Starting an investment company

14 Replies

Lets say I wanted to start and investment company where I purchased homes and rented them out for cash flow with opm and gave them a return on their investment. Is this possible? Has anyone else had experience doing this? Does anyone know of any books or substance I could read to show how to do this? I'm sure I can find the investors and the homes, my question is mainly on structuring this and if it has worked for anyone else?

Yes, yes and yes.  You're here.  Anything you want to know is on bigger pockets, if it's not ask and I'm sure someone has the knowledge.  People use "Private Money" all the time to buy and hold.

@Troy Fisher  I am looking on the forums for the info I mentioned. However maybe its worded differently than I am searching it. If you have any forum post specifically you can point me towards I would LOVE to read them. 

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Private Money Lenders.  At some point we all have OPM (Other peoples money).  You offer to borrow their money usually @ 6-8% and purchase property that is hopefully giving you returns of 12% and you pocket the difference.  I just do it with a bank.  They loaned to me at 4.5% and I'm getting 12% returns!  I pocket 7.5%  Pesky Private Money Lenders cutting into my spread!

But seriously you haven't proposed anything outlandish or creative.  It's every day occurrence in Real Estate!

Haha thanks @Troy Fisher   I want to start an investment company and do this. I am currently unable to use a bank for financing as I've only been at my job 1 year and made the mistake of writing everything off. Well I don't know how much of a mistake that is, it just means I have to wait 2 more years to have tax returns showing I pay a lot in taxes so banks will believe I'm responsible with my money and have enough of it to pay them. Kinda sdrowkcab ssa but whatever. 

How do you go about starting a company and doing what we've talked about? First of all what kind of company do you start? llc? Second where is the best place to find private money lenders? 

Entity Structures are complicated discussions.   

The First place to start is to develop your goals, and research real estate a little bit more. Then develop a strategy. You are probably dreaming big. But when you get big the upfront expenses are immense and overly complicated. Most people start off small. Wholesale for some $$, build a reputation and a track record, move into rehabbing build those relationships, buy a buy and hold SFH, sell it and 1031 into multifamily.

Also my tax returns show that I have little to no TAXABALE Income because of all of my write-offs. My banks haven't said to no to me. They care about my DCR .

DCR? Well. I'm not interested in flipping homes. I am mainly into rentals. If I buy a rental and get a steal I would be willing to flip it for cash no prob. I just want to focus on buy and hold rentals. I would have no problem wholesaling. The issue there is I have a real estate license and if I can sell someone's home for more money to an investor aren't I obligated to tell them that? I'm not sure how that works. Or does it not matter if I let them know up front I'm looking at your home as a personal wholesaler not an agent to sell it for you?

@Matt Cramer DCR = Debt Coverage Ratio. Or for SFH you are looking more at DTI Debt to Income. I guess my point is unless you already have a bunch of people ready to loan you money, finding someone who is going to be a Cash Partner, Equity Partner, Private Money Lenders is going to require a some sort of track record.

Your Broker is the one who is going to be able to give you the legal advice on what being a realtor in your market is expected to do.  

Also pressing the vote button on the upper right hand side of the post lets people know that you thought the post was helpful.

Originally posted by @Troy Fisher:

Entity Structures are complicated discussions.   

The First place to start is to develop your goals, and research real estate a little bit more. Then develop a strategy. You are probably dreaming big. But when you get big the upfront expenses are immense and overly complicated. Most people start off small. Wholesale for some $$, build a reputation and a track record, move into rehabbing build those relationships, buy a buy and hold SFH, sell it and 1031 into multifamily.

Also my tax returns show that I have little to no TAXABALE Income because of all of my write-offs. My banks haven't said to no to me. They care about my DCR .

 HI Troy,

Regarding lending based on DCR and cash based debt coverage, DCR is mainly used by commercial, local, and business oriented bank loans, while conventional financing and residential 1-4 lending generally focuses on debt to income.

45% Debt to Income (DTI) = $2.22 dollars of cash flow or gross income needed to be shown for each dollar of monthly obligation you're looking to qualify for

50% Debt to Income (DTI - $2.00 dollars of cash flow or gross income needed to be shown for each dollar of monthly obligation you're looking to qualify for

The above are some examples as each bank has different ranges of requirements.

If the max is 45% DTI and the borrower is seeking a mortgage of 1500 but net rents are 750 then they are seeking to qualify for a net -750 which requires 2.22 times the income to receive an approval which means they need 1665 gross monthly income.

Hope that example helps conceptually explain the residential vs commercial lending aspect.

Originally posted by @Matt Cramer:

DCR? Well. I'm not interested in flipping homes. I am mainly into rentals. If I buy a rental and get a steal I would be willing to flip it for cash no prob. I just want to focus on buy and hold rentals. I would have no problem wholesaling. The issue there is I have a real estate license and if I can sell someone's home for more money to an investor aren't I obligated to tell them that? I'm not sure how that works. Or does it not matter if I let them know up front I'm looking at your home as a personal wholesaler not an agent to sell it for you?

 I can only speak from being broker licensed in CA and here and probably there in MI you will probably have a "Fiduciary," duty to act honestly, ethically, and in the clients favor. So if you're not telling the client what the real value is and seeking to make a profit from their home you are not be acting in a Fiduciary capacity and possibly setting yourself up to end up in a lawsuit. This ends up costing the end consumer (a highly protected class with regards to the CFPB - consumer finance protection bureau) more in the end. 

Then again, the above assumes you're representing the buyer client as "their," agent and trying to make a profit on their home, AKA making an extra commission that is off the settlement statement, apart from your normal commission.

Let's say you follow your plan with advice in forums and then later you go to jail.

Look up public offerings for REITs. Spend the first 100+K of your money to get through the requirements before you begin selling bonds under the guidance of a securities attorney.

Otherwise, use the profits from your investments with other investor partners and buy more properties, which is much safer. You should still see an attorney, let's also say when folks think too much they usually get in trouble. :)

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I agree with Bill Gulley this time because he is right, and also I agree when folks think too much they get in trouble and look at all the bankers whom the government slap with fines for thinking without advice from a lawyer.


Joe Gore

I am not a lawyer either and maybe the question needs a little more detail. If you are looking to partner with other investors I believe you would be OK as long as did this with one person per property. When you have several into a pool of money there are several laws you would need to follow and should only be done with legal advise, After all you don't want to get into trouble for not managing funds properly. As @Bill Gulley stated, you would have trouble wholesaling due to your Fiduciary duty to the seller. How ever as a Realtor several years ago I did find a few FSBO's that were motivated sellers, and they were happy to just unload the property dirt cheap. There the importance to keep inline with what you are and are not allowed to do would be if you have cash buyers and could get the seller out quick. Openly letting them know that if you list it near or at market price, you could get them conceivably more. The ins and outs of listing and the possible time frames. I would still ask legal advise on this, after all you wouldn't want to loose your license over misrepresentation.