setting up our RE investing company & looking for feedback

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setting up our RE investing company & looking for feedback

Diane Menke
Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes

Today our domain name was locked in and some initial data placed there.

Photos of our sturdy not glamorous rental props will follow next week or so, along with tenant support information.

Props for sale will be shown on this site. We have one money maker for sale now.

More than likely we will post information for folks there who would like to become members in our investing LLC.

We want to form an LLC which will locate REO's for flip at 75% ROI minimally, or hold and rent at 20 - 30% ROI. These are returns we have exceeded previously when investing our own dollars, so we feel confident.

Description of our property LLC -

"It will (in all likelihood) be an LLC with two classes
of members: member-managers and limited-members. So just call it an LLC." (I quote the lawyer partner here)

We will be creating this entity soon (its quick) and put a prospectus together in the next Q which we can present to potential members.

Its my goal to put about 75K of my own cash into the LLC, becoming its member manager, and find a matching 75K from others who wish to be limited members.

What would a reasonable ROI for limited members be? Is there a baseline folks would consider good for a flip or a rental? Do they care if its a flip or a rental at all? Maybe they just want to see their 10-15% and not be bothered?

I would like to set this up as a 12 or 24 month cycle (like a CD) , with the option of closing it earlier (via a sale to cash out) if the returns are there and we can get into the next deals = make more money. To avoid taxes can we do 1031's out of this and into the next deals?

I'm guessing I am missing some issues here so I appreciate your feedback while we continue to flesh out the details of the system.

With appreciation,
Diane Menke

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  • Adam Black
    Ridgeland, MS · Member since 2009 · 106 posts · 0 votes
    17y

    Explain your ROI a little further please. At 75%, are you saying you by the property for 100,000 and selling for 175,000. If so, that is not a true ROI for the investor as he would not be recieving that complete $75,000. Am I understanding correctly?
    ROI in the investmetn world is a term used to compare returns on investments where the moneys gained or lost are not easily compared using monetary values. For instance, a $1,000 investment that earns $50 in interest generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.

    $50/$1,000 = 5% ROI
    $20/$100 = 20% ROI

    Not bashing your plan at all but unfortunetly I deal with investors everyday, both in our company and buyers of our houses and ROI is very important to them.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Why don't you just create a manager managed LLC? You can be a member (i.e., invest money) along with your other members. You can also be the manager.

    Would you use the money you've put in and the money from your investor to pay cash for the houses, then also use your own money to rehab them? Then, sell them? You could just offer your investors a fixed return, secured by the property. They loan you money, you give them a deed of trust and promisary note. They get either monthly/quarterly interest payments and then get the principle back when you sell the property. That's essentially a CD from the lender's point of view. That's gives them better security than investing in your company, and avoids you having to deal with them other than as a private lender. Offering 12% would probably get interest (yuk!).

    For a long term hold, you may be better off with more conventional lending. I heard today commercial loans are available at 7.5%, amortized for 25 years, due in three. With $150K of your and your investors money, and a bit of a track record, you should be able to get something like that directly for the LLC.

    The investors don't have a direct interest in the property, with that structure. Just an interest in the property.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    17y

    How will investors get there money out? If you're constantly rolling funds into subsequent investments -- or more importantly, holding rentals -- where does the liquidity come from?

    If there is a set time-period for which an investor will allocate funds, how will you ensure that the proceeds are liquid when it's time to pay off the investment?

    Agreed with Adam that 75% ROI doesn't mean much to me. Is that nominal ROI? Annualized ROI? Based off the original investment? Based off the final investment (if refinanced)? Does it take into account the fact that monies will be invested at different times (some at closing, some during rehab, some during holding, etc)? ROI for flips can be interpreted many ways; you should include more detail.

    How does the company manage cash reserves? If you have $150K in the "fund", will a portion of it be allocated as reserves and not be invested? Will the total return include that uninvested capital?

    Will you pay dividends on a regular basis? What will determine the dividend amounts? How will you ensure liquidity to cover dividend payments?

    Are you registering with the SEC? If you plan to sell securities (that's what this is) via your website, there are rules you must follow. For example, you should ensure that your investors are accredited; do you have an auditor who will evaluate the investment status of prospective investors?

    Will investors need to provide anything other than the upfront cash? Such as credit or escrowed funds in the case of a cash short-fall?

    How will you handle a cash short-fall? What happens if you owe a mortgage payment and don't have the funds liquid to pay it? Will you ask the investors for additional cash? Will you pay for it yourself? What happens if you can't raise that cash? Will you allow investors right of first refusal to buy the investments at some percentage of face-value?

    There are hundreds of details like these that you need to think about, and then you need to solidify them in a prospectus, and ultimately a contract (if your investors are smart).

    $75K really isn't that much money to invest into something like this, but I'd certainly want a lot more information before I invested.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Thanks guys you are helping us flesh this out. Best way to do it is write it down and find the holes. Then find the answers to fill the holes.

    I can see you all are more adept at the financial maneuvers than I am. I know from watching folks in my remodeling business that this is where the money is made - understanding and managing money.

    Jon's example quoted here is a model I have used already and I have had success with personally - no other members just me securing a loan in the name of my LLC. I do have a commercial lender I work with already who has said this would work for them -

    <The investors don't have a direct interest in the property, with that structure. Just an interest in the property.>>

    We get the 75% ROI when I calculate "in money". Is there an acronym you guys use for that? We get about 75% (or more) at sale on a flip and we get 20% annually in rent on a hold.

    So if I put 30K cash in on a buy to flip using a loan for purchase and construction, we will get at least 22,500 back in profit after expenses are paid. Thats a 12 month venture this market.

    If I put down the same 30K on a rental, we know we are looking for 6,000 net rental income annually or $500 positive cash flow per month.

    Adam does this explain our results a bit better? I'm going to chew on your explanation of ROI a bit more today. Tell me if I am missing something please.

    J, the puzzle of getting money out so to pay folks is one I am still chewing on and so I am glad you brought it up. When we run the project ourselves we get paid at refi or sale. A limited member sitting on the sidelines is not going to like that so we need to create the system to pay them and put it in the docs.

    If we run with Jon's example, I can get people paid off at a fixed % rate in either 12 or 24 months through a sale or a refi (in this market 24 months seems more prudent). The time frame and the return we got on our cash would suggest an annual fixed interest rate of between 10 -12% for limited members is doable.

    We would only be rolling manager member earnings back into the LLC. I think its best to have limited members re apply after every time period for now. Thoughts?

    We only want to work with savvy folks who can understand financial statements. We do want to stay on the right side of the SEC and my lawyer partner is looking into the fine points of doing so this Friday. We would run it all buy our CPA before hand as well.

    Again feel free to poke holes in what you see. This is very helpful.

    Thanks very much
    Diane Menke

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    17y

    Just be very careful when you quote specific interest rate or ROI numbers to potential investors. This is an area where many trip up and get themselves into trouble with the regulators.

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  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Yes Taz, the legal partner is grooming me about what I can and can not say. I tend to go "wide focus" in general and so here is a detail I need to stick to.

    I take from your suggestion too, that I might say a return "could be in the range of 10-12% but no guarantees" etc.?

    I was in the bank not 3 weeks ago and a guy was aching to get 3.9% for a CD over 12 months. Ouch. I wanted to dope slap him.

    OK will do.
    Thanks Taz

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  • Adam Black
    Ridgeland, MS · Member since 2009 · 106 posts · 0 votes
    17y

    Be very careful as someone else mentioned you are begginnign to sound like a security and with that you fall under a whole new set of rules with private placement memorandums and such. Can be very sticky.
    Mna, if your making 75% profit on every flip, you are doing things right. I am very envious. Good luck with everything.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Unless you're talking about big multi-units, you're just not going to get $500 in true cash flow after all expenses. Even if you pay cash for the property, the "50% rule", or whatever variation you believe, still applies. So, $500 in cash flow would mean $1000 in rent on a property you own outright. That doesn't sound like a $30K property. If you put $30K down and have a loan, you might get a property where rent is $500 higher than PITI. But that's just the start of expenses. If you're planning on doing a bunch of these, you must account for all the other expenses, vacancies, and capital expenditures.

    I don't think you can even say "a range from 10-12%". As I understand it (no expert), you can't make ANY promises. If you do it as a loan, you can offer a specific rate of interest on the loan. But, if its an investment in your company, you can't make any claims.

    People have different investment goals. For many people, capital preservation is more important than the return. A 3.9% return with absolutely no risk to the principle is a much better deal than stocks or real estate. Anybody who invested a 20% down payment in a house in 2005 (as if anyone actually did) has lost their entire investment. Anyone who had money in stocks lost 40%. If you've worked up a $2 million next egg and are getting ready to retire, seeing that drop to $1.2 million is incredibly depressing. Even if stocks resume their supposed long term 10% rate of return (which seems unlikely in the short term), you're now 5 years away from retirement! Actually longer than that, since inflation will mean you need more than the $2million you needed now.

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  • Account Closed
    Manhattan, NY · Member since 2008 · 801 posts · 61 votes
    17y

    Yes, it is best to stay away from numbers in anything OTHER THAN the private placement memorandum. Even in there you should not PROJECT returns in any way that looks like, smells like or even remotely resembles a guarantee.

    Private placement of debt can talk about the interest rate you are willing to pay in the PPM but only in there.

    Also, make sure you are very clear that you are looking for qualified investors and not the average joe with $5000 wanting to loan to you or invest with you.

    0Reply
  • Diane Menke
    OP
    Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes
    17y

    Good advice all. I will forward your advice to the lawyer partner and curb my speech accordingly.

    I am a bit burnt out right now and I still have to hit the rowing machine. I will save my rental returns for tomorrow perhaps. We do have one dog rental house out there right now I have to lower rents on. I really have to get that rented.

    Yeah I have heard from a lot of average Joe's (the plumber?) who have 5K they "really want to invest". They heard we had some rental properties or a flip and wanted to "get into it too".

    Thier idea of investing is that I do a remodel on a shell at below cost. They don't know how to read a balance sheet or income statement, a P&L or any of these. They don't know how a remodeling company has to price things to be profitable and darn it why shouldn't it lose money! And they have no experience but want to jump in and tell me how to do it. This is why I want to structure the thing to keep non managing members out of the process.

    I'm no expert myself but I know these financial statements are the keys to knowing the true performace of any investment. The more I learn the more I know I need to know. The bigger we grow, the more new things I learn.

    Thanks again guys
    Diane

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    17y

    I'll let your attorney tell you for certain, but he may very well recommend not marketing your investment to anyone who is not an "accredited investor."

    By this I mean:

    http://en.wikipedia.org/wiki/Accredited_investor

    Generally speaking, an accredited investor is someone who has $1M+ net worth or makes at least $200K per year.

    Based on that, your scope of potential investors may be small.

    But again, your attorney can give you his legal recommendation...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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