I just realized today that credit partnering is a fantastic thing. If I find the deal, and a credit partner gets the money at 3.75% (or even at portfolio loan rates), we split the downpayment and split the profits 50/50.
The key is to get a high LTV which is possible through a few approaches I learned.
The reason I like this idea is because I calculated that each deal (good deal) I do with a credit partner will bring the account about 800/month and cost us 400/month for debt. (roughly).
That means each deal increases the credit partner's income by 10k which makes him eligible for yet another loan that costs 400 or 500 a month. We both will just keep paying more in debt service, but receiving TWICE more in income. Am I wrong?
One down side is you have to keep coming up with 50% down payments. Unless you are having your credit partners do liar loans and getting funded as owner occupied (please don't do this), that can be a significant down payment on each deal for you. Not sure what your financial situation is, but I can't foresee even a guy with deep pockets having much staying power running business that way.
Not to mention there will probably not be significant return on your cash invested after debt service, expenses, and splitting the net 50/50.
I think a better option is to partner with people who have money in their retirement accounts and use those funds to acquire the property. Give them a 1st trust deed against the home and split the upside with them. When the property is vacant, there isn't any payment due. You can cover that and how repairs are handled, management, etc. in an operating agreement.
How do you plan to take title? After a few properties, each of your "credit partners" will be required to have a certain amount in reserves and the lenders will lend at a lower LTV. I see the potential here if you were to find many "credit partners". Although, I'm not sure that I would put up half the down payment, if I had to be the one sticking my neck out with the loan. You may have to put in a higher amount to attract more partners.
Matt, while you're correct, it is only to a degree as Phillip points out. You need to carry your own water in a 50/50 deal.
I have pulled off many deals by providing my exprtise with others, but you'll need to really have marketable skills to do so. Eventually most credit partners will get tapped out as their liabilities increase and they are qualifying for financing on after tax income from a partnership arrangement.
And those that sell their credit and financial statements usually are trying to do with others, so you may see yourself going into a deal and being seen as overleveraged, especially in rentals when vacancy rates are considered. Guess what I'm saying is that your real cash flow is different from your income considered for future financing due to taxes, vacancy, depreciation added back in vs the equity held.
View each deal on its own merit, case by case, launching a business model on this primis would be difficult and would require several partners, imo.
Actually I think many individuals approaching retirement these days would be happy to put up half the down payment and use all their own debt and take title . Why? Because they are going to be making 20%+ cash on cash on a steady investment. They are not going to buy investment real estate alone because they don't know how to find good deals like I do, and they're scared of many aspects of managing the asset, but I'm not.
I believe this is a very powerful approach, and yes there are some kinks to work out, but it can be tackled.
I have used a credit partner with the following terms and it worked well for both parites
*Credit partner purchases property in their name and immediately transfers to LLC
*50/50 owners per LLC operating agreement
*Each partner fronts 50% of down payment and any renovation that is needed.
Its a great way for an experienced investor to add a property without another loan in his/her name and a great way for a new investor to learns the ropes from an experienced investor.
[Actually I think many individuals approaching retirement these days would be happy to put up half the down payment and use all their own debt]
IMO I think people wouldn't be looking to load up on debt coming into retirement. There's a lot of risk involved: what if there are vacancies, evictions, unforeseen expenses, or a foreclosure?
As others pointed out, the credit partner would probably see lower credit scores with the increase in debt, and cash reserves would be required with each additional properly. Plus the income from each property generally has to be on your tax returns for 2 years to be counted as additional income, to qualify for additional loans.
- Tom
The personal income to debt ratio of the guarantor who is a partner in an LLC is not affected by purchases made under the LLC. If you are doing buy and hold, form an LLC with your credit partner as your chief financial officer, and you have a much greater capacity to purchase on credit without over extending. @J Martin would be a great person to ask about this.
I really feel credit partners are only great for flips if you're not going to use an LLC.
One down side is you have to keep coming up with 50% down payments. Unless you are having your credit partners do liar loans and getting funded as owner occupied (please don't do this), that can be a significant down payment on each deal for you. Not sure what your financial situation is, but I can't foresee even a guy with deep pockets having much staying power running business that way.
Not to mention there will probably not be significant return on your cash invested after debt service, expenses, and splitting the net 50/50.
I think a better option is to partner with people who have money in their retirement accounts and use those funds to acquire the property. Give them a 1st trust deed against the home and split the upside with them. When the property is vacant, there isn't any payment due. You can cover that and how repairs are handled, management, etc. in an operating agreement.
With an LLC properly set up for multiple income property purchases, you actually don't have these concerns to deal with.
Here is the quote from j Martin I was referring to earlier. This is from another forum post on this subject:
If the strong partner guarantees the deal rather than signs directly, it is a contingent liability rather than direct liability. It is often-times not directly underwritten as debt as long as the deal is paying for itself.. Especially if the guarantor is very strong, has CF, liquidity, NW, etc..
With strong enough guarantor(s), you may be able to get a non-recourse loan for another 25-50bp. This avoids the debt going on anyone's credit. Ironically, you need a very strong partner for the Bank to have enough confidence to not make any natural person sign.. But experience will probably be important to them too.. With this strategy, you can finance as much as you can put downpayments on, although they might want 25-30% down for non-recourse.
I think we are getting more into the subject of business formation and corporate structuring than creative real estate financing. I know there are BP members with strong legal backgrounds that would be of some service in this post.
Anyone?
There are entity specialists @Douglas Dowell and others
http://www.biggerpockets.com/renewsblog/author/douglasdowell/
I have a JV idea that I feel has merit. I have done it once a long time ago.
Say you have a $400,000 ARV, free and clear, $50,000 rehab.
65% of ARV less repairs - sales costs
Say you offer to JV with the seller, offer to do the repairs for a JV for a profit, beating any WE BUY HOUSES offer by $10K or more.
You create a note and mortg/DOT to protect $50K plus say $20K profit. It takes 3 months time.
You borrow $50K from money parter for $5K interest for 90 days use of the money.
You have no holding costs, no conveyancing costs. You get your $70K in 90 days, your seller gets $400,000 less $70K less sales costs less holding costs, less closing costs.
I know that depends on the deal and its particular numbers, but I like that you are helping the seller make more money and you have a guaranteed profit with security.
I can sense people would say, "What if the Seller fights you on sales price?" I imagine an attorney can create a JV Agreement that compells the Seller to sell at an agreed price.
Thoughts anyone?
I have a JV idea that I feel has merit. I have done it once a long time ago.
....Thoughts anyone?
I think that's a great scenario. The trick is convincing the seller to wait a few months for their payoff, and also convince them that you're not trying to scam them (for people not involved in real estate, this can sound complicated) -- but if you can get the seller to agree, it's obviously a great position for the investor.
I'm actually in the process of negotiating with a private seller using a seller financing/holdback...this may be another great strategy to try with this seller...
Thanks Brian!
There are only two ways to fund a valid note, in an installment contract selling the property which funds the note buy equity or earned equity or with cash disbursed to the maker (borrower) or to their account. You can finance improvements and labor after work has been accomplished, earned equities from products or services like some window company finances new windows after they are installed, this is a contractor financing arrangement. As described you are not creating a valid note based on future performance for payment, that can lead to filing a false lien which is illegal in all states. So it needs to be secured after the fact.
Let's cure this with the right documents.
Have the owner sign a Future Advance Note, the note becomes "funded" as money is spent on the rehab or advanced. Provide a bill for work accomplished at different stages for labor and profits agreed, that billing can then become a debt secured under a future advance note arrangement.
If you went the other way and the seller said stop, you'd have an invalid lien. If you dropped dead, your heirs could certainly have issues trying to clean that up.
you thought of something that's been done before. Many sellers can't afford to fix a place to sell, you'll find these in expired listings, the property has significant or updating issues and they can't sell. You go in and make the deal.
You can partner with them, convey a half undivided interest with the power of sale is another way and you can place a lien/rehab loan on the property. You can also go this route by contract.
Partnering with an owner, you need a power of sale (that can be terminated but I never had an owner do that) you can encumber the property with liens, if you're in title you can force sale, if not your attorney can motivate the owner. The lender you used can foreclose and pay you off. Need to agree at a "sell at or above price" on any valid offer.
Folks need to treat notes and deeds with a little more respect, they aren't a do all tool as a lien to protect non existent equity, secure future agreements or performance. If you don't do things properly along the way and your deal blows up for any reason, you can lose out. See your attorney. :)
Thanks Bill. I need to go to law school. :)