Posts Tagged Michigan Turnkey
I received an email from an overseas investor today that I really had to shake my head at. He originally contacted me to provide registered agent services for his LLC, and in my response I asked him how the properties he purchased were performing. (To avoid any confusion let me clarify that he did not purchase these properties from Michigan Turnkey). Nevertheless here’s a copy of what he said in his email response:
…my investment is not going as well as it was supposed to do. You know I paid for 2 properties in Detroit from here. For the second property I have some problems. I paid the full price of $ 45’000.00 to <edit company name> for it in March 2011, and I still don’t have the deed ! And I can’t anymore get in contact with the seller <edit company name> by mail or telephone. So I’m looking for an attorney in Detroit who can help me to cancel the contracts and refund my money back so I can invest in another property in Detroit. Could you give advice?
Clearly he has a big problem on his hands. Unfortunately I’ve heard this same story in various forms over and over again about investors purchasing property here in Michigan, and particularly in Detroit. The bottom line is that you need to know who you are dealing with when investing from afar. We’ve talked about this before on our blog in our post Invest in Turnkey Properties The Right Way – Step 1 – Select the Right Team. In that post we offer several recommendations for evaluating the company you will be working with. You will certainly want to do your due diligence on the company you’re working with and before you send money to any company.
This brings up another mistake this particular investor made – you should NEVER send money directly to the company you are working with. Money should always be sent to a title company who will manage the transaction. The title company is there to protect you because they abide by the purchase agreement contract, and your funds will not be transferred to the seller until all requirements in the purchase agreement have been achieve. Then once this happens and both parties sign all the closing documents the title company makes sure you receive the deed to the property because they record the transaction with the local municipality. This obviously did not happen with this particular investor’s transaction.
So, take heed, there are people here in Michigan (and dare I say lots of them) who are trying to rip you off. Please, do your due diligence on the company you will be working with as this can avoid very serious problems like our example above.
Today we will continue our series on how to invest in turnkey properties the right way. To date, we’ve covered the following 3 steps:
Today, we will discuss Step 4 – The Closing Process.
Purchasing property not overly complicated, but there is a process to it. There are several things that you should check every time you purchase a property, and we have broken them down into what you should do, and when you should do it.
Things to do Immediately After Coming to Agreement to Purchase
Send The Purchase Agreement, EMD and Proof of Funds to the Title Company
First things first! Every offer you have to purchase a property needs to be in writing, and this is usually in the form of a purchase agreement. The purchase agreement will list the following details:
- The name of the buyer and seller
- Legal description of the property
- Agreed to purchase price
- Amount of deposit
- Timing for when the purchase shall be completed by
- All agreements made between buyer and seller
It is very important that all aspects of the purchase agreement be in writing because the purchase agreement is the document that will guide the closing process, and it is the legal document that the title company will abide by to complete the transaction.
Now, once the purchase agreement is signed by both the buyer and seller, it needs to be submitted to the title company. Along with the purchase agreement, the buyer will also be required to submit their Earnest Money Deposit (EMD) and provide proof of funds to close the deal. Proof of funds should be in the form of a bank statement or a loan commitment letter.
The title company is a third-party that will act as a referee during the closing process. They will abide by the purchase agreement 100%. They hold the EMD and any other funds in escrow, and they will not release the funds unless directed appropriately by the purchase agreement. Therefore, the title company protects both the buyer and seller during the process. You should NEVER purchase a property without having a title company involved.
Request The Title Search and Title Insurance
Once the purchase agreement is sent to the title company, you (or the seller) should request that the title company conduct a title search. A title search will discover any and all liens on the property. Since you will be purchasing the property, these liens will become your responsibility, so you want to make sure there aren’t any when you take ownership of the property. One of the biggest mistakes we see investors make is that they take title to a property without conducting a title search. We do not recommend our clients ever purchase a property with conducting a title search.
Now, once you have the title search completed, and there are no issues with the title you’re safe right…
Title companies can and do make mistakes which is why there is title insurance. You should always get title insurance when purchasing a property because it will protect you from being liable for any mistakes made by the title company conducting the title search. Furthermore, in the US it is customary for the seller to pay for this insurance, so it should not cost you anything to get this protection.
Set Your Closing Date
Typically, you will want to set a tentative closing date immediately when the purchase agreement is submitted. Most times this is somewhat flexible and you may be able to close on the property sooner or later as long as the change in time period is agreeable by both the buyer and seller.
Things to Do Within 7-10 Days of Submitting the Purchase Agreement
Conduct Your Inspections
Any inspections you will be conducting on the property should be completed during the period of time specified on the purchase agreement. Typically this happens within the first 7-10 days after the purchase agreement is submitted. You’ll want to make sure to coordinate with your inspectors to make sure the inspections are completed within the time specified in the purchase agreement.
Setup Your Property Insurance
You are purchasing an asset, and as such, it is wise to insure your asset from damage or loss. If you are financing the property, you will be mandated by the bank to provide property insurance to cover the cost of the loan if the property is damaged. You will want to get your property insurance squared away at least a week before the closing date.
Interview Property Management Companies
If you are investing from out of the area, you will likely need to hire a property manager. Within the first 7-10 days (or even before submitting your purchase agreement) you should interview the property managers you will be considering. At Michigan Turnkey we will recommend one or more property managers that we have worked with in the past, and you should discuss with them how they will manage your property.
You will want to formally hire your property management company about a week before you close. To do this, you will setup a management agreement with the management company which spells out all the responsibilities for the property management company along with the fees that they charge. It is very important to get this in writing.
Things to Do 1 Week Before Closing
Review the Settlement Statement and Closing Documents
About a week before closing, the title company will provide you with the closing documents. The most important document in this package is typically the settlement statement. The settlement statement (sometimes called the HUD statement) is the document that provides the accounting for the sale of the property. This document is going to list the purchase price, closing costs, tax prorations, rent credits, commissions, and any other accounting needed to complete the sale. You should look over the settlement statement and the rest of the closing package very carefully. Our experience has been that the 1st draft of the settlement statement contains errors more times than not. If you see something that doesn’t look correct you need to question it with the title company.
Arrange For Your Funding to Be Sent to the Title Company
Once you have reviewed and agree with the settlement statement, you will need to arrange for your funding to be transferred to the title company. This is typically done by wire transfer or by certified check. The title company will hold the money in escrow and distribute the monies according to the settlement statement after all of the closing documents have been signed.
About a week before closing you should schedule to have all the utilities (gas, water, electric) transferred into you or your company’s name. If the property is rented, you may not have to transfer any utilities, but you should consult with your property management company to determine what utilities need to be transferred.
Things to Do At Closing
Sign The Closing Documents
On closing day, everything should be fairly anti-climactic. The title company will have prepared all of the closing documents for you. You’ll want to read each of the documents carefully sign and return all of the closing documents. If there are any mistakes or omissions you should consult with the title company.
Things to Do After the Closing
File Your Property Transfer Affidavit
It may be different in other states, but in Michigan you are required to file a property transfer affidavit within 45 days of purchasing a property. This is the buyer’s responsibility to complete, but it is something your property manager will be able to file on your behalf. If you purchase from Michigan Turnkey we will offer to do this on your behalf as well.
Start Collecting Checks
Of course this is the whole reason you’re investing in turnkey properties to begin with right? If you have purchased a turnkey property you should begin collecting rent the first month after your purchase. Enjoy!
Next time we will wrap up our discussion on Investing in Turnkey Properties the Right Way as we discuss Step 5 – Property Management.
Summary for November 2011
- Auto sales are up and Detroit automakers are all profitable
- The unemployment rate continues to fall
- Foreclosures are trending up in recent months but overall are trending down for the year
- Home prices have stabilized since mid 2009 and prices are up 11.1% in 2011
In part 1 of our series Invest in Turnkey Properties the Right Way, we talked about Selecting The Right Team, and today we will talk about Step 2 – Setting Up Your Business Structure.
Step 2 – Setting Up Your Business Structure
For many of our clients, purchasing rental property in the US is a whole new concept, and there is certainly confusion revolved around how to setup your business, how the taxes work, and what papers need to be filed. So in today’s blog post we will talk all about how we recommend you setup your business structure to own property here in Michigan. It involves setting up your LLC, EIN and US Bank account, so read on…
Setup Your Limited Liability Company (LLC)
When it comes to holding real estate Michigan Turnkey recommends the business structure shown below for holding rental properties.
Using this structure, the investor sets up a single member Limited Liability Company (LLC), and this LLC owns the investor’s rental properties. This structure has two advantages – Liabilty Protection & Tax Flexibility.
As the name implies, the big legal benefit of an LLC is that it provides liability protection for the owner. Why do you need such protection? Well, these days many investors joke that the definition of a tenant is “A Plaintiff”.
All jokes aside, if you find yourself in a lawsuit due to something like a slip and fall accident on your rental property, the effects can be widely different depending on how you hold the property. If you own the property in an LLC, then you stand to lose all the assets within the LLC including the property. This is not preferable, but it pales in comparison to the scenario where you hold the rental property in your own name. In this case, a lawsuit can not only cause you to lose your rental property, but you can lose everything else you own as well.
Now, limited liability companies aren’t bullet proof, so you should seek the advice of a competent attorney when setting up your entity structure. There are additional things you can do to discourage lawsuits from being filed, and you also have the opportunity to carry liability insurance.
The second benefit of forming an LLC concerns the tax structure. By setting up an LLC you have the freedom to elect the tax structure that the LLC will be taxed as. For example, if the LLC has a single owner, it can setup to be taxed as a sole proprietorship, an S-corporation or a C-corporation. Or, if the LLC is owned by more than one person, you can elect to have the LLC taxed as an S-corporation, a C-corporation or a partnership.
For most of our clients, we advise them to set up a single member LLC to be taxed as a sole proprietorship. In this scenario, you receive the liability protection, but the LLC does not have to file its own tax return, so you will save on annual tax filing fees.
Other Things to Consider with LLC’s
Limited Liability Companies offer great benefits in terms of liability protection and tax flexibility, but there are some other things you should consider before deciding on this entity structure for holding your rental properties. An LLC will have costs associated with it. The costs include an annual filing fee of $25, and if you are not local to Michigan you will also have registered agent fees. The registered agent is required if you are not local because all Michigan LLC’s must have a Michigan mailing address. The registered agent provides a Michigan mailing address for you and will collect and forward any mail sent to your LLC.
Furthermore, there are things you need to maintain in order to keep your LLC in good standing and ensure the courts will treat it as a separate entity if you ever do find yourself in a legal battle. First, you must keep appropriate records for your LLC. This includes meeting minutes, financial records and annual statements. Next, you need to keep your finances separate from any other personal or business dealings. In the eyes of the law you are setting up a separate entity and you need to treat it as such. If you do not, the courts may find it fit to dismiss the existence of your LLC and allow a plaintiff to attack your personal assets. This is exactly what you’re trying to avoid, so keep things separate by running all the finances in a separate bank acount (more on that below).
All things considered, most real estate investors do elect to hold their rental properties in an LLC because of the benefits cited above.
Setup Your Employer Identification Number (EIN)
I know a lot of you are saying what is an Employer Identification Number (EIN) and why do I need one because I don’t plan on hiring any employees. Well, the name is a little misleading, but essentially your EIN is the number that identifies your LLC with the Internal Revenue Service (IRS) which is the US taxing authority. When you file your tax return, you will need this number. Additionally, you will need this number if you wish to open a US bank account.
Setup a US Bank Account
With your LLC and EIN setup, you are almost ready to invest in Michigan real estate. The last item we recommend is to get a US bank account setup. This will allow you to hold money collected from your rental properties in the US and prevent you from amassing large currency exchange fees every time you collect rent, or have to pay for property expenses. You will want to select a bank that offers access online. This is typically not an issue as most banks in the US have very good websites allowing you 24-hour access to your money.
How Do You Do All of This???
Okay, okay, I know there is a lot of information here, and it might be a little overwhelming, so we have a solution for you. At Michigan Turnkey, we’re applying the Turnkey mentality towards all aspects rental property investment, and this includes your business setup. We currently offer a service that will file for your LLC, setup your EIN and open your US Bank account. Additionally, we also offer a resident agent service through your property management company that will provide your resident agent services and submit your annual LLC filing.
Once you have selected your team and your business structure setup, you will be ready to invest in properties. Next time we will continue to talk about how to Invest In Turnkey Properties the Right Way as we talk about Step 3 – Selecting the Right Property.
How do I get started purchasing a turnkey rental property?
This is the most common question we receive from our clients, so we wanted to put some information together in a series of blog posts to help you understand the steps we recommend you take. At Michigan Turnkey, we understand that many of you are purchasing these properties from afar, and we strive to make every aspect of your investment as seamless as possible. We really try to take the concept of Turnkey much farther than just the property. We want to make your investment Turnkey in all aspects, and this includes your business structure setup, the purchase process, property management, property selection, financing and of course the property.
Today we will talk about the most critical step on the whole process – selecting the right team…
Step 1 – Select The Right Team
Okay, so you’ve decided to look at the opportunity to invest in Michigan real estate. You’ve seen how the Michigan Real Estate Market has declined over the last 5 years and you understand the buying opportunity that is currently in front of you. Your problem is that you live in Australia, or Hong Kong, or the UK, and you’re nowhere near Michigan. The opportunity looks very good, but you’re just not sure because of the long distance relationship you will have with your property…so what can you do?
Quite simply you need to work on building your team. When investing in rental real estate from afar, you will need a full team of individuals that will help manage your property, and you need to know that the team on the ground is working for you. So how do you build a good team?
Obviously here at Michigan Turnkey we pride ourselves in the team that we have built, but we understand you cannot take our word for it, nor should you. You’re thinking about investing significant amounts of money, so you should conduct your due diligence on your team just like you would conduct on the property. So, here’s what we recommend you should do…
Come to Michigan
First and foremost, I encourage all investors to visit the areas they will be investing in. If you’re planning to make a $40,000 investment (or more) into a rental property, it behooves you spend a few dollars to come to Michigan and see first hand the areas you will be investing in. A trip here will allow you to see the area, see properties, meet with your property manager, attorneys, accountants, contractors, bankers, etc. You will be able to meet the people you will be dealing with helping you manage your investment. I know this isn’t practical for every investor, but we certainly do encourage our investors to come see us here in Michigan.
Do a Google Search
Have you conducted a Google search about the individual or company you are dealing with? You can be amazed at what you will find by conducting a simple name, company name or email search in Google. I know I certainly was the last time I Googled my own name. To my dismay when I did this I found that there’s another Todd Brittingham in MacPherson Kansas who is a child molester. Obviously you need to make sure you are reading about the right individual or company when you do this kind of search, but it can be a great way to gain some insight into the people or companies you are working with.
Talk to Other Investors
One of the best ways for you to understand who you’re dealing with is to talk with other investors who have worked with them. At Michigan Turnkey we’re happy to connect you with other investors that we have worked with in the past. This is a great way for you to get an honest opinion about the team you will be dealing with and gain insight into their level of customer support.
Use Social Media
Everyone has Facebook right? Okay maybe everyone doesn’t but a good majority of people do. Interacting on Facebook and other social media sites is a great way to gain insight into your team members. We’re on Facebook, Twitter, YouTube, Bigger Pockets, and other social media sites. Come look us up and we would be happy to talk with you.
Ask Lots of Questions
If you’re new to investing from afar, you will certainly have lots of questions, so ask them! The responses you receive will not only give you the information you are looking for, but you will also gain insight into the people you are working with. Some of the things you should be looking at during these discussions in addition to getting your questions answered:
- Was the response delivered promptly? If it takes 3 days for someone to return an email, what will it be like after you purchase?
- Was the response clear? Communication skills are very important when working from afar, if you are confused by the response it is not a good thing.
- Were all of your questions answered? Attention to detail is critical, so all your questions should be answered every time, or at a minimum a plan to answer your questions should be established (i.e. I’ll get back to you when I find the answer).
Some of this stuff is common sense, but if you make a habit to constantly evaluate the individuals you’re working with you can gain a lot of insight into them and prepare yourself to make a decision whether to invest or not with that individual or company.
Okay, these are just a few ideas you can use to help you select the right team. If you have additional ways that you recommend, please by all means post them in the comments we’d be happy to get your feedback.
In our next post we continue our series on Investing in Turnkey Properties the Right Way and we will be talking about Step 2 – Setting Up Your Business Structure.
You’re probably thinking that depreciation doesn’t sound like a good thing…and how the heck am I going to make money from it? Well as it turns out, depreciation is a very good thing. In fact, for many sophisticated investors, it is their favorite form of income from an investment property.
So what is it? Well, in an effort to encourage investment in real estate, the US Federal Government has set up a tax deduction where you can deduct the depreciation of an investment property. In actuality, the property may be increasing in value, but that does not matter. This is referred to as a paper loss, because you didn’t actually lose the money, but the government is allowing you to take the deduction.
Now, there are rules on how the deduction is calculated and how much you can deduct, and I encourage you to consult with your tax accountant on this. For practical purposes however, I will give you some rules of thumb.
- For residential property, you can depreciate the property over 27.5 years.
- For commercial property, you can depreciate the property over 39 years.
- Only the improvements to the land are deductible. The land is not. A good rule of thumb is about 75% of what you paid for the property and improvements is deductible. Again speak with a tax accountant on this.
Now, to calculate the depreciation on a rental property you can use the following formula:
Depreciation = 75% x B /27.5
B = Basis (amount you purchased the property plus any improvements made)
Again I will mention that this calculation is a rule of thumb and you will need to speak with your tax accountant to get the absolute amount you can deduct. This calculation will get you pretty close though. So, for example, if you have a property that you purchase for $40,000 and, your annual depreciation deduction can be approximated by:
Depreciation = 75% x $40,000 /27.5 = $1090.91
So, for this example, you would be able to deduct $1090.91 every year for 27.5 years from your income thereby reducing your tax burden and increasing your return. This is just for one property…imagine if you had multiple properties.
Now the great thing is that you can take this deduction on your taxes even though you did not actually realize this loss. It is a paper loss, and the net effect is that your returns are increased. This is why depreciation is one of your best friends as a rental property owner.
If you’d like to start investing in Michigan Real Estate, feel free to contact us to get started.
As many of you know, we’ve been anxiously awaiting the arrival of our son…
We have finished all the renovations on 659 Wesbrook in Pontiac, and we’re expecting to have the property rented by August 1st. You can see all the details on this property on our listing page. Let us know what you think…
As some of you may know, we’ve put together a series of 7 webinars leading up to our Michigan Cash Flow Property Tour which is being held next week July 7-9, 2011. These webinars contain loads of information you’ll need to succesfully invest in Michigan real estate. If you’ve missed any of the webinars please feel free to view them below…
Webinar 1 – The Top 10 Mistakes to Avoid When Investing in Michigan Real Estate
First Aired April 3, 2011 (Note: Fast forward to 2:00 to get to the start of the webinar)
Webinar 2 – Overview of the Michigan Real Estate Market
First Aired April 17, 2011
Webinar 3 – Property Location and Property Criteria to Maximize Your Return
First Aired May 1, 2011
Webinar 4 – Tax Planning, Legal Planning and Property Insurance
First Aired May 15, 2011
Webinar 5 – Property Management, Section 8 & Land Contracts
First Aired May 29, 2011
Webinar 6 – Pontiac Michigan – Market Preview
First Aired June 12, 2011
Webinar 7 – Detroit, Michigan – Market Preview
First Aired June 26, 2011