the complexities of a corporation, and for what?

Should I just get this one duplex in my own name and then get it added to my regular taxes at the end of the year?? It might push me
into the higher tax bracket so I'm concerned with that.


Oh, believe me, with the numbers you listed at the beginning of the post, that duplex will NOT raise your taxes. It'll probably lower your taxable income about $1000/year (after the depreciation allowance) more or less, depending on your vacancy factor and on the amount of maintenance you have to do. That PI looks very favorable, especially with the tiny down payment. How are you going to get terms like that?
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<<<I am also just starting out and thinking about buying a duplex. cost is $150,000 and i can get it with a down payment of $4250. The mortgage is $966 and the monthly income (before expenses) is $1625.>>>

I ran some very quick numbers and for 966 (P&I) to amortize 145k over 30-years, interest rate cannot be much over 7%. 7% for commercial real estate seems very low to me in today's market. Using all 966 to amortize principal also means that taxes and insurance would need to be calculated separately from mortgage and together with other operating expenses.

Do you have a copy of the operating expense history?

Just my $0.02. Regards, JAFO
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Thank you Jim...
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