Unique request from GM/team member

8 Replies

I am new to real estate and I am already facing a very interesting situation. Please advise

Background;

I am a father of four wonderful kids. Ages 9,7, 5 and 2. Last year, my wife and I decided to sit down with our financial
adviser to plan for our retirement and most important, the college funds for our 4 kids. Even with a very busy practice
and my wife working 2-3 days a week, the numbers do not look good so I decided to explore ways to create passive income.
I started with Robert Kiyosaki's "Rich Dad, Poor Dad" which led me to Ken McElroy's "The ABC's of Real Estate of Real Estate Investing"
which led me to Brian Murray's "Crushing It in Apartments and Commercial Real Estate" which led me to BiggerPocket where I am still
learning everyday.
Honestly, this real estate thing has become an obsession. It consumes my every thought. I catch myself thinking about RE while examining my patients..very annoying.
I figure the only way to calm this obsession is to jump in with both feet.

My goal is to start out small with SFR as rentals (3-5 within the next 6 months) then move to apartments by the end of 2020.

I planned to BRRRR out of state since we currently live in southern California. I have a 'superstar' team put together and ready to go.

The situation;
Our general contractor happens to be a very good friend and an experienced real estate investor in the area. He is willing to help with our new business venture but he's not sure what to charge for his time.
In addition to taking care of the renovation-including design layout he will also be
1. checking out the property with the real estate agent to run renovation estimates and making sure it will be a good rental.
2. coordinate all permits and license with city
3. even offer to manage the property without the usual management fee

For his time and effort, he is proposing that we give him part ownership of each property. He doesn't want any of the passive income from the properties. He just wants a percentage of the sale of the property when it's sold in the future.

I like his proposal but I just don't know what the fair/appropriate percentage should be?

Please help.

Hi @Phuong Le , a few thoughts for you:

1) How about pricing out the service that your GC is offering with other GC’s so that you can get a sense of what the dollar value of the service is. This can inform how much equity you provide in return

2) Partnerships are a big part of most of the success stories on BP so embracing that mentality early can enable accelerated scale

3) I like arrangements where incentives are aligned so it’s a positive that your GC cares about the project outcome and value created as much as you do

4) With 4 kids and a full time job you may want to include some passive investing via syndicates in your strategy.  In return for capital you get access to all-star teams who charge a very reasonable fee and you get the same economic and tax exposure as you would with doing your own direct investments.

Good luck!

@Phuong Le , @Ronan Donnelly lists out some good things to consider.  

When I read your post, I was thinking about alignment of interests though.  He is willing to manage your properties "without the standard management fee".  How will he be compensated, when his interest is in appreciation, but yours is in long term hold.

I would just make sure that there is some level of alignment of interest here, since he won't be compensated until you sell/refi, and the refi may not be as much as he wants, and the sale may never come based on your investment objectives.

In my opinion, your GC might think this is good idea now but when he realises you are not selling any of your properties and his work starts being more more as you buy more properties he probably won't like it as much because altough he is gaining equity he is getting no cash flow. I believe this kinda of set up will cause you problems in the long run. (These are just my thoughts)

I would recomend paying him the price you would pay any other contractor for the rehab and paying him a management fee so he can get some cash flow. If he wants a piece of the property and you are willing to give hims some then pay him a lower than usual management fee (say 4 or 5% of the rent).

As for the % amount I would be willing to give him on a deal like this, it depends on how much under appraisal value do I plan to buy. Lets say I plan to buy properties at 70% under the appraised value then I would not give him more than 15% that way I would still make 15% in equity myself.

Originally posted by @Phuong Le :

Hey Doc, a Happy belated New Year. Hopefully, your advisor has given you some total dollar amount you need in xyz years. I would look what is your "start up" capital now. As having multiple doctor friends they continue to bury themselves in work usually because they have a busy practice, work at the hospital, or need to provide for the family. As you are smart I am sure you understand anything that will do well needs times, oversight and continuous follow-up. I would look at investing in syndication it could be multifamily, student housing, or heck even mobile home parks. I would also ask the syndicator can I 1031 my funds at the end. As the goal to grow this initial amount and instead of pulling and paying roll it in again and when retirement hits deal with the tax then. This is not tax or legal advice. I would look if setup a 529 for your kids to help with the costs of the school. Also, I would speak with your CPA, to help lower taxes you can gift yearly funds to your kids. If you have more disposable income that should help get to retirement quicker and those funds could even be invested but again speak to your CPA and attorney as they can only give you advise.  

@Ronan Donnelly-Thank you for your insight. I've thought about syndicates but prefer the challenge of trying to create a good size portfolio on my own. I know I will make tons of mistakes but I hope to learn from them quickly. 

@Roni Elias, We do have a 529 for all the kids. I actually have a meeting with my CPA next week for taxes. Will ask him about the gift for the kids. Thank you!