Recommend a compensation model between a rehab developer and financial partners?

Question

I've been a broker for 7 years. I recently moved to a new market where rents are relatively high against low purchase prices. I am tempted to set up an LLC and offer investment opportunities to my clients back in Massachusetts.

What I don't know is how to structure the deals. I need about 25K/per building and can generate an above average return within 3-6 months. I am willing to manage and locate tenants as well. What do I offer investors? Advice is appreciated.

Champak Shah · Answer

I am surprised --are you going to keep RE License ? Not making enough as a Broker ?
How can you manage full time --find deals, do rehab, find tenants and manage property and still keep RE Borkering ? there are only 24 hours in a day --first you need a well thought out Business Plan -- supply and demand as well as appreciation study for new area-- if homes are selling cheap and rent is high --may not be long before you have competition --

Several ways-- Have an LLC and go Private Placement offering--to rasie $1.0 million --
and buy 10 to 20 houses in one year---or even six months --if you are aggressive and have foreclosures or fixer uppers available in area-

25K per building ( hosue) - may not be enough and too much paperwork -- too slow process-

You need to decide how much your time is worth -what can you make as salary -full time -
minimum $80,000 per year - subtract all expenses --car -mileage , meals etc --then project profit and offer 50 % of profit -- also
need to consider income taxes --deprecition as well as capital gaines tax--need to run projections over five years -- how many houses will you buy and how long will you keep ? How many investors do you need ?
What is the exit strategy ? what happens if some one needs money back due to some emergency ? what happens if you get sick ?
how will you leverage ? can you get mortgage ? can you afford hard money ?
need to decide specific strategy --seems like you are planning to buy, do rehab and rent - hold- run by some numbers --and see what return do you get --

Eddie Brown · Answer

Some ideas might be:

1. A clause in an agreement that the developer retains the right to buy the investor out in year 1 at some high interest rate if perhaps the agreement starts off as an equity stake.

2. Or perhaps its wiser and more conservative to keep the financial backer in the event of construction emergency.

3. Additionally I'd like to know what the actual procedural costs for invest/divest...Incorporating, distributing checks, etc. Does bring the backer in and out of ownership add any additional costs? Does it seem depend on the ownership not transferring out of the LLC, an independent entity, whose membership can change.

Good advice is appreciated, thanks!

Joel NA · Answer

"What compensation should be offered? High interest short term loan or 50% equity stake long term?"

I think that's a good question...I've wondered the same thing myself. I guess it depends on how high the interest rate is...seems like the guys around here think that money at reasonable rates is better than equity stake. I'd love to hear some others chime in...

Great topic!

Eddie Brown · Answer

Champak, Thank you for the interest. I wouldn't be brokering at all, I mentioned simply as its given me experience in understanding home value, how markets work, and how to locate and manage tenants.

I like your idea on setting an income number and building a model around that.

The 25K figure is based on my ability to acquire the structure with my own capital or equity. 25K is general figure per unit for renovation and carrying costs. The rents are high enough to be cash positive relatively quickly.

My goal is to generate income. Even if the sale value on the property only increased 1% per year that might be fine - if rents are this high. The difficulty many people are having getting loans creates the opportunity.

Ideally I would like to start with a few properties to demonstrate to my investors that this is a functional opportunity.

I have a job here now that pays my bills.If I can generate enough investor interest and enough proven opportunity I will rehab and manage full time.

Therefore:
What compensation should be offered? High interest short term loan or 50% equity stake long term? A 5 year period would be sufficient to either develop an income portfolio for further sale. Ultimately I am only willing to be the direct property manager for the first few years.

But I might need to build a managment company as I suspect the local outfits are inept and unreliable.

Advice is appreciated! Thank you!

Mark Updegraff · Answer

membership into the entity that owns the RE?

Recommend a compensation model between a rehab developer and financial partners?

Recommend a compensation model between a rehab developer and financial partners?

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