Kevin talked with his bank today, and they told him that the minimum loan is $100K, which is more than we need, but we can pay off the excess in a couple of weeks, and then the payments would be decreased. At this point, I am considering buying a slightly more expensive house if we can get sufficiently higher rent for it.

I think there may be missed communication about the payments being decreased after paying off any excess. Most mortgages that I am aware of unless there is a PMI which there does not sound like there should be maintain the same level payment. It could be the loan is not a mortgage but some other type.

I agree with maifleur. I am unaware of any mortgage where the payments decrease just because you pay down the principal. I pay about $300 extra on my mortgage each month and the only effect is that I will pay it off sooner.

The reduced payments would be for a home equity loan. I never said it would be reduced for a mortgage loan. We are considering both types of loans.

Either way, we can handle the payments for $100K mortgage, and paying it off sooner (if we do not need that much) will be very helpful. If we buy a more expensive house, we will get more rent for it.

Our latest problem is that all the houses that I am interested in have been selling after being on the market for 5-6 days.

Why is that a problem? Get there on day 4 and all is well.

The city takes 12% of any rent that you bring in? That is crazy!!!

And then add at least 10% more for the property management company. Your cash flow may be gone already before adding in expenses, maintenance, vacancy... is it OK with you and your brother if the rental does not produce positive cash flow?

Just wanted to clear up a little confusion going on. I believe what the bank was referring to is called mortgage recasting. You can make a lump sum payment and then recast the loan to lower the monthly payment. There are parameters around it, though, and you would need to find out what those are from your bank.

You are probably correct. My daughter's car loan is recasted each month. It is much lower now than on day one, because I pay a bit more each month. Bank of America loan.

I believe there is a hotel tax for any short term rentals in California, and I am okay with that - it can be added to the price of the rent. When we rent hotels, the price we see generally does not include the tax, but it is noted that it will be added on.

We're going tomorrow to look at houses, and I think we should be able to pick one out this week-end. The one I like most is back on the market after a deal fell through for it - it is $11K under our budget. My second choice is $30K over budget, but that would end up being a small loan, I think, and easy for use to pay off.

We also have a rent tax here for short term rentals in Florida. Any rental that is 6 months or less, considered short term rental, is taxed by the State of Florida plus whatever the county tax is where the property is located. Right now that rate is 13% in my area and that tax is passed onto the tenant.

Consequently there is a solution to legally avoid the tax by having the minimum lease term at 7 months or even six months and one day where no tax is due. However, that wouldn't apply to AirB&B locations as they are usually very short term IME. Here the rate is advertised and the tax is added on top of the nightly or monthly rate for the consumer to pay just like the hotels do it. However, I have yet to see a convenience fee or incidentals fee added to the rate which is common in hotel charges here - also added to the rate. Good luck with your search this weekend in Palm Springs.

Do you guys know what vacancy rates are for Air BNB types in your market? You need to know this figure to really know if things make sense or not.

But then again, you may be just more interested in long term appreciation as opposed to a positive monthly cash flow.

Lars, I believe the so-called hotel tax is a municipal tax and not something that's statewide. I could be wrong. It's common in large cities and resort/vacation areas. Whether there is or isn't one, and how much it is, varies from place to place. Ask the local municipality (or call a hotel/motel nearby) and ask.

Be careful with taking out a loan on your home to finance another property. Under the new tax law, that interest isn't deductible on Schedule A because it wasn't used to buy or remodel or repair your home. You may be able to do a "10T election" to trace the interest to the rental.

Also, talk to your tax person about short term rentals. Also, talk to people who own short term rentals if you haven't already. As the owner of a short term rental and a past owner of a long term rental, the two are very different. Some short term rentals are considered businesses subject to SE tax in addition to income tax.

Elmer J Fudd, it is called an occupancy tax in the city where our vacation/short term rental is.

You also may have to register and have the rental inspected once a year. We have to have a smoke and CO2 inspection annually.

The taxes do vary from one city to the next, and I believe they are 15% in Palm Springs vs 12% in Cathedral City.

As for AirBnB vacancy rates - they are extremely low in the area where we are looking, but the rates also vary seasonally. I noticed that it is normal to have near 100% occupancy in the month of May and certainly near 100% in the winter. July, August, and September are the slow months, and the rates are lower, but there are still rentals. The rental company would help us with pricing seasonally. During the Coachella Festival, rates go up considerably, and there are other festivals in the area that cause vacancy rates to go down, but Coachella is when the rates really go up, but only for a week or so. Still, the rates during that week are extremely high. Also CC is closer to Coachella than PS and therefore more desirable during that week.

We bid on one house this week-end that has a 30' long pool in the back yard, desert landscaping that we love, and it also has solar panels, although those are rented, and we would have to assume the rental cost of $160 a month, which I assume is lower than the utilities we would have to pay or else the owners would not have installed them. We bid what we wanted to pay in all cash, but there are multiple offers, and we are going to have to rebid when we get a counter offer from the owner. We were the lowest bidder, but we can go up $21K and still be comfortable, although this will still be about $8K below asking price. The asking price is $13K above the Zillow estimate, which I think is really a fair amount, but houses are selling very fast, as I said. This house was by far my favorite, and I will be very disappointed if we do not get it, but if we do not, we will keep looking. The market there slows down in the summer, and there might be a lot less to choose from at that time.

For now, we are going to try to stay within what we can offer in cash and feel that the owners may prefer cash offers since they can get their money faster and we are not requiring an appraisal. I feel comfortable with that, but we do have inspection contingencies. For the house that we are bidding on, the furniture will stay with the house because the owners do not want to pay to move it. It is their second home (I believe they are Canadian), and they want to sell because their children refuse to go there to visit them during vacation times. I think they are getting a different second home in Florida or perhaps Georgia/South Carolina - something with a beach. The existing furniture is pretty gag-worthy, and I think we would have to get a home equity loan to replace furniture in the master bedroom in order to make it more rentable. Our first bid reflected this cost and would not have required us to get a loan to make the house more attractive, but it is gorgeous on the outside, which is where people would spend most of their time.

If you are interested, I can post the listing, but the photos in the listing do not show the whole horrendousness of the master bedroom. The house was built in 1991, but the furniture looks like it is from the 1970s or 1980s at the latest.

We looked at other houses that were of interest to us, but the owners accepted an offer on one before we could even consider bidding. On this one the pool needed to be resurfaced, but the price per square foot was quite a bit lower than our favorite one.

We definitely would have to register our rental property, but even with taxes, I would make much more money than in the stock market.

So just my 2 cents on several things.

First, were I in your shoes in my location, I would start with a low closing cost HELOC. It gives you the flexibility to take out what you need rather than a set amount and a way to make all cash offers and offer expedited closings without actually having the cash.

There is an interest rate premium but most HELOC's recast automatically and for a small amount on an investment property, I would just pay it down early. As for taxes, on a $20,000 loan, even after the introductory rates expire you should still be under $1,200 of interest for a year if you don't pay it off early. So I would pay it off early.

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Next, I probably wouldn't get in your shoes in my location. I have both short term and long term rentals and there is no way I would get either one with a pool, but I can't imagine a short term rental with a pool. I would strongly advise that you discuss this idea with a real estate attorney prior to going any further. It is time to start thinking about liability shields if you insist on having a pool. In my opinion, you are going to struggle to fully indemnify yourself from the liability of having a pool in a short term rental.

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Finally, were I in your shoes in your location, I would work really hard at structuring the transaction with a purchase money loan that would trigger the California non-judicial non-recourse status.

I keep my short term rental properties in an LLC and financed to limit my liability. I would strongly advise others to do the same.

Best of luck to you.

If you refinance a rental property that's in an LLC to reduce your equity percentage, how do you get the money out and how does that route limit your liability?

Bry911 - while I definitely understand the liability concerns, is it really that unusual to have a short-term rental property with a pool? We spent a week in Orlando with my extended family this winter, in a rental home with a pool (which was smack dab in the middle of a neighborhood of identical homes with identical pools, most of which seemed to also be used for short-term rentals). Presumably in warm weather locations this is pretty normal?

"If you refinance a rental property that's in an LLC to reduce your equity percentage, how do you get the money out and how does that route limit your liability?"

It is just a distribution from the capital account. You are simply converting net assets to different net assets and taking the cash as a distribution from your capital account.

You might still be on the hook for any shortages due on the note if you are in a recourse state and the bank required your personal guarantee of the note, but any forfeiture of property would be net of balance due on the note. That discourages actions against the LLC as it is mostly debt.

In Coachella Valley, a vacation rental with no pool is highly undesirable.

I definitely understand the liability concerns, is it really that unusual to have a short-term rental property with a pool? We spent a week in Orlando with my extended family this winter, in a rental home with a pool

The seasonal rental market is a little like the Wild West. So no, it is not unusual, but that doesn't make it a good idea. Most Florida rentals are vacation homes used to get a few rental dollars. The owners wanted the pool at their vacation home and the rental was just an attempt to offset some of their cost.

Pools are high maintenance and high liability items. Probably the worst thing you can have in a rental.

ETA: Just to be clear, I didn't say don't get a short term rental with pool, I said consult with a real estate attorney before you do.

My sister is an attorney with a lot of real estate experience, and I have discussed this with her.

We made a counter offer today with the highest that we are comfortable with, and it looks like we can get a $50K loan to make up the extra we are going to have to pay if we get it and still have $20K left over for improvements, etc. in addition to what we already have in savings.

The rental agents in Palm Springs will also be able to help us with understanding liabilities regarding pools, and there are quite a few of them to choose from. Our agent said that we should interview with at least two rental agents before we select one.

We still may lose out on the house, even though we submitted a bit at $10K over the original asking price, which I thought was high, but my agent says our bid is in line with comps. Also, the house we are bidding on has some fairly unique features that make it more valuable, such as the size of the pool and great mountain views from one end of the pool where there is a pergola.

Let us know please.

Unless it's the rare real estate investment that produces a profit, capital accounts simply represent money previously invested and distributions are limited. The equity value of real estate remains even if some of the cash put in to buy it is taken out.

I'm not sure that having an LLC accomplishes much. Not infrequently, and varying by state, lenders may want the principals to cosign for loans. And I'm also not so certain that cash movements out, in anticipation of or in an effort to protect assets from lawsuits, are always respected. Especially with one-owner entities. Liability insurance is better protection.

Sometimes people like to throw terms around in an effort to impress others, even if what's said isn't entirely as represented.

Good luck, lars.

"Unless it's the rare real estate investment that produces a profit, capital accounts simply represent money previously invested and distributions are limited. The equity value of real estate remains even if some of the cash put in to buy it is taken out."

Yes, and... what is your point? Most of the world doesn't see property appreciation so high that removing all of the contributed capital for a cash purchased property leaves huge amounts of equity.

However....

If your attorney can't figure out how to move assets around LLC's to create realization events when you refi, then he is an idiot.

"I'm not sure that having an LLC accomplishes much. Not infrequently, and varying by state, lenders may want the principals to cosign for loans."

First, California is a non-judicial one action state so it is basically non-recourse. So whether they make you sign or not is moot if you can work the deal as a qualified purchase money loan.

Next, I already noted you may have to co-sign in recourse states. But your personal guarantee for the note has nothing to do with limiting your liability from a pool. Yes, you are unlikely to simply walk away from a mortgage note because you put the property in an LLC. But any action will be limited to the fair value of net assets. In other words, you lose the property, it gets sold, any proceeds in excess of the note are distributed by the courts, however if the net assets will only produce a shortage the action is unlikely to occur at all.

"And I'm also not so certain that cash movements out, in anticipation of or in an effort to protect assets from lawsuits, are always respected. Especially with one-owner entities. Liability insurance is better protection."

Who said anything about anticipation of an event? A liability shield is smart. Keeping properties financed is smart. Combining the two is even smarter, but even without a liability shield properties are crappy investments without being levered. Creating a levered real estate investment is not going to weaken your liability shield. Of course, you can't do this after some event happens.

We will definitely get liability insurance! I still expect to make a decent profit from renting this as AirBnB, based on what I have seen other rentals in the area get for this type of rent. The property we are bidding on has a lot going for it and will be highly desirable to renters, as it appears to be also to other buyers. If we do not get this house, I think it will be quite a while to find something comparable, but the buying does slow down July-Sept.

Your understanding is incomplete bry911. I sense some "knowledge by Google searching" going on for your comments with unconnected dots. If that's not the case, please say so.

Be sure to get knowledgeable expert advice when you need it.

Elmer and Bry can correct me because much depends on individual state laws but LLC's tend to protect your assets that are not in the LLC at least in this state. Again depending on the states laws, two states/two laws, your personal assets if sued may be protected. You do not want to loose everything you have worked for because someone slips on water from your pool.

Elmer, currently I am typing this from a rental property that should be ready for tenants in a couple of weeks. Would you like a picture as evidence? I doubt you will understand the picture unless you have rental properties but I assure you that everyone who has evicted a tenant will immediately recognize the result of an eviction.

I suspect my understanding is fairly comprehensive. I bought my first rental property 19 days after my 18th birthday and I rented it to my fraternity brothers. I have had tenants and attorneys since then.

However, if it puts your mind at ease, last year I paid my attorney enough to send his daughter to college to protect me in a dozen different real estate transactions, I really don't care if he understands what he is doing or he just carries really good E & O insurance.

Good luck to you.

" I suspect my understanding is fairly comprehensive. "

It's clear you feel that way but based on some of the incorrect/misleading things you've said, I'd suggest more modesty might be warranted.

Elmer again your attacking something I did not say. My comment was that here LLC's protected your assets but there are laws from two different states that need to be taken into account. This is a very wide country and most of your comments only have to baring on the small part that you know about. You may think that LLC's do nothing. "I'm not sure that having an LLC accomplishes much" but for many farmers and ranchers that had to go into bankruptcy it saved assets that would have been lost if they had remained sole proprietorships.

maifleur, keep you hat on. I wasn't attacking you or anyone else.

The topic was an LLC for a passive income activity. No one mentioned active businesses of any kind, not farming or anything else.

It's clear you feel that way but based on some of the incorrect/misleading things you've said, I'd suggest more modesty might be warranted.

Name them. Put your money where your mouth is. I agree with you 95% of the time, but sometimes you get this irrational need to swing at pitches you can't hit.

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First, yes you can generalize. Education is powerful even when people are only familiar with concepts, knowing enough to ask the right questions is important. That is how people learn when to get professional advice.

Generally, LLC's are not that hard. You can form an LLC in any state even if your business or home isn't in that state. You will probably still be subject to the laws of the state you operate in, but can typically skip restrictive formation requirements in a state by simply operating as a foreign LLC in that state. An exception for PLLC is required in some states, but that doesn't apply to real estate or farming.

All properly ran LLC's limit your liability for the torts of others, that limit being your remaining investment in the venture at some point administratively determined (this means that at some point in an action the courts will determine the date at which distributions were not in the normal course of business). This is true for every state.

LLC's don't work quite as well to limit your liability for your own torts. The degree to which an LLC will shield you for your own torts is something specific to your business and your state. But if you get drunk and hit a bus full of preschoolers while driving your work truck, you are probably not going to be successful hiding behind an LLC. However, your business partner, assuming he didn't commit a tort, would be.

Where this is so important in this topic is because of the pool. Most states have an attractive nuisance doctrine that creates a duty for homeowners to make reasonable attempts to remove access of children to dangers that they might be attracted to, such as a pool. However, some states, like California, extend this duty of care beyond children to anyone hurt on their property. A properly formed and operated LLC, will owe this duty. That doesn't mean that you can be negligent yourself and still be protected, again, you are usually responsible for your own negligent acts. However, if your short term renter does something negligent, an LLC will offer some (probably complete) shielding of personal assets.

The topic was an LLC for a passive income activity. No one mentioned active businesses of any kind, not farming or anything else.

Can you corroborate this assertion? I would like some evidence of a difference between the liability shield based on active or passive income generation. That sounds like something my professor would have mentioned...

Another swing and a miss.

ETA: I am not going to hi-jack someone else's thread any longer. My only advice was to see an attorney. This is just another one of those floating currency debacles.

Some people who rent in Cathedral City require that the renters (or tenants) all be over the age of 25 and still have no problem renting their properties. The property we would rent would probably not appeal to families with children, but we will put a minimum age limit anyway, which is perfectly legal in CC.

Lars, I am not advising that you consult with an attorney (your relative in this case) because of tenants. You can typically insure and indemnify yourself to some extent for tenants.

When you have a danger that a reasonable person can forsee as attractive to strangers, then you have a duty to those strangers. In other words, you can't put a trampoline in your front yard and claim that since you didn't invite kids to jump on it, you are not responsible for their injuries. Since a reasonable person would assume that kids will jump on it.

A few states, such as California, don't limit this responsibilty only to kids. The owner's responsibility in those areas extends to adult trespassers, which makes things even more difficult for owners, as limiting access by kids is easier.

This becomes more pronounced in short term rentals as the home will be vacant more often and thus more inviting to trespassers. Additionally, long term rentals might mitigate some of the liability as they will bear some responsibility for their residence. This doesn't happen in short term rentals.

Of course, insurance is your first line of defense, but attractive nuisance judgments often exceed reasonable insurance amounts. A few hundred dollars speaking to an attorney who is experienced in rentals is well worth the expense in my book.

The agencies who handle the rentals in the area will have plenty of experience with these issues, and I plan to talk with several of them, which will cost me nothing, since they will want me to hire them to handle the rentals.

Not sure what you mean by that, Sushipup, but we did get the house, and I am so thrilled! We're going to do some loan comparisons now to find out what will be our best option. Kevin has already been approved by his credit union for $100K, and we might just want to take that, do all the updates we want, and the pay back whatever is leftover.

Here's a link to the listing. The furniture in the master bedroom looks much worse in person than it does in the photos. The barstools and dining chairs are pretty kitschy, but I might decide to live with them for a while. If not, my agent said I could sell that furniture, but I think I need to do a complete redecorating project if I start doing that. The master bedroom will be the first project, as it is very difficult for me to look at that furniture in person. We also want to replace at least one bathtub with a walk-in shower. Picture #13 (I think) of the living room shows a baroque gold leaf console with a granite top, which looks like it is from the early 1990s, and was probably very expensive when it was new, but it will have to go. I think I can sell that fairly easily as it is in very good condition and there might be someone who likes it.

My next step is unfreezing my credit reports. Kevin and I had to freeze them when Sony was hacked a few years ago, and still someone tried to steal Kevin's identity. It may take me a while to find the information I need to do this, but if I cannot find my passwords, I can still contact the agencies and answer a barrage of questions to get my credit unfrozen.

I will also look into the LLC.

Wonderful! (The MBR furniture is really worse in person, really?) A great basis for a redecorating project!

(I was referring to the the two "experts" battling it out. The same two do that every so often in other threads, and neither one will give up if someone doesn't call them out on it. It's really tiresome.)

To sushi (my former regional neighbor)

For me, it's not a matter of giving up, but rather of just stopping. Here I've expressed my views and I have nothing more to say. Done.

I have figured out a budget for getting the house into good rental condition, and I think we can do that for $17K. We are going to proceed with getting a loan from Kevin's credit union (after I get my credit unfrozen) for $100K, $19K will go toward the price above what we want to pay in cash, and then $17K to perhaps $20K will go toward renovations. Whatever we have left over we will pay back to the credit union, but they are giving us a good rate at 3.7%. Whatever we pay off will decrease the amount of time we have to pay back the loan, but not the monthly payments.

One repair we will need to make ourselves is the heater for the pool/spa. I estimate this at $3K, but it will be worth it because people have already told me that they are willing to pay the $40-$50 per day charge for heating the pool when they rent in the winter. In May through October, there will be no need to heat the pool, but we need to have that option to offer. The main renovation we will do will be to change the bathtubs to walk-in showers. That's what we want for ourselves, and people have told me that they do not take baths in rental properties and prefer the walk-in showers.

Anyway, to answer my original question, it looks like we are going to use my brother's credit union (from Sony) for our loan, and I will be meeting with him tomorrow at 11:00 AM with the loan officer. Tomorrow morning Kevin will do the wire transfer for the escrow from his bank on the Sony lot, and I will meet him after that.

Congrats... yes, you can get a nice 400,000 BTU Pool heater for $3000. Even a little less.

Not certain if they even make them but perhaps you should look for something that warms in the winter but cools in the summer. Someone I know retired out there and complained she could not use the pool during the summer because the water was warmer than what came out of her hot water heater. Others have mentioned that it was interesting how warm the water was.

I have also noticed very warm pool water in July in Palm Springs, but we will just lower the rent during the months when it is too hot, and I won't mind spending time there during the heat. I do intend to put outdoor misters to cool the patio area in the summer months.

Opposite of the problem we had in San Diego... pool temperature in Summer was right at 71-72 degrees - too cool.

That situation would be suitable for the pool to act as the heat sink for the home's Heat Pump. The pool temperature would be like 60 degrees in winter. (Watched Richard Trethewey of This Old House make such an install.)

San Diego has a lot of climate zones as you well know, SD, and once you get away from the ocean, even a few miles, it gets warmer and warmer. But even in the coastal zone, having the right pool cover on when not using the pool will both produce and retain the heat to get to much warmer temps than you mention.

Home and pool inspections are on Tuesday, and our agent is handling this for us, and so we will not need to be there. I'm anxious to go back and take measurements so that I can draft the floor plan, and I want to look at some of the finishes in the bathrooms again.

Correct re micro-climates in the San Diego area. Either five miles inland or five miles south of where my home was and the summer temperatures are in the 90s and 100s. I used my A/C in Del Cerro maybe two or three days a year during a Santa Anna... my home had a clear view from our pool down Mission Valley to the Pacific Ocean maybe ten miles distant... Also, ran the furnace only a few days each winter, however did use a gas fireplace sometimes.

San Diego is actually desert with an ocean breeze in many areas near the coast.

I live near the beach in Los Angeles, and so summers are very cool here. Generally it only gets hot in September and maybe October, although we've also had very warm days (in the 80s) in January. In Cathedral City, it will be cooler in the winter than here and of course much hotter in the summer. I think I can handle the heat if I have a pool. Right now we are having June Gloom and drizzle.