New Partnership Model

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

1y

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.

“ 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”

V.G. Jason, or WHOEVER you really are (your BP page gives absolutely NO information about you - typical for those “keyboard warriors” who spend their time trying to “get even” for the bullying they endured during childhood)

Your tactics are reprehensible, reminiscent of Wisconsin Senator JOE MCCARTHY. You’ve made an accusation, used it to imply that I’m covering something up, and provided not even an example, evidence, foundation, etc. for your outrageous claim. Put your “money where your mouth is”. Since you can “say without a doubt” then you must have , at your fingertips, evidence that I’ve “had my hands in the cookie jar on some partnerships that would be deemed predatory”. And since your life, such as it is, consists of responding to every BP post mentioning yourself within 15 seconds, you should have no problem responding within the next, say, 1 hour with your “evidence” to back up your slanderous remark.

I’ve come across more than a few like you in my 45 years as a real estate investor. And those who are argumentative, bitter, accusatory, slanderous, and addicted to drama are ALWAYS putting on “bravado” to cover their singular lack of success in business, love and life.

You are a BAD MAN, V.G. Jason, a very bad man. (As counsel for the Army told Senator Joe McCarthy during the conclusion of the Senate Committee on UnAmerican Activities Hearings).

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James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

1y

How many stories have we heard about the Government going after Lease Option operators? I would avoid this business model. It's right down there in the gutter with Sub2 and wholesaling.

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Shiloh LundahlPro Member

OP

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

1y

@James Wise Just like any model, there are good operators and bad operators. We all, thanks to you, have heard of our Portuguese friend, who gave turnkey a bad name in Indy.

I think the important thing is to follow the laws and have everything spelled out in the contracts. But in addition to that, I also connect my tenant buyers with lenders to help them get ready to exercise the option. You can check out my videos to see some of the tenant buyers that were super grateful to become home owners. It would be great to meet up sometime and I can go over the way we set up our lease options to help people buy the properties which is what I really want. Because in reality, as soon as they exercise the option, I can redeploy that capital into another under valued asset and build wealth quicker.

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James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

1y

Quote from @Shiloh Lundahl:

@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.

I have a point for ponderance in this model.

Say a "partner" comes in and it's say the unit is set, rent stabilized with a 3yr term.

And in 18mnths that "partner" says they need to liquidate. There getting divorced.

What happens?

Are you chopping down there equity for an early buy-out? Is there an early buy-out? Are they stuck into it? Can they sell to others?

Or, say at end of term buyer-tenant can't execute on option. You mentioned to a "rinse and repeat" but what if "partner" wants out at yr3? Because way this is framed it's conveying a lot of certainty of a 3yr out.

And as a person who's done a fair # of CD's, I see the averages reflected that >50% don't execute. And I am doing CD's not LWO's which the #'s with LWO's are even lower close rate than CD's. Statistically speaking.

So what happens if "partner" want's capital back? And if they expect the kind of returns promised at start, even though the unit is "rinse and repeat" and not closing to tenant-buyer?

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Dominic M.

Property Manager · Northern Virginia & DC · Member since 2020 · 157 posts · 69 votes

1y

Thank you for providing the details - I wouldn't say this is a new partnership model. This is quote on quote syndicating and you're incorporating a lease option.

Raise funds from LPs and you're the GP. Your waterfall is 50/50.

This is one way, but in the traditional sense in private equity, it would be an acquisition fee to the GP, asset/and construction management fee to the GP, and then a waterfall on the exit - possibly include a promote for exceeding expectations.

LPs would probably seek 17-25% IRR and 2x MOIC. This is a win win for both GP/LP if the GP can perform and as your suggesting, you'll out perform this. Would love to see your modelling, PPM and OM if you have this?

Anyway, what I'm hearing is you are foregoing the former fees and sticking with the latter on a 50/50 waterfall - what if you underperform? are there hurdle rates to meet before your split kicks in? are you contributing equity?

1 Reply

Shiloh LundahlPro Member

OP

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

1y

@James Hamling that is a great question. If a tenant buyer does not exercise the option within the three year period of time, then we can do a couple of things.

1. let's say they leave early. At that point in time, we can just list the property and sell it. we have long-term capital gains rather than short-term capital gains, we would have probably experienced some appreciation during that time. And we could just exit early. We wouldn't get as much money but the rate of return may be just as high or higher if we are able to keep the closing costs low.

2. We could put in another lease option buyer for 18 to 24 months.

3. If they the tenant buyers to leave after three years and did not exercise the option, we could either sell it at that point or we could decide to do another lease option with a higher strike price.

I guess the key concept is, because we have equity, we have some flexibility with what we would like to do.

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James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

1y

Quote from @Shiloh Lundahl:

@James Hamling that is a great question. If a tenant buyer does not exercise the option within the three year period of time, then we can do a couple of things.

1. let's say they leave early. At that point in time, we can just list the property and sell it. we have long-term capital gains rather than short-term capital gains, we would have probably experienced some appreciation during that time. And we could just exit early. We wouldn't get as much money but the rate of return may be just as high or higher if we are able to keep the closing costs low.

2. We could put in another lease option buyer for 18 to 24 months.

3. If they the tenant buyers to leave after three years and did not exercise the option, we could either sell it at that point or we could decide to do another lease option with a higher strike price.

I guess the key concept is, because we have equity, we have some flexibility with what we would like to do.

That seems rather fair, and simple, if I am understanding correctly.

That you truly treat them like a partner, and not just "another" LP.

That when decision points happen, you get together and allow them to lead in preference of the actions.

I assume if one wanted to 1031 for "rinse and repeat" you'd also be game for that as well.

A powerful point is the value-add at entry.

I just wonder, can you commit to assuring this aspect. A lot hinges on a conveyor belt of value-add because as you said, the equity is there making all the various options viable.

Remove value-add aspect at entry, now we have the specter of negative equity infringing upon options.

As we know stuff happens, if things change and can't assure that appropriate value-add at entry, it takes some exceptional integrity to tell those throwing $ at one "sorry, it's a no-go at the moment, we simply don't have viable enough deals to enter at this market timing" and risk they get imbedded with others.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

1y

@Don Konipol

Taking a pot shot at don is pretty strange. Don is one of the brightest investor lenders on bp and does nothing but helps folks

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Ken M.

Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes

1y

Quote from @Don Konipol:

Quote from @V.G Jason: