A lot of people have been asking me whats the best way to properties. If you’re doing pre-construction flips you want to either do it in a C Corporation or a retirement plan. If you flip too many homes a year, IRS will stick you with dealer status which means you lose a lot of real estate tax breaks. If you use a C Corp, the C Corp may get dealer status, but you are shielded. I like to use retirment accounts like a qualified corporate pension plan or an IRA to flip properties. That way i dont have to worry about taxes for many years.

For properties that you plan on holding for a long time, I believe the best way is to use an LLC. The LLC should not be managed by all the members, but instead have only one manager. That manager should be a C Corp that owns 1 to 5%. Even though all parties in an LLC are supposed to have liability protection, I’ve heard that a sharp attorney can pierce that. However, if the manager is a C corp and no other members are involved in the running of the LLC, its more difficult to do that. Only the C Corp is liable in case of lawsuit, and if structured properly it can provide better asset protection. Not only that, if the LLC has elected to be taxed as a partnership it will get optimal tax benefits.

For more information, I heartily recommend Albert Aiello’s “Real Estate Investor’s Goldmine of Brilliant Tax Strategies”.

seeing that there’s only 3 months left in 2005 and i’ve just sent in my tax return for 2004, maybe its time to make some goals for 2006. This year has been pretty good. I’ve cashed in some chips and increased my net worth quite a bit. I’ve gained some recognition among other investors and I also got to travel quite a bit too.

So here are my goals in no particular order

• Increase my cashflow to $2500/mo
• Increase my networth by $500k
• Travel to Alaska and Hawaii
• Get into land subdividing & development

wish me luck!

Union Tribune link

The newspaper basically said what I’ve been saying for the past 12 months. 50% of all new jobs in CA created since 2001 were real estate related and if the RE market tanks, it’ll take the whole state’s economy with it.

I’m banking on this happening and the signs are all there. DOM is trending up, inventory is trending up, prices are trending down and
last year was the first time we saw a negative population net migration.

I think we’ll hit the bottom between 2008 and 2010 when all the people who couldn’t afford homes and still bought them with 3 and 5 year ARMs see their loans readjust to a 50% higher payment. The banks will get back a ton of homes and people who have cash will benefit! I fully expect to see a 25-40% drop in prices in different parts of CA,despite fervent pleas from my wife to keep my opinions to myself and stop scaring her friends and acquaintances.

I’m so glad I cashed out of the CA market.

I recently tied up some SFHs in Boise, Idaho. The plan is to put down a small deposit, wait for six months until the homes are complete and then sell them for a profit. While it sounds very simple, there are some important rules to follow.

1. Make sure you target an area where there is strong price increase.
   After you subtract closing costs, real estate commissions and maybe holding costs, the property needs to have risen sufficiently enough to make a decent profit. example: I’ve tied up homes for $190k [included closing costs] and they’re already worth $250k even though they’re a few more months from build-out.
2. Make sure the area is experiencing actual population and job growth.
   You want to ensure that the price growth isn’t just fueled by rampant investor speculation. if so, when it comes time to sell, you won’t have any buyers.
3. Make sure you get in at the right time in the Cycle.
   You don’t want to be left holding the bag at the tail end of a cycle like some Pulte home investors in Las Vegas. After they closed, Pulte reduced the prices by as much as $100k.
4. Stick to bread and butter homes
   I’m buying between 1600-2000 sq ft homes in the sub 250k price range [depending on the market]. Don’t go for the super luxury homes. that just increases your risk. instead go for several b&b homes. that spreads your risk.
5. Make sure you get a home inspection done
   Sometimes in a new home, the electrical won’t work or the plumbing is jacked up [because the contractor dumped plaster down the toilet]. dont’ skimp on this $300 investment.
6. Try to work out a deal with your agent
   If you use them to resell the property, ask if they’ll give you a discount on the listing fees.
7. Try and work out a deal with the builder
   Sometimes if you buy bulk, the builder will work out a deal with you.[difficult, but worth a shot].
8. Make sure you do your homework about taxes.
   The last thing you want to do is be in the highest tax bracket or be labelled a dealer.But thats a topic for another day.

UPDATE: March 2007
I NO LONGER RECOMMEND PRE-CONSTRUCTION FLIPS IN ANY PART OF THE COUNTRY. THE SITUATION HAS DRASTICALLY CHANGED AND YOU’RE MORE LIKELY TO BE STUCK WITH A PROPERTY YOU WON’T BE ABLE TO UNLOAD

I was about to lend another investor $15k at 3% interest per month with a 6 month ballon or an extension with a 6% penalty but the escrow company told me that its against texas’s usary laws!

I spoke to a broker and he said there are ways around it but he wouldn’t advise it. tough luck!

We both lost out making some easy money.

What exactly is “usury”? Its the act of charging an exhorbitant interest on money lent out. Kinda like the credit card companies charging 29% interest thats calculated over a floating 60 day period so you’re charged for the next 2 months after you pay off your balance AND you get stuck with a $1.50 “finance” charge.

What are the laws against it? Well in the kindness of their hearts, many states have legislated that individuals can’t charge more than a certain amount of interest to borrowers. In texas its 18% and in California I think its 10%. Of course its perfectly legal for a corporation to charge a usurious rate of interest which is why credit card companies maintain the friendships with people who make the decisions!

But Prosper.com is the closest you can get to charging usurious rates of interest. I’m currently getting 19.7% on the money I’ve lent out. Lets see how long it takes for the borrowers to default.

Some states also have a “legal rate.” In such states, as a general rule, if you have a contractual obligation that provides simply for interest without a specific term, or “interest at the highest legal rate” then the “legal rate” what applies. In other instances we have stated a “judgment rate.” That’s the rate that final judgments bear. In states without a usury limit, there still may be a federally imposed limit because at certain astronomical rates of interest “loan sharking” will be inferred by the federal government.

Usury Is A Complicated Area Of Law. Transactions that a person would not consider to be affected by usury often are, for example, repurchase agreements, or sales with an option to repurchase are often found to be loans. A word of caution. Before trying to lend someone money or “invest” with a guaranteed return, see an attorney to make sure that you don’t run afoul of the usury laws. In state’s that specify one limit for
consumers and one limit for non-consumers, you cannot avoid the usury limit by creating a sham business deal. In a supplement that is now being prepared and will be available soon, we will review the penalties for usury in each state and point out special circumstances in each state.

ALABAMA, the legal rate of interest is 6%; the general usury limit is 8%. The judgment rate is 12%.

ALASKA, the legal rate of interest is 10.5%; the general usury limit is more than 5% above the Federal Reserve interest rate on the day
the loan was made.

ARIZONA, the legal rate of interest is 10%.

ARKANSAS, the legal rate of interest is 6%; for non-consumers the usury limit is 5% above the Federal Reserve’s interest rate; for consumers the general usury limit is 17%. Judgments bear interest at the rate of 10% per annum, or the lawful agreed upon rate, whichever is greater.

CALIFORNIA, the legal rate of interest is 10% for consumers; the general usury limit for non-consumers is more than 5% greater than the Federal Reserve Bank of San Francisco’s rate.

COLORADO, the legal rate of interest is 8%; the general usury limit is 45%. The maximum rates to consumers is 12% per annum.

CONNECTICUT, the legal rate of interest is 8%; the general usury rate is 12%. In civil suits where interest is allowed, it is allowed at 10%.

DELAWARE, the legal rate of interest is 5% over the Federal Reserve rate.

DISTRICT OF COLUMBIA, the legal rate of interest is 6%; the general usury limit is in excess of 24%.

FLORIDA, the legal rate of interest is 12%; the general usury limit is 18%. On loans above $ 500,000 the maximum rate is 25%.

GEORGIA, the legal rate of interest is 7%; On loans below $ 3,000 the usury limit is 16%. On loans above $ 3,000, the limit appears to be 5% per month. As to loans below $ 250,000 the interest rate must be specified in simple interest and in writing.

HAWAII, the legal rate of interest is 10%. The usury limit for consumer transactions is 12%.

IDAHO, the legal rate of interest is 12%. Judgments bear interest at the rate of 5% above the U.S. Treasury Securities rate.

ILLINOIS, the legal rate of interest is 5%. The general usury limit is 9%. The judgment rate is 9%.

INDIANA, the legal rate of interest is 10%. Presently there is no usury limit; however, legislation is pending to establish limits. The judgment rate is also 10%.

IOWA, the legal rate of interest is 10%. In general consumer transactions are governed at a maximum rate of 12%.

KANSAS, the legal rate of interest is 10%; the general usury limit is 15%. Judgments bear interest at 4% above the federal discount rate.
On consumer transactions, the maximum rate of interest for the first $ 1,000 is 18%, above $ 1,000, 14.45%.

KENTUCKY, the legal rate of interest is 8%; the general usury limit is more than 4% greater than the Federal Reserve rate or 19%, whichever is less. On loans above $ 15,000 there is no limit.
Judgments bear interest at the rate of 12% compounded yearly, or at such rate as is set by the Court.

LOUISIANA, the legal rate of interest is one point over the average prime rate, not to exceed 14% nor be less than 7%. Usury limit for individuals is 12%, there is no limit for corporations. (As warned, you cannot evade the limit by forming a corporation when the loan is actually to an individual.)

MAINE, the legal rate of interest is 6%. Judgments below $ 30,000 bear 15%, otherwise they bear interest at the 52 week average discount rate for T-Bills, plus 4%.

MARYLAND, the legal rate of interest is 6%; the general usury limit is 24%. There are many nuances and exceptions to this law. Judgments bear interest at the rate of 10%.

MASSACHUSETTS, the legal rate of interest is 6%; the general usury rate is 20%. Judgments bear interest at either 12% or 18% depending on whether the court finds that a defense was frivolous.

MICHIGAN, the legal rate of interest is 5%; the general usury limit is 7%. Judgments bear interest at the rate of 1% above the five year T-note rate.

MINNESOTA, the legal rate of interest is 6%. The judgment rate is the “secondary market yield” for one year T-Bills. Usury limit is 8%.

MISSISSIPPI, the legal rate of interest is 9%; the general usury limit is more than 10%, or more than 5% above the federal reserve rate. There is no usury limit on commercial loans above $ 5,000. The judgment rate is 9% or a rate legally agreed upon in the underlying obligation.

MISSOURI, the legal and judgment rate of interest is 9%.
Corporations do not have a usury defense. (Remember that a corporation set up for the purpose of loaning money to an individual will violate the usury laws.)

MONTANA, the legal rate of interest is 10%; the general usury limit is above 6% greater than New York City banks’ prime rate. Judgments bear interest at the rate of 10% per annum.

NEBRASKA, the legal rate of interest is 6%; the general usury limit is 16%. Accounts bear interest at the rate of 12%. Judgments bear interest at the rate of 1% above a bond yield equivalent to T-bill auction price.

NEVADA, the legal rate of interest is 12%; there is no usury limit.

NEW HAMPSHIRE, the legal rate of interest is 10%; there is no general usury rate.

NEW JERSEY, the legal rate of interest is 6%; the general usury limit is 30% for individuals, 50% for corporations. There are a number of exceptions to this law.

NEW MEXICO, the legal rate of interest is 15%. Judgment rate is fixed by the Court.

NEW YORK, the legal rate of interest is 9%; the general usury limit is 16%.

NORTH CAROLINA, the legal interest rate and the general usury limit is 8%. However, there is a provision for a variable rate, which is 16% or the T-Bill rate for non-competitive T-Bills. Above $ 25,000 there is no express limit. However, the law providing for 8% is still on the books- be careful and see a lawyer!

NORTH DAKOTA, the legal rate of interest is 6%; the general usury limit is 5 1/2% above the six-month treasury bill interest rate. The judgment rate is the contract rate or 12%, whichever is less. A late payment charge of 1 3/4% per month may be charged to commercial accounts that are overdue provided that the charge is revealed prior to the account being opened and that the terms were less than thirty
days, that is, that the account terms were net 30 or less.

OKLAHOMA, the legal rate of interest is 6%. Consumer loans may not exceed 10% unless the person is licensed to make consumer loans.
Maximum rate on non-consumer loans is 45%. The judgment rate is the T-Bill rate plus 4%.

OREGON, the legal rate is 9%, the judgment rate is 9% or the contract rate, if lawful, whichever is higher. The general usury rate for loans below $ 50,000 is 12% or 5% above the discount rate for commercial paper.

PENNSYLVANIA, the legal rate of interest is 6%, and this is the general usury limit for loans below $ 50,000, except for: loans with a lien on non-residential real estate; loans to corporations; loans that have no collateral above $ 35,000. Judgments bear interest at the legal rate. It is criminal usury to charge more than 25%.

PUERTO RICO, the legal rate of interest is 6%; all other rates are set by the Finance Board of Office of Commissioner of Financial Institutions. Judgments bear interest at the same rate as the underlying debt.

RHODE ISLAND, the legal rate of interest and judgment rate is 12%.
The general usury limit is 21% or the interest rate charged for T-Bills plus 9%.

SOUTH CAROLINA, the legal rate of interest is 8.75%, and judgments bear interest at the rate of 14%. Subject to federal criminal laws against loan sharking there is no general usury limit for non-consumer transactions. The South Carolina Consumer Protection code provides regulations for maximum rates of interest for consumer transactions. Please consult with counsel for the latest rates.

SOUTH DAKOTA, the legal rate of interest is 15%, judgments bear interest at the rate of 12%. There is no other usury limit. There are certain limitations on consumer loans below $ 5,000.00.

TENNESSEE, the legal rate and judgment rate of interest is 10%. The general usury limit is 24%, or four points above the average prime loan rate, WHICHEVER IS LESS.

TEXAS, the legal rate of interest is 6%. Interest does not begin until 30 days after an account was due. The judgment rate of interest is 18% or the rate in the contract, whichever is less. There are a number of specific ceilings for different types of loans, please see counsel for information.

UTAH, the legal rate of interest is 10%. Judgments bear interest at the rate of 12%, or a lawfully agreed upon rate. There are floating rates prescribed for consumer transactions. Please see counsel for information.

VERMONT, the legal rate of interest and judgment rate of interest is 12%. On retail installment contracts the maximum rate is 18% on the first $ 500, 15% above $ 500. The general usury limit is 12%.

VIRGINIA, the legal rate of interest is 8%. Judgments bear interest at the rate of 8%, or the lawful contract rate. Corporations and business loans do not have a usury limit, and loans over $ 5,000 for “business” or “investment” purposes are also exempt from usury laws.
Consumer loans are regulated and have multiple rates.

WASHINGTON, the legal rate is 12%. The general usury limit is 12%, or four points above the average T-Bill rate for the past 26 weeks, whichever is greater. (The maximum rate is announced by the State Treasurer.) Judgments bear interest at the rate of 12% or the lawful contract rate, whichever is higher.

WEST VIRGINIA, the legal rate of interest is 6%. The maximum “contractual” rate is 8%; Commissioner of Banking issues rates for real estate loans, and, may establish maximum general usury limit based on market rates.

WISCONSIN, the legal rate of interest is 5%. There are a myriad of rates for different type of loans. There is no general usury limit for corporations. Note that a loan to an individual, even if a corporation is formed, will violate the law. The judgment rate of interest is 12%, except for mortgage foreclosures, where the rate
will be the lawful contract rate.

WYOMING, the legal rate and judgment rate of interest is 10%. If a contract provides for a lesser rate, the judgment rate is the lesser of 10% and the contract rate.

When you buy a new home you can ask you loan officer to close on the 3rd or 4th of the month and tell him you dont want a mortgage payment until the start of the 2nd month. they’ll roll that payment into the closing costs and can tack onto the balance of the loan.
The reason I like to do this is so that i preserve capital. I like to buy homes that cashflow to begin with and the more money i can keep in the bank the better chance i have of withstanding long periods of vacancy or unforseen expenses.

Just got an email from ING direct. they’ve upped their savings account rate to 3.40%. They dont have branches and you have to link their account to another bank account in order to access your money, but they offer amongst the highest interest rates for a simple savings account with no minimums and no monthly charges. There may be other banks that offer similar rates but I have used them. I have heard good things about emigrant.com from a friend though. I think they offer a higher interest rate.

About Me
I’m a 31 year old programmer. I’ve been interested in investing for nearly 15 years but actively engaged in it for the past 6. I currently invest in Real estate and Commodities and in Stocks via my company 401k. I also have my own corporation with its own pension plan that invests in Real Estate. My goal is to retire by the time I’m 34. That doesn’t mean sitting around and waiting to die!!! That means I have enough money through passive investments to pay for food, shelter and some luxuries, which will give me the opportunity to travel and enjoy life….and of course devote more time to investing!

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