New Partnership Model

Gilbert, Arizona

Creative Real Estate Financing

New Partnership Model

Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

I'd love to get some feedback and hear your thoughts on the investing model that I am planning on ramping up this year.

Let me give you some background for context and to help you understand why I am moving in this direction with investing this year.

I have been investing in real estate for the past 15 years but more actively for the past 10 years. People started to ask me to help them learn how to invest so I started coaching new investors over the past 7 years on how to start investing in real estate. I would charge them $5,000 with the ability for them to earn back $2,500 and I'd have a call with them every other week to guide them on how to find deals and money lenders and how to get the properties fixed up and get them refinanced, etc. About 90% of my coaching students bought properties and increased their net worth on average of $100,000 the year we worked together. A mentor of mine told me that I was charging too little for the amount of value I was providing. So I increased my rate to $10,000 with the ability of my coaching students to earn back $5,000 if they completed their homework in betweeen coaching sessions that was geared towards helping them meet their real estate goals. The results of my students were about the same and they would create about $100,000 of increased net worth during the coaching program. My mentor told me I was still charging too low for the value I was providing.

Towards the end of last year, one of my buddies contacted me and told me his accountant told him that he needed to buy some real estate to lower his tax bill. I shared with him some ideas on how to buy undervalued real estate and he basically told me that he would rather just partner with me and provide the money and have me find and manage the investment and then split the profits. So I found and purchased 3 undervalued properties from wholesalers and we are just finishing up the 3rd one. Each property is estimated to create about $70,000 of profit over the next 3 years. He has deposited $100,000 into the business account. That covers the down payment for the purchase, the rehab, and the $18,000 for reserves for the account, and $5,000 for me for each property for the time and work involved. That $5,000 is part of my portion of the 50% of the profits and will be deducted from my payout when the property is sold.

The property will be rented out on a 3-year lease option and will be either sold to the tenant buyer or sold on the market if the tenant decides not to exercise the option.

The money partner on these deals will bring in about $35,000 to $50,000 for each deal and the expected IRR is around 25%-35% each year for the 3 year period essentially doubling their money in 3-4 years.

So rather than focusing on picking up a couple of coaching clients this year, I think I am just going to focus on finding money partners to buy deals with. I already have the knowledge, experience, and systems in place to do about 20 properties this year. So I think I am going to shift my focus away from coaching and more towards partnering.

I'd love to get hear some of your thoughts and get some of your feedback.

480-206-1209 Podcast Guest on Show #287

134 views

Most Popular Reply

V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

1y

Quote from @Shiloh Lundahl:

@V.G Jason it seems like you don’t see that this type of partnership would be enticing for people who want to be passive investors. Walk us through one of the kinds of deals you do with partners that are enticing for them.

I don't work with partners, because I don't need to. I also don't post strategies online to drum up business so others can latch on and see what services I am subtly selling. Because, I don't have anything I am selling.

If someone asked me for advice on "passive" investing. I'd tell them passive investing is a farce, you really want active investing with systems in place.

But if they wanted less control in investments---go the route of equities, fixed income like tbills or CDs, mortgage notes syndicators, REITs, possibly RE syndicators but do your diligence especially now, and even crypto cause that's an investment with little control.

I would do all of those prior to giving up 50% upside on a physical RE investment to someone who has little risk, and is offering their time. I'd rather people offer their time through contractual work that raises the ceiling of my physical investment yet I keep all the equity.

Otherwise, why would I risk my capital?

See this reply in the discussion

87 Replies

Jump to latestLatest

Sort by

Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Alan F. I am sure@V.G Jason has given great information and opinions on economics and things he knows a lot about.

I myself don't give my opinion about land investing (even though I own land) or large multifamily investing (because I've never owned a multifamily larger than a 12-plex) or commercial real estate or mobile home parks or luxury short-term rentals (even though I own all of those). Just because I own something and am familiar with it, doesn't mean my opinion is relevant or even helpful. I don't have that much self aggrandizement to think my opinion is helpful about things that I am not an expert at. Likewise, I don't listen to the opinions of others who are not experts about the specific subject either. I think it makes someone look foolish to state something is a bad investment in a forum where many people, operators and money partners alike, have made lots of money working together on that specific type of investment.

Whereas I may not be an expert at the things that I referenced above, what I am an expert at is buying properties under market value in 5 cities in Arizona. Then we get them fixed up with crews that my project manager runs and we fill them with tenant buyers. We conservatively make about 70k in profit on each of them with about a 90% success rate which I think is pretty good in a competitive market.

What I am looking for in this post is to get good feedback from people that don't have a "Big Hat with little Cattle" or a big mouth with a small portfoli. Or in this case little to no experience in partnerships.
480-206-1209 Podcast Guest on Show #287
0 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
1y
@Shiloh Lundahl I think your really onto something here.

It's a work in progress though, right, as any intelligent pre-launch is.

I think incorporating @Stuart Udis insights and adjustments, as well as @Jay Hinrichs is how get this clay into solid-gold.
The 50% is rather deep a cut, especially with all the additional operational expenses not included into that 50%. If you were providing all of that from your 50%, maybe, I wouldn't but I could see a market of enough size possibly going for that.
I really like Jay's idea, on a contract basis.
I suggest doing BOTH. Giving potential partners an option. One is via the contract route, where once "rent stabilized" your effectively out of it.
The other is the "full-Monty", your a partner to the end.
The 50% is much though, it really is. You gotta improve your value a few notches I think to justify 50%. As you detailed I'd say 30% is pushing it.
Lastly, agreed 100% with Stuart, you can't go into it using best case scenario assumptions and allocations. Remember, historically only about 1/3 of LWO/CD buyers close on property, so odd's are you will be with a different finality.
And you have to factor that odd's are it wouldn't come back after 3yrs list ready, that's just reality of things.
Personally that's why I like to sell such tenant buyers a 1yr extension, or at least present such. I find about 50% of those do complete. But only about 2/3 accept the extensions.
I like it though. There is certainly much opportunity out there for such. Having good accountants will be an important item to afford scalability.
0 Reply
Drago Stanimirovic
New to Real Estate · Miami, FL · Member since 2024 · 1k+ posts · 441 votes
1y
Hi Shiloh,

You're onto a strong model, but I’d challenge you to think about scalability. Managing 20+ deals a year with individual partnerships could stretch your capacity. Have you considered raising a fund instead? Pooling investor capital could streamline acquisitions and reduce the complexity of one-off deals.
Best,
Drago
1 Reply
Alan F.
Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
1y
Quote from @Shiloh Lundahl:

@Alan F. I am sure@V.G Jason has given great information and opinions on economics and things he knows a lot about.

I myself don't give my opinion about land investing (even though I own land) or large multifamily investing (because I've never owned a multifamily larger than a 12-plex) or commercial real estate or mobile home parks or luxury short-term rentals (even though I own all of those). Just because I own something and am familiar with it, doesn't mean my opinion is relevant or even helpful. I don't have that much self aggrandizement to think my opinion is helpful about things that I am not an expert at. Likewise, I don't listen to the opinions of others who are not experts about the specific subject either. I think it makes someone look foolish to state something is a bad investment in a forum where many people, operators and money partners alike, have made lots of money working together on that specific type of investment.

Whereas I may not be an expert at the things that I referenced above, what I am an expert at is buying properties under market value in 5 cities in Arizona. Then we get them fixed up with crews that my project manager runs and we fill them with tenant buyers. We conservatively make about 70k in profit on each of them with about a 90% success rate which I think is pretty good in a competitive market.

What I am looking for in this post is to get good feedback from people that don't have a "Big Hat with little Cattle" or a big mouth with a small portfoli. Or in this case little to no experience in partnerships.

You make some great points and I truly respect your response. That being said I think it's fair, on an open forum for there to skepticism and discourse amongst the members. We all have different perspectives.
I don't think the size of ones portfolio dictates their effectiveness in investing. Merely my opinion.
It has been my experience that the only person who truly looks out for me is me, undoubtedly that has gilded my perspective.
Unfortunately I've always been were the buck stops.
Personally I'm a huge fan of value add....if an LP was to invest cash with you, what position would they be in? IMO real estate investing is rather tactile, what level of engagement would it be? How could an investor make sure their risk is mitigated and/or they contribute to a positive outcome for all parties involved? That includes you. I feel very strongly that if you're bringing value to others you should be rewarded.
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Stuart Udis be careful not to interpret my use of words as upset. I use words calculatedly for a living.

It has been awhile since I have been active in the forums so you may not be used to my posts. I tend not to be a conventional investor. I tend to invest outside of how the average investor invests. And it has paid off. I will often go against the common investor thought and defend my position based on my experiences. And when I point out someone's lack of experience to back up their statements they get upset at me, swear, and name call. So I am used to it.

What you are saying about someone being able to invest in real estate and they don't have to give away 50% of the deal is absolutely correct. However, when I go to meetups and I talk with people who are new at real estate, they often don't know where to start and they feel overwhelmed. They would like to do a deal but they don't have systems in place or contractors or sub contractors and everything is new to them. They can jump in and get started and learn along the way like most people do. However, most people don't do really well on their first deal by themselves - me included. There are also people that have high paying jobs that require a lot of time and they don't want to learn the process of real estate investing. They just want to place their money with a good operator and get better than average returns. This type of partnership can meet the need of a specific type of person. That's all. And I may be a good fit for that type of person. What I would like though is to get the feedback of people who have done similar types of partnerships and have learned through experience the pitfalls that I should watch out for when investing using this or a similar model.

Because of this post I have already had a phone call with a mentor that gave me some good advice and I am just looking to continue to get some feedback from other experienced investors too.
480-206-1209 Podcast Guest on Show #287
0 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
1y
Quote from @Shiloh Lundahl:

@Alan F. I am sure@V.G Jason has given great information and opinions on economics and things he knows a lot about.

I myself don't give my opinion about land investing (even though I own land) or large multifamily investing (because I've never owned a multifamily larger than a 12-plex) or commercial real estate or mobile home parks or luxury short-term rentals (even though I own all of those). Just because I own something and am familiar with it, doesn't mean my opinion is relevant or even helpful. I don't have that much self aggrandizement to think my opinion is helpful about things that I am not an expert at. Likewise, I don't listen to the opinions of others who are not experts about the specific subject either. I think it makes someone look foolish to state something is a bad investment in a forum where many people, operators and money partners alike, have made lots of money working together on that specific type of investment.

Whereas I may not be an expert at the things that I referenced above, what I am an expert at is buying properties under market value in 5 cities in Arizona. Then we get them fixed up with crews that my project manager runs and we fill them with tenant buyers. We conservatively make about 70k in profit on each of them with about a 90% success rate which I think is pretty good in a competitive market.

What I am looking for in this post is to get good feedback from people that don't have a "Big Hat with little Cattle" or a big mouth with a small portfoli. Or in this case little to no experience in partnerships.

I think where you're confused with my background is that I actually have indulged in the privy of vetting more partnerships than you've done.

I refused them because wearing the risk wasn't balanced. This doesn't just stem in SFR, this stems in fast food chains, logistics chains, trade shops, infrastructure RE, energy trades. The latter points I have more in depth experience with given my space in the FO realm.

I rarely seen them work, and my two cents is just-- an opinion. If you're upset and distraught with them, that's fair. This isn't small portfolio, big portfolio, etc. If you want to trade barbs on that, you are not even remotely comparable and it would be a Dave Chapelle quality joke to think so. Rather than push back on my two cents, or degrade my view or dismiss my ability to form an opinion-- my suggestion would be to come a little better and have an appreciation of others understandings and views. Particularly, since you're on a forum heavy selling your practice or "model". You're barking up with the tree not knowing who the other dog is.

This is just mere advice from a seasoned/experienced investor. Seasoned/experience doesn't mean the best, most prolific, intelligent, or anything else people want to take. No one needs to indulge in partnerships to have a view or opinion on partnerships, experience can offer that in itself.

They can form their own opinion, I am just on an open forum providing it.
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@V.G Jason you will have to forgive me, I know very little about you. When I click on your profile, it shows nothing. I’m not sure if you are an investor with a little bit of experience or a lot of experience.
In contrast, it’s very easy to find out a lot about me. I try to put as much relevant information on my profile as I can so that if people are wondering where I get my opinions from, they can look at my background and experience.
I encourage people to be able to research the people’s opinions they’re listening to or reading about because not all opinions are helpful.
480-206-1209 Podcast Guest on Show #287
0 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
1y
Quote from @Stuart Udis:

@Shiloh Lundahl No reason to get upset. V.G Jason merely pointed out what you are providing to the hypothetical partnership can easily be performed through contracted services with proper vetting and without having to give up 50% of the upside. Most individuals can originate the debt these projects require as well so its not as if your signature is opening the doors to properties these partners couldn't purchase on their own either. You mention you would also share in losses, but you aren't investing any capital so poor performance would lead to your partner realizing a monetary loss before you.

Let's not distract from the actual issue. It's not the "model", its business is slow.
We get it, it's hard times. Especially transactionally in RE, and this is way of trying to light the fire. Sell his model, pitch his model, however you want to convey it.
He even starts the thread with
I'd love to get some feedback and hear your thoughts on the investing model that I am planning on ramping up this year.

Let me give you some background for context and to help you understand why I am moving in this direction with investing this year.
He doesn't want feedback, he wants validation. And he wants business from that validation. My post is simply an opinion of this partnership model not being all that great for "partnership", or "passive investing", or really any mechanism of employing my capital.
0 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
1y
Quote from @Shiloh Lundahl:

@V.G Jason you will have to forgive me, I know very little about you. When I click on your profile, it shows nothing. I’m not sure if you are an investor with a little bit of experience or a lot of experience.
In contrast, it’s very easy to find out a lot about me. I try to put as much relevant information on my profile as I can so that if people are wondering where I get my opinions from, they can look at my background and experience.
I encourage people to be able to research the people’s opinions they’re listening to or reading about because not all opinions are helpful.

Right, there's little about me and a lot about you. You're here to sell your services, I'm here to learn and the dialogue. That's the difference.

That difference is why I don't have an agenda in my posts, yet you do.

I'm here to learn, here to apply, and here to get my SFR position stronger as a portion of my portfolio. I've learned a more from people like Jay, Henry, James, Nathan, Chris, Alan, Joe, Carlos wherever that guy is, than folks you would think have the "credentials" to give me advice.

That's because they don't pitch something.

I can sit here and trade barbs on my "size", my "AUM", my "portfolio". It won't go anywhere, I'm here to learn and so when I see things suggested & push back with my opinion, there shouldn't be anything wrong with that. Infact, I welcome the dialogue on why I am wrong.

This doesn't mean I don't know anything, for all you know you may actually know who I am just don't know that. And I think a lot of folks on here may learn that the hard way, too.

1 Reply
- Allan C.
  Rental Property Investor · Member since 2018 · 826 posts · 809 votes
  1y
  @V.G Jason I've been wondering where Carlos went as well. Hope he is ok as it seems odd for him to go cold turkey on this forum.
  3 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@James Hamling it is a work in progress. The thing that got me considering this model and actually scaling it was a call I got from a friend. He told me his accountant told him he needed to buy some real estate to offset some of his taxes. I gave him some ideas of how to purchase some properties under market value, and then get them fixed up and force equity that way, but he told me that he would rather just provide the capital and have me run the projects. I told him that I could do it and we could split the profit. He liked the idea so we created an LLC and a partnership agreement and he deposited 100k into the business account. We have 2 out of the 3 properties finished and leased out and the other one is in the middle of rehab.
There have been a few things from this partnership I have learned that I am going to tweak moving forward.

And from this thread there are a few more things that I am going to tweak. So I appreciate the feedback that I have gotten from people experienced in this model.
480-206-1209 Podcast Guest on Show #287
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@V.G Jason You seem upset.
480-206-1209 Podcast Guest on Show #287
0 Reply
Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
1y
@Shiloh Lundahl Understood, but I wouldn't refer to buying and renovating $250k SFH's with hard money financing unconventional real estate investing. Seems to be what most most turn to who want to buy real estate beyond their primary residence. Perhaps look into an acquisition strategy that has greater barriers and isn't easily replicated. That will be draw in better capital partners.
[email protected]
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Stuart Udis I would say the way I buy is unconventional. Let me give you an example

Let's say you buy a house under market value at 70% ARV and it needs very little work. Let's say just a roof repair and a little bit of dry wall and paint and replacing some door jams and baseboards. Total work is less than $10,000. Let's say the discounted purchase price is $200,000 but it could easily appraise for $280,000 with the $10,000 of repairs. Sounds like a good deal right? If you get a DSCR loan at 75% of the ARV then you could get a loan for $210,000 and only need to leave the amount of closing costs in the deal, let's say $15,000 with both sets of closing costs and holding costs. And then let's say that you get an option fee for $5000 from somebody who wants to purchase the property from you within the next three years. So really you have $10,000 left into the deal. You may also cash a couple hundred bucks a month

This is how it should work. However, this often isn’t how it works. Because you found a really good deal and only had to put in $10,000 into repairs, and you were able to get it done within a couple weeks, the bank is not going to give you 75% of the $280,000 that it should appraise for. In fact, the appraiser may not even appraise it at $280,000 even though the comparables would point to that value all day long. The reason being is because you got such a good deal. If you invest a lot then you know what I am talking about. And because you purchased the property for only $200,000 and only put $10,000 into the repairs, the appraiser is going to have to explain to the bank why they think the value is $80,000 more than when you bought it a few weeks ago if you only put $10,000 into it. So it’s likely that the appraiser will appraise the property lower than it should be appraised for. And not only that, but because you’ve done all of this work within such a short timeframe, the bank will either give you 75% of the after repair value or 80% of what you purchased it for plus what you have it for. Whichever is lower. So unless you want to wait a seasoning period that may take between 6 and 24 months, depending on the bank, the most you’d be able to get the loan for on this property would be $168,000. Now instead of leaving only $10,000 in the deal, you are now leaving $42,000. You’ll be cash flowing higher because there won’t be as high of a loan on it. However, you need to leave four times the amount into the property which will dramatically slow your ability to scale your portfolio.

I buy the property is such a way that I can get the property refinanced within a short period of time (sometimes just weeks) at 75% of the ARV without waiting for seasoning. This has probably been the one thing that has helped me scale my portfolio so much and so quickly within the past 6 years.

So the things that I would bring to the table that a new investor wouldn’t have access to (at least at the beginning until they build their own systems and networks) would be my knowledge and streamlining of getting financing, having deal flow, using vetted and skilled subcontractors, discounted prices on materials, systems in place to find tenant buyers, and streamlined refinancing and management in place

It is similar to turnkey, only you don’t have to put 25% down and you walk into equity and the exit is already planed and the tenant buyer gets connected with a lender upfront to help them get ready to exercise in the option within 3 years.

So that is what makes this different than other models. And just so you know my rate of tenants who exercise their option is about twice as high as the average rate.
480-206-1209 Podcast Guest on Show #287
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Drago Stanimirovic we actually do have a fund. We created it about three years ago in order to help us convert a mobile home park that we own in the center of Florence, Arizona into a tiny house village. We were also able to use the fund to acquire and fix up other mobile home parks. Because of the rates went up dramatically in 2022, we have held off on building a tiny house village. We put the money into some repairs on some of our other parks which we are now putting on the market for sale. When those sell, will be paying off the fund and we will have some cash to get started on the tiny house village.
There are pros and cons to the fund model. You always have to pay interest while money is invested into it. That’s one of the cons because that money might not be deployed in a deal and it may just be sitting there. But, you can use the fund money as part of the down payment for different projects that are a lot more expensive.
Since these deals are pretty small, I’d rather just have one off investors that want one to three properties and that want to be pretty passive, do these deals with me.
The management of the 20 properties shouldn’t be too difficult. We just sold about 50 properties in a couple of our mobile home parks so my project manager has a lot more time on her hands and I like to keep my crews busy so we have the infrastructure to handle it.
480-206-1209 Podcast Guest on Show #287
0 Reply
Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
1y
@Shiloh Lundahl Two days ago your hypothetical transaction had a total cost of $197K with an ARV of $245K, but your latest example has a total cost of $210K and ARV of $280K, nearly 2X the equity. It appears you are just making up hypothetical transactions with values to make your system seem more enticing. That in itself is a huge red flag for me.

At the end of the day, you are still buying $250K SFH's, the easiest asset class to finance in the real estate world. I don't find anything you are doing to be unconventional. Plenty of ways to structure financing with earn outs on the construction to permanent loans without even having to refinance or use hard money which would reduce the transactional costs below what you've quoted in your examples.
There's nothing wrong with your strategy other than the partnership component, but don't twist the numbers in your hypotheticals in order to gain traction.

[email protected]
5 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Stuart Udis you say things like a “red flag” almost as if you don’t believe what I am saying or think that I am making things up.

They are 2 different properties.

Latest property: 14004 W Noble Cir, Casa Grande, AZ 85122

https://www.zillow.com/homedetails/14004-W-Noble-Cir-Casa-Grande-AZ-85122/8705508_zpid/?utm_campaign=iosappmessage&utm_medium=referral&utm_source=txtshare

The other property that I referred to: 3893 W Long Dr, Eloy, AZ 85131

https://www.zillow.com/homedetails/3893-W-Long-Dr-Eloy-AZ-85131/88899431_zpid/?utm_campaign=iosappmessage&utm_medium=referral&utm_source=txtshare

And I do need to apologize and to make a couple of corrections. I was just giving you numbers from memory while I was responding at the supermarket last night. I checked the actual numbers this morning before responding to this message. So here are the accurate numbers. We actually bought the property on Long for $210,000, but we closed on it at $285,000 and we put about 7k to 8k into repairs. I bought the property from a wholesaler that was working with the agents on behalf of out of state family members of the owner who had passed away if I remember the situation correctly. I thought the appraisal would come in at $290,000. But I was wrong. It came in at $357,000. I didn’t share the actual appraised value before because I didn’t want it to seem like I was just making numbers up to make my partnership model look more enticing. And to be honest, I think the appraisal came in much higher than it should have. Zillow’s current estimate is $299,000, and I think the current value is probably around $310,000 to $315,000. So even though I get deals like this sometimes. Most of them are not like this. So I don’t tend to use the appraisal on this property as an example of what is normal for my deals. My average conservative deal creates about 70k in equity.
480-206-1209 Podcast Guest on Show #287
0 Reply
Josh YoungPro Member
Rental Property Investor / REALTOR® / Property Manager · Gilbert, AZ · Member since 2023 · 384 posts · 421 votes
1y
@Shiloh Lundahl
Your posts are always entertaining, the banter cracks me up. A while back you ripped on my style of slow and steady long term investing in buy and hold real estate with low down payment conventional loans because it's not as fast as your style and the potential of cash on cash returns isn't as high. Your model of fix and flip with lease options does have big upside potential, but also has more risk for most people starting out, and you have done great at scaling your business, so no doubt having you in the deal does mitigate a lot of that risk. My question though is why do you want to bring on equity partners? I understand needing more capital to scale, but why not bring on debt partners and keep more upside for yourself?
[email protected]802-274-8121
1 Reply
Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
1y
Quote from @Shiloh Lundahl:

I'd love to get some feedback and hear your thoughts on the investing model that I am planning on ramping up this year.

Let me give you some background for context and to help you understand why I am moving in this direction with investing this year.

I have been investing in real estate for the past 15 years but more actively for the past 10 years. People started to ask me to help them learn how to invest so I started coaching new investors over the past 7 years on how to start investing in real estate. I would charge them $5,000 with the ability for them to earn back $2,500 and I'd have a call with them every other week to guide them on how to find deals and money lenders and how to get the properties fixed up and get them refinanced, etc. About 90% of my coaching students bought properties and increased their net worth on average of $100,000 the year we worked together. A mentor of mine told me that I was charging too little for the amount of value I was providing. So I increased my rate to $10,000 with the ability of my coaching students to earn back $5,000 if they completed their homework in betweeen coaching sessions that was geared towards helping them meet their real estate goals. The results of my students were about the same and they would create about $100,000 of increased net worth during the coaching program. My mentor told me I was still charging too low for the value I was providing.

Towards the end of last year, one of my buddies contacted me and told me his accountant told him that he needed to buy some real estate to lower his tax bill. I shared with him some ideas on how to buy undervalued real estate and he basically told me that he would rather just partner with me and provide the money and have me find and manage the investment and then split the profits. So I found and purchased 3 undervalued properties from wholesalers and we are just finishing up the 3rd one. Each property is estimated to create about $70,000 of profit over the next 3 years. He has deposited $100,000 into the business account. That covers the down payment for the purchase, the rehab, and the $18,000 for reserves for the account, and $5,000 for me for each property for the time and work involved. That $5,000 is part of my portion of the 50% of the profits and will be deducted from my payout when the property is sold.

The property will be rented out on a 3-year lease option and will be either sold to the tenant buyer or sold on the market if the tenant decides not to exercise the option.

The money partner on these deals will bring in about $35,000 to $50,000 for each deal and the expected IRR is around 25%-35% each year for the 3 year period essentially doubling their money in 3-4 years.

So rather than focusing on picking up a couple of coaching clients this year, I think I am just going to focus on finding money partners to buy deals with. I already have the knowledge, experience, and systems in place to do about 20 properties this year. So I think I am going to shift my focus away from coaching and more towards partnering.

I'd love to get hear some of your thoughts and get some of your feedback.
Lots of interesting feedback - but even if I didn’t feel the OPs offer to passive investors was great - I wouldn’t think it EVIL - which seems to be the opinion of some responders……

Key point for people evaluating the “fairness” and “competitiveness’ of the offering is that the sponsor is receiving too much benefit for too little contribution. The THING they seem to not be taking into account is that the sponsor is responsible for one half of any losses. This brings a much greater liability into play, and in my opinion provides greater balance.

Is this offering the best “deal” for a passive investors? Probably not even close. Is it the worst deal? Again, not even close. Basically what we have is a pretty “average” real estate opportunity investment. There are a lot more dangerous, and horribly structured investments being offered every day.

I can see this investment fitting into an investors portfolio of the investor meets and has contact one on one with the sponsor. This brings us to the question of scalability.

Again, in my opinion this model doesn’t scale, beyond a point that is reached sooner rather than later. There are many reasons. One big one is that scaling the lease option sale to a homeowner will attract both public regulatory scrutiny and private litigation, perhaps class action, once it reaches a certain threshold. And the cost of legal defense , even if successful, will drive the company out of business.
Private Mortgage Financing Partners, LLC
Website View Page
1 Reply
Alan F.
Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
1y
Quote from @Allan C.:

@V.G Jason I've been wondering where Carlos went as well. Hope he is ok as it seems odd for him to go cold turkey on this forum.

Me too, he's 1 of the few in the Bay Area that I could converse with. I sure hope he's ok. FWIW theres been alot tumultuous activity in tech jobs.
0 Reply
Alan F.
Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
1y
1 thing; in this current market those are decent margins on such a low price point.
Since I got no answer on my questions I can only *** u me that the $ partner is in a unsecured position, a no go for me.
It would be cool though if more renters can buy homes.
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Josh Young this is probably the best question that I have gotten on this thread so far.

The truth is, that is the way that we scaled at the beginning. We just brought on debt in second position that we would pay 10-12% interest on that would leverage the property up to 80%. Sometimes though, we had to still leave some of our own money in the deal and we had to keep our own money in reserves. The structure that I am proposing is less profitable for me, but I also wouldn't need to bring any of my own money into the deal unless there was a loss. Also, I would get paid $5000 of my portion of the profit upfront, which is nice not to have to wait the 3 years for me to get any type of payment from the deal, considering the fact that I'm the one that is putting in all of the work upfront in order to put the deal together to get paid when the deal sells.
480-206-1209 Podcast Guest on Show #287
1 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
Thank you @Don Konipol for thinking this model is NOT evil. I agree.

I am interested in your causion and I'd like to know more details about that. I have probably done between 80 and 100 lease options and we haven't had any issues with litigation or anything. We try hard to follow the regulations, including the Dodd Frank Act. So I'd be interested in seeing what I might be missing that could be a possible danger with the lease option model in particular.

Also, I would be interested in hearing some other models and investment strategies that would be better deals for passive investors. If you wouldn't mind sharing, that would be great.
480-206-1209 Podcast Guest on Show #287
0 Reply
Shiloh LundahlPro Member
OP
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
1y
@Alan F. the money partner would be 100% secured. They would be a partner on the LLC and the LLC would own the property. So their capital would be fully secured by the real estate.
480-206-1209 Podcast Guest on Show #287
1 Reply
Alan F.
Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes
1y
All in all it seems like a good plan, I like Shiloh's transparency through this thread. I sincerely hope it all works out & brought to scale.
0 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
1y
Quote from @Don Konipol:

Quote from @Shiloh Lundahl:

I'd love to get some feedback and hear your thoughts on the investing model that I am planning on ramping up this year.

Let me give you some background for context and to help you understand why I am moving in this direction with investing this year.

I have been investing in real estate for the past 15 years but more actively for the past 10 years. People started to ask me to help them learn how to invest so I started coaching new investors over the past 7 years on how to start investing in real estate. I would charge them $5,000 with the ability for them to earn back $2,500 and I'd have a call with them every other week to guide them on how to find deals and money lenders and how to get the properties fixed up and get them refinanced, etc. About 90% of my coaching students bought properties and increased their net worth on average of $100,000 the year we worked together. A mentor of mine told me that I was charging too little for the amount of value I was providing. So I increased my rate to $10,000 with the ability of my coaching students to earn back $5,000 if they completed their homework in betweeen coaching sessions that was geared towards helping them meet their real estate goals. The results of my students were about the same and they would create about $100,000 of increased net worth during the coaching program. My mentor told me I was still charging too low for the value I was providing.

Towards the end of last year, one of my buddies contacted me and told me his accountant told him that he needed to buy some real estate to lower his tax bill. I shared with him some ideas on how to buy undervalued real estate and he basically told me that he would rather just partner with me and provide the money and have me find and manage the investment and then split the profits. So I found and purchased 3 undervalued properties from wholesalers and we are just finishing up the 3rd one. Each property is estimated to create about $70,000 of profit over the next 3 years. He has deposited $100,000 into the business account. That covers the down payment for the purchase, the rehab, and the $18,000 for reserves for the account, and $5,000 for me for each property for the time and work involved. That $5,000 is part of my portion of the 50% of the profits and will be deducted from my payout when the property is sold.

The property will be rented out on a 3-year lease option and will be either sold to the tenant buyer or sold on the market if the tenant decides not to exercise the option.

The money partner on these deals will bring in about $35,000 to $50,000 for each deal and the expected IRR is around 25%-35% each year for the 3 year period essentially doubling their money in 3-4 years.

So rather than focusing on picking up a couple of coaching clients this year, I think I am just going to focus on finding money partners to buy deals with. I already have the knowledge, experience, and systems in place to do about 20 properties this year. So I think I am going to shift my focus away from coaching and more towards partnering.

I'd love to get hear some of your thoughts and get some of your feedback.
Lots of interesting feedback - but even if I didn’t feel the OPs offer to passive investors was great - I wouldn’t think it EVIL - which seems to be the opinion of some responders……

Key point for people evaluating the “fairness” and “competitiveness’ of the offering is that the sponsor is receiving too much benefit for too little contribution. The THING they seem to not be taking into account is that the sponsor is responsible for one half of any losses. This brings a much greater liability into play, and in my opinion provides greater balance.

Is this offering the best “deal” for a passive investors? Probably not even close. Is it the worst deal? Again, not even close. Basically what we have is a pretty “average” real estate opportunity investment. There are a lot more dangerous, and horribly structured investments being offered every day.

I can see this investment fitting into an investors portfolio of the investor meets and has contact one on one with the sponsor. This brings us to the question of scalability.

Again, in my opinion this model doesn’t scale, beyond a point that is reached sooner rather than later. There are many reasons. One big one is that scaling the lease option sale to a homeowner will attract both public regulatory scrutiny and private litigation, perhaps class action, once it reaches a certain threshold. And the cost of legal defense , even if successful, will drive the company out of business.

I never said evil, but you can exaggerate and say that. I can say without a doubt that you've had your hands in the cookie jar on some partnerships that would be deemed as predatory, too. And because of that, you're putting a disclaimer before analyzing Shiloh's deal just to make sure the crumbs don't appear.

For the most part, you agree Shiloh's deal isn't that great. And it could fit a unique investor. And I agree, an investor that does zero diligence, doesn't value capital, and wants to find a structure that's RE related but not REITs, the debt behind it, syndications, etc. This could be perfect for them.

I still fail how to see it defeats the options that I provided, or leans towards a better passive model or even a "partnership".

I think the best suggestion in this thread is actually from @Josh Young where @Shiloh Lundahl should seek debt partners. Now that's a way to go. Secure the debt by real estate, now we're talking a great partnership deal. That way someone can have "passive" exposure through the debt, yet still have RE exposure in some form or fashion. Giving up 50% equity on a value add in today's environment is just too much to give up without a significantly better return that's not offered through almost any other asset class.

0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free