BiggerPockets

I need your input on this investment that I want to offer to private investors, let me know if you think this sounds fair.

Here is a little bit about what we do.
My company is Liberty Estates, LLC. We buy, sell, rent, and manage real estate property all over the United States, we have more than 50 years of real estate experience.
As you know, it has never been a better time to invest in real estate; opportunities are endless. We are experts on buying, remodeling and renting foreclosure properties. We are always seeking new investors, large or small, to expand our company.
Here is an example of an investment that we have available for you and/or your investors.

We guarantee you a yearly 10% net return on your money, and a profit at the time of resale.

This property has a market value of $72,500, it is rented for $8,400 a year, has a property tax of $1,100, insurance rate of $500 and a yearly management fee of $840.

Market Value $72,500
Gross rent income $8,400
Property Tax -$1,100
Hazard Insurance -$500
Management fee -$840
Total net rental income $5,960

Your participation in the investment can be as follows:
Your buying price will be $59,600.
Your participation can only be up to 70% of the total investment; we keep 30% of all our investments to ensure good management and control of the property.

To resume:

Market Value $72,500
Our sale price to you $59,600
Our 30% share $17,880
Your 70% share $41,720

As soon as you invest with us, you are making a profit. Since your share of the investment is 70% and the market value is $72,500, your capital just increased to $50,750.

You invest $41,720 and your capital increases to $50,750, which gives you an immediate profit of $9,030.

You will also receive a 10% net return on your initial investment every year.
$41,720*10%=$4,172 per year

In case the property increases only 3% a year and we resell the property in 5 years for $84,047.37,


You will then receive a capital of:
$84,047.37*70%= $58,833.16

your capital gain: $17,113.16
Total interest received over a 5 years period: $20,860
Your total investment profit: $37,973.16 or 91%return

All investments are guaranteed a 10% net return with property that have already been rehabbed and rented.

1) We are not planning on selling any time soon, we are keeping the properties until the markets recovers even if it takes 20 years, we make sure than our properties have a good rental income.
2) Our company is backing up the return. Even if the property doesn't rent, we will pay you the 10% return.
3) We are setting up an LLC for each investment, where the investors can own up to 70% of the shares.
Our company always keeps 30%.
The title will be held by the LLC, we do it this way so if an investor wants to get his money back, we can buy the shares back from him without having to sell the property.
4) Most of the properties are located in Pittsburg PA, it takes us an average of 3 weeks to evict a bad payer. Yes, we garantee the return no matter what. This is how we do it. First we manage all of our properties ourselves, and we set our rent under the current market, that enables us to get a larger choice of tenants and we can then be more selective, also we own a lot of properties, so if one doesn't rent we have income to back it up.
5) All of our properties are insured so in an extraordinary case like yours, we would be covered.

Thanks for your input, I will make sure to cover all of that in our presentation.
Please ask more questions if you have any.

Rudolphe, if the GSI is $8,400 then the NOI is probably around $4,200 and if you are going to have an LLC for each home then the NOI is probably even less. Assuming a 10-cap, which would support a 10% yield, we have a market value of around $40,000 per home.

Where do you come up with the $72,500 market value? It appears as if you are getting more than 100% of the market value of the home right now in return for 70% of the ownership.

Why should someone believe that you company has the ability and willingness to pay the 10% yield if things turn sour? You guys might file for bankruptcy the same way most other companies do when they are unable to pay their bills.

In my opinion, the business model itself is not a bad one but I think this business, like any other, can only work in the long run on a large scale if you are able to offer honest good value to your clients. Right now, it does not appear to offer that.

OK, now I have to disagree. The NOI is NOT $5960. I agree, that's what you calculated, but you've left out vacancies, which are guaranteed to happen over five years, and maintenance, which is also guaranteed over five years even if the house is brand new right now. I would consider the $4200 a better estimate (50% rule) than the overly optimistic $5960.

If you're getting people to buy units in an LLC, vs. buying a property or lending on a property, I assume you're done your Regulation D filings and are only offering these to investors that fit within the guidelines of your offerings. Otherwise some guys from the SEC will wanting to have a chat with. Especially if you're making these offerings publically.

Rodolphe

Seems you're looking for a lender, not an investor/buyer.

In simple terms, you're offering a 10% return on a 70% LTV, no? Just using an LLC instead of recording a mortgage.

Actually, it seems you're getting more than 100% LTV, while still maintaining control and being able to say, "all properties owned free and clear!"

Is there a reason you wouldn't just leverage your properties in a more conventional way, at a lower rate?

Have you done any of these? I get the impression from your post, saying "I want to offer to private investors" that you're just testing this creative financing idea.

Bad idea to guarantee the return. Guaranteed to fail.

I think you'll run into legal issues, too, but not sure. Not a lawyer.

Thanks for the inputs guys,