I'm looking to purchase a rental property with some friends/family and have a few questions that I thought might spark an interesting discussion. We are currently contemplating purchasing a single family home or a 2 bed condo unit to long term lease. We would purchase through an LLC (for liability protections from any issues with lessee) and would all co-borrow on the mortgage (I've called a few banks and they won't lend directly to an LLC in this situation). A few questions have come up as we move forward with both the deal and the market in general:
1. Are there any securities law issues with multiple different friends purchasing equity in the LLC (to fund the down payment)?
2. I know this is very market dependent, but how are people feeling about residential real estate prices? Our thinking is that prices will continue to fall after the Fed does one more rate hike (but it seems like this takes awhile to flow through as mortgages are mostly fixed rate) and the economy continues to slow.
3. Any tips on determining market rent prices and their direction? We've just been going on Zillow and seeing what similar properties are renting for. As rates go up and drive higher mortgage costs, I imagine rent prices should follow. Related question, how should we think about being competitive on rent prices when we are paying 5-6% mortgage with existing rental property owners paying 3% mortgage? Maybe most rental properties are investor owned financed with floating rate debt?
Might be overcomplicating this, let me know what you think.
biggerpockets.com
Regarding (2), I do think there will be some price declines, but their degree will depend on location. Historically, markets and submarkets that are supply-constrained hold their value more than ones where it's easy to build new houses. So I'd plan on more downside risk in Houston or Phoenix suburbs than in NYC or SF suburbs. And within most markets, the desirable inner-suburban submarkets tend to be more stable than the peripheral submarkets farther out.
Just purchased a rental myself so hopefully I can help.
1. There are no securities laws that I am aware of barring multiple people purchasing equity. However, almost any residential lender will limit you to 4 people being on a guarantor on a mortgage, and they'll be hard pressed to lend to the LLC if there's members in the LLC not listed on the mortgage. Also, make sure you have everything and everyone on the LLC docs and OA prior to executing your transaction. You're opening yourself up to recourse with the lender if you add members after the transaction in an attempt to hide them. Probably not as big of a risk, but worth being aware of.
2. Decide whether to enter a residential transaction like you would a commercial. Make sure you can cash flow day 1 with your debt costs, and purchase price. Prices over the next year or two may stagnate/decrease (IMO, stagnate due to limited supply overall), but in your long term hold scenario a home will most definitely increase so long as you pick a decent market. Houses always have the insulating factor that is: regular joes, non investors want to own them. So even if rental returns aren't booming/declining/stagnating, which would hurt your valuation in a commercial deal, housing demand can still be strong in a given market. Very unique product type in that sense.
3. I like to use zillow and in particular pay attention to the properties that have applications. Not all listings will have that metric/option to apply through the page, but it gives an confirmation that someone was willing to put in a complete, paid application to rent that product at that price point. This is going to be your biggest gauge of market interest. See something that's been there 2 days and has 6 applications, and another thats been there 7 and has 0, you have a pretty good idea of what's in demand and for what price.
In terms of being competitive with your rent price, mark to market, and then decide your strategy. This will largely depend on your target demographic. If you're looking to get a family in, who hopefully will keep your property in better condition than college kids, you may want to prioritize keeping them as tenants. The most expensive scenario for a rental is having no tenants, so it's up to you to decide the trade off between trying to jack up rent growth, or essentially eliminating vacancy expense by having responsible long term tenants. Often, the value from reduced/no vacancy on a model will surpass increased rent growth (to a certain point). My caveat here is that if rates in your market have drastically increased, it's probably better to move to market.
Hope this helps. Feel free to PM me or reply here and ask any more questions as the transaction I just went through was fairly nuanced and I learned a lot and hope to use the experience to help others.
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