34) Surprise Fees at Closing & Should you become a GP or LP?

Real Estate Investing with House Money

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House Money Weekly

In this week’s House Money Weekly segment, Lauren and Alan get together with their special guest, Dan, the guy behind the Landlord Horror Stories Podcast. They discuss blog 132, 5 Surprise Fees at Real Estate Closings. When Alan bought his first property, he thought the down payment was enough, but he didn’t expect the fees he had to pay at the closing table! Lauren suggests getting a rough estimate of closing costs from lenders, title companies, closing attorneys. The mortgage company by law has to provide closing numbers before closing. Dan shares that if you're going through a traditional lender, you most likely will need to have six months’ worth of reserves or mortgage payments so you can't go all the way down to zero. The first surprise fee is the closing attorney. Both the buyer and the seller by law must have an attorney represent them so there are fees on both sides. Closing attorneys make sure that the person has the legal right to sell the property and that the titles they own are free and clear. You're going to have to prepay three to six months’ worth of prepaid home insurance cost and property taxes too. The last surprise fee that was discussed is the HOA onboarding fees. Dan gives some advice about HOAs, since he owns units in one in Milwaukee. Alan, as always, expresses his opinion of HOAs. All three of your hosts try to negotiate closing costs into their deals.

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Mortgage Minute: Jasmine answers the question: How often does the lending quote change by the time you get under contract?

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Real Estate Is Easy Interview

Lauren interviews Brad Shepherd of Sugarhouse Investments. He is currently based in Boise, Idaho. Brad is a Utah native who spent 10 years in Texas. Lauren opens by asking what an LP is. LP is a Limited Partners. Brad explains LP as someone who puts money on the table, betting on the management team of a syndication (group investment) with no ability to influence the project whatsoever. One pro of being a limited partner is you have no liability exposure (the most you could potentially lose is your investment dollar). Lauren asks if anyone can invest in these things or if they have to be an accredited investor. It depends on how the operator has set up that specific deal. Brad shares that there are two ways people qualify to be considered an accredited investor: 1) must have a million-dollar net worth which doesn’t include the primary residence and 2) earning at least $200,000 per year as an individual or $300,000 as a married couple for the last two years with the expectation it will continue. It’s the SEC’s way to try to protect investors. Lauren asks if there’s an average split between GPs and LPs in terms of ownership. The common split is 70-30, meaning 70% of profits going to the LPs and 30% is going to the operators which is generally done after a preferred return for the investors is achieved. A new syndicator will make it more desirable for LPs. Lauren wonders if GPs bring money to the table, and Brad says that they often do. He encourages it. Brad is a fan of becoming an LP because he actually does better on passive investments. If someone is interested in being active, though, they should be GPs or manage their own portfolios. Brad talks about the current environment and the impacts on syndications. It’s not all good right now because of interest rates. And lastly, Brad makes real estate easy by taking complex terms and making it understandable and digestible for somebody who is not a real estate expert.

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Guest Host's Segment

Guest Host Dan talks about one of his landlord stories podcast episodes. This is story of landlord Shaq from California who’s investing in Akron, Ohio. He bought a single-family house on a quiet street, which he posted for rent. A college student reached out to him and took a house tour. They signed the lease there and then. The first couple of months were smooth, but then a neighbor called Shaq and told him that there are people who are coming over the house frequently at odd hours. Shortly after that, the police show up and start pulling people out of the houses on either side, and soon she hears gunshots. It turns out the tenant had installed a professional meth lab in the basement of this property. Shaq went to Akron, and although there were gun shots fired in the house, the property is somehow clean. No pipes were hit. He sold the meth equipment to finance repairs (although he did return the $50k cash to the cops). Lauren shares that she looks at diedinhouse.com when she buys a property and this report also tell you if there has been a meth lab. Alan mentions that sellers must disclose meth labs. Alan asks what Lauren and Dan suggest to prevent this situation from happening in their rental property. It’s best to do a deep background check and due diligence to make sure that the potential tenant is clean and qualified.

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