Entrepreneur · Leesburg, FL · Member since 2016 · 8 posts · 0 votes
I currently own a couple of properties and I have this idea to look for potential investors and create an actual business. I'm located in Central Florida.
First of all, the idea is to buy properties and use them as rental income properties. Now, let's say I want to buy a house for:
Price: $50,000
Down-payment (20%): $10,000
Misc, closing expenses: $2,000
Instead of needing $12k to invest I would look for an investor that put $6k and I put another $6k.
If that property rent's for $1,000 and the mortgage is $500, let's say the property management is 10% ($100, I would do the property management), that means that I would make:
$200 in income and $100 in property management.
and the investor would make $200.
Once the property is paid numbers will change etc.
My questions are:
1. Does it make sense or should I change something?
2. Do I need to open a LLC for each house we buy?
3. How can I make the person part owner if the person doesn't qualify for a mortgage but I do?
4. To actually get the capital for my side of the downpayment, I heard about "refinancing a house" that means if I buy a rundown house, fix it, then I can actually get a bigger mortgage which means I could get more money to invest in other properties?
@Ricardo Funk Hernandez - this really depends on your financial goals, your current financial picture, and your personal ability to perform. For some folks, partnerships provide structure and a much needed push to excel.
I'll address your questions individually to the best of my ability. It could make sense, it depends on your situation. In this scenario, you are giving away 50% of the equity and 50% of the profits for 50% of the relatively low buy-in.
1) Financing is possible as a percentage OF HARD COST or APPRAISED ARV value, whichever is lesser. So, you can hypothetically get into these properties, through a standard investment bank, with little to no money down if you have an established game-plan. Basically, you can utilize sweat equity (if you have the skills) to make the down payment up.
2) Some people open LLCs for each and every property. This is a cumbersome in my opinion; but you will want to keep a separate operating agreement / LLC for each set of partners you work with, if you proceed with the model proposed. The operating agreement will help from either party getting greedy over time and renegotiating terms.
3) There are creative ways around it but... safer for you both to be listed as guarantors. I do not know any commercial banks that are going to forego a personal guarantor without significant commercial assets in the entity...
4) Yes. Buy, Rehab, Rent, Refinance. You can do it... find a commercial bank that isn't going to make you "refinance" every deal though.
For me, equity partnerships do not make sense and never has. I can pay a bank much less money than most creative financing models AND retain 100% of my equity. We got started doing pure flip and sell until we could afford to hold onto a few (this was possible with savings + a W2 job to back up my funding). Then we transitioned into blending the models (flip some and a modified value-add remodel to hold on the rest). We were patient and grew the hold portfolio over a few years time while maintaining significant capital growth via flips. I have been full-time investor for several years now, never looked back and glad I patiently waited without partnering...
Present day: Here's what we do... we simply add each property as collateral against our overall line of credit. The available line of credit keeps growing monthly as we make payments against it that cover interest plus an amortized amount of the total loans. This allows us to maintain a very flexible financial model, if we want to buy a property... we have enough available on the LOC to purchase it outright without a financing contingency, appraisal or otherwise. The property closes, a trivial mortgage for intended value is added secured by a $1.00 note. Then we can have it appraised (if necessary) and our line of credit is expanded. The note is adjusted as needed internally... mortgage is what secures lien-hold rights for the bank.
Your idea is fine, seen it plenty. Your going to need an LLC for each partnership, operating agreements, and commercial lending from a local bank. Both you and your partner will be the guarantor of the loan, if you where not planning on your partner to have to guarantee it, you get all new rules on capital limits and partner interest, which then kicks things into PPM and SEC stuff. Bottom line is your going to need an attorney for this.
Just some things to add to what Levi said. You should definitely get an LLC if you are going to form a partnership. Getting commercial financing for a LLC is difficult, difficult in that you are limited. You can't do conventional, unless you get creative but it will expose you to potential problems in the future. And with the loan that you can get, don't expect 5% interest rates. You are looking at 6.5%-10%, unless you go talk to a LOT of local banks to see who would be more flexible on their portfolio loans.
BRRRR is a great idea. But you need capital, not just the amount to cover the purchase+rehab, but much more for unknown and refinancing out.
@Ricardo Funk Hernandez - this really depends on your financial goals, your current financial picture, and your personal ability to perform. For some folks, partnerships provide structure and a much needed push to excel.
I'll address your questions individually to the best of my ability. It could make sense, it depends on your situation. In this scenario, you are giving away 50% of the equity and 50% of the profits for 50% of the relatively low buy-in.
1) Financing is possible as a percentage OF HARD COST or APPRAISED ARV value, whichever is lesser. So, you can hypothetically get into these properties, through a standard investment bank, with little to no money down if you have an established game-plan. Basically, you can utilize sweat equity (if you have the skills) to make the down payment up.
2) Some people open LLCs for each and every property. This is a cumbersome in my opinion; but you will want to keep a separate operating agreement / LLC for each set of partners you work with, if you proceed with the model proposed. The operating agreement will help from either party getting greedy over time and renegotiating terms.
3) There are creative ways around it but... safer for you both to be listed as guarantors. I do not know any commercial banks that are going to forego a personal guarantor without significant commercial assets in the entity...
4) Yes. Buy, Rehab, Rent, Refinance. You can do it... find a commercial bank that isn't going to make you "refinance" every deal though.
For me, equity partnerships do not make sense and never has. I can pay a bank much less money than most creative financing models AND retain 100% of my equity. We got started doing pure flip and sell until we could afford to hold onto a few (this was possible with savings + a W2 job to back up my funding). Then we transitioned into blending the models (flip some and a modified value-add remodel to hold on the rest). We were patient and grew the hold portfolio over a few years time while maintaining significant capital growth via flips. I have been full-time investor for several years now, never looked back and glad I patiently waited without partnering...
Present day: Here's what we do... we simply add each property as collateral against our overall line of credit. The available line of credit keeps growing monthly as we make payments against it that cover interest plus an amortized amount of the total loans. This allows us to maintain a very flexible financial model, if we want to buy a property... we have enough available on the LOC to purchase it outright without a financing contingency, appraisal or otherwise. The property closes, a trivial mortgage for intended value is added secured by a $1.00 note. Then we can have it appraised (if necessary) and our line of credit is expanded. The note is adjusted as needed internally... mortgage is what secures lien-hold rights for the bank.
Thanks everyone for your time, I really appreciate it.
Mitch, thanks for the inside, your information seems to be pretty accurate and based on facts. I'm moving away from equity partnerships towards Buy, Rehab, Rent, Refinance since I do have some money to start.
Your present day information seems to be the jackpot, I understand about 50% but seems enough for now, I';m not sure about the line of credit, is that with a bank, with credit cards, with private investors?
"you can hypothetically get into these properties, through a standard investment bank, with little to no money down if you have an established game-plan. Basically, you can utilize sweat equity (if you have the skills) to make the down payment up."
I do have the skills (sweat equity), you mean by refinancing it after the rehab and get the down-payment back?
Our line of credit is established through a commercial/investment bank.
Towards the little to no money down piece, going to use an example from earlier this year. This will give you a mindset to approach banks with in your quest to find the right fit. This is an extreme example, but did occur (will include a link to the "after" remodel at the end of the post). Purchase price of $13k, rehab estimate of $90k (hard cost $13k+$90k=$103k), appraised After Repair Value of $135k. Bank gave us a construction loan for $92.7k (90% of hard cost or 70% of ARV whichever is less) to get through the project. From this, they funded $13,609 at close to purchase (purchase price, closing fees minus tax prorate). Leaving us with roughly $80k to cover our forecast repairs: materials, labor, subcontractors. The difference between that and your actual is your out-of-pocket forecast.
This is where the "sweat equity" comes into play... $90k rehab is a reasonable forecast (broken up over all the trades - we use licensed subs for mechanical / electrical and we are a licensed plumbing company). In other words, to the bank and the appraiser $90k is what one could realistically expect to spend rehabbing this project. For example, if you end up hanging the drywall, painting, laying flooring, etc yourself instead of hiring someone else, maybe it costs you half of what you would have forecast. You can turn in for your materials (but not your time). Bankers stay happy, job still completed it just cost less money. So, that $92.7k loan to get $103k of work done is doable. Meanwhile, you only have your time/labor out on the project.
Sidenote: This was a burnt down house that sat vacant for several years. It needed literally everything... On the finished product, we ended up classing the house up significantly more than initially planned and did go over budget quite a bit. Added over $10k in landscaping along with staging / upgraded finishes. Sale price was over $180k... appraisers are historically conservative with their estimates, as you should be as well.
@Ricardo Funk Hernandez There are many ways to do this. Levi T is right, there are foundation actions you need to do just to get to the point where you need an attorney. Before you start, ask yourself if the headache of going through this is actually what you want. If it is, then move forward. Several times I've created a game plan so complicated to create "freedom" it actually created more stress and a job and i had to stop.