Newbie Group STR Investment

24 Replies

Hello All!

I have been looking to start in real estate investing for a while and think that STR investment is the best option for me, but I have a couple of questions. Hopefully, someone can help me out with some advice.

My husband and I along with 2 other couples (6 people total) are looking to buy a 4+ bedroom cabin in the Gatlinburg/Pigeon Forge area for STR use. What we have been looking at in the $600k range. We travel there quite often and love the area and per our research the ROI would be what we are looking for. The issue is we are trying to figure out the best way to make this purchase happen.

We considered forming an LLC to make the purchase in which all 6 of us are equal members of the LLC. However, we found that this would require us to get a commercial mortgage with 20-25% down. We were hoping on a lower downpayment than that if possible. I know another option is to purchase it as a personal vacation home and do a lower downpayment. If we went the vacation home route, can we do this with all of us on the mortgage? Would there be an option to transfer the mortgage to the LLC down the line, or refinance to the LLC? Is there another option I am not considering?

Buy something in the lovely town of Coffeyville Kansas.  $20,000 can get you a 4+ bedroom 2+ bathroom house.  The duck and deer hunting is pretty good.  There is also a river that borders the town.  30 pound catfish are common.  Just don't eat any fish you catch that are near the refinery.

Talk to Parker Borofsky on these forums about financing. She's done a couple of my cabins and knows things inside and out. I expect that as long as you can qualify individually, you should just buy as a 'second home' (wink wink) and get the lower rate and less paperwork. At some point down the road (after servicing the note changes in a month or three) you can transfer to your LLC if that's what you want to do.

@Justin Anderson I figured that would be a response. If we could switch it over to the llc within a few months that wouldn’t be a big deal. I was just trying to see if there was a way around that. I sent a message to Parker because I saw her name come up several times. Hopefully she has time to respond. She seems like a busy woman 🤞🏾

Dezmin,

Generally speaking for REI properties, if you are purchasing it as a 2nd home you can qualify for a residential mortgage with as low as 10% down. As far as having all of your names on the mortgage, I would speak with your lender about that but be wary! You should structure your partnership with your friends through a RE attorney who can protect your interests and have it written down as a legal document. I've heard way too many stories about my investor friends getting burned in partnerships with family and friends where the business or personal relationship turned sour. You all need to be on the same page with respect to your short and long term investment goals, property management and marketing strategies, maintenance, and ultimately disbursement of profits.

With respect to placing the property in an LLC you can find several arguments for/against this in multiple BP forums. The skinny: LLC's offer liability protection which comes in handy when you have an extensive portfolio, have a large equity stake in the property, or are trying to shield large amounts of personal wealth. However, they can be expensive to establish and maintain and might not be worth your time if you have limited equity in the property and/or if this is the only property in your portfolio. Also, keep in mind you can't refi a property that is deeded in the LLC name (at least not in my state of TX, but consult with your attorney). The deed has to be transferred to you and/or your partners in order to do this.

Ultimately, I would seek legal counsel to best structure your partnerships and whether or not an LLC is in your best interest. Lots of ways to skin a cat, but this is just my 2 cents.

@Dezim McCoy

I second @Mike De Lota posts. 

Definitely speak with a reputable real estate attorney, regardless of how you mange to secure the mortgage. The thought of 6 thinking emotional adults undertaking a newbie STR adventure is both exiting and scary. The chances of a scheme like this surviving the long term without a warm and fuzzy business contract is precisely 0.00000001% ish.

The mortgage part of this equation is only a small fraction of the over all picture you all need to consider. The list of nuances here are long and some offer considerable risk if not mitigated in a contract. @Mike De Lota mentioned a few business considerations you must hash out and put in black and white. 

I would also ask what exit strategies you have in mind? The likelihood of all partners wanting to hold the property in perpetuity is unrealistic. So? Sell in 3/5/10 years? Sell when market value reaches X relative to Y?  What if someone wants or needs to sell after the first year? Would you all be forced to sell or would someone have first right of refusal? Can one of your partners sell their stake to any old stranger? etc etc.

Exciting. lots to think about. Good luck.

@Marcello Di Gerlando  

@Mike De Lota

We are definitely going to work out a contract with an attorney and have talked about this point. However, we do first want to make sure the initial financial investment is viable before we get to this point, which is why I am posting on the forum and seeking guidance from lenders. We 100% will not blindly put our money together without those protections. 

Each lender is different in how many names you can put on a mortgage and you'd have to contact your lender to ask that question. Most lenders only allow 4 borrowers on a residential loan, but differs per lender and state. In doing this you achieve your above-stated goal of lower down payment. You do however, sacrifice the legal protections and structured partnership of an LLC. Also if one of you were to want out of the deal, the only way that I know to get that person's name off the title is to refi- another thing to consider. As always, consult your RE attorney.

Going the LLC route makes ownership stakes more clearly defined and offers liability protections but jeopardizes your above-stated goal of lower down payment. As above, you can't refi if the LLC holds the title.



@Dezmin McCoy @Mike De Lota I saw you say that you can't refi if the LLC holds the title? What are you referring to on this point? I'm just trying to understand before I comment.

@Dezmin McCoy LLC's, tycially are not expensive , but having the attorney draw up the articles and operating agreement will be a necessity.

So here is a few ideas and it would be contingent on the state laws as I don’t know them.

1. Whether you bought it in your name or the LLC, you could simply draw up a joint venture with anyone not on mortgage or LLC

2. If you bought in a personal name, you could sell on land contract to the LLC (state laws very) but land contract is common here in Ohio for more creative investors

@Dezmin McCoy @Paul Sandhu

It is rather mind boggling the number of people that see Paul crushing it in Coffeyville yet NO ONE wants in on the action. On this thread he actually got LOLed!

Maybe it’s time for me to give up on the mountains and give uncle Paul a call.

@Dezmin McCoy we just bought a 4 BDR STR for that amount in Pigeon Forge. We closed on it August 3rd and it has been great!

I don't know about having that many hands in the pot for a STR, that can be difficult. You are getting into the hospitality industry with STR, who is going to be managing and fielding all the dumb questions from the guests. If people in the group are going to be passive, it sounds like a syndication. I might Joint Venture with 1, maybe 2 people.

Originally posted by @Marc Rice :

@Dezmin McCoy

To add, generally you don't want to quit claim the title into an LLC until about 12 months.

 It is rare that they call you out on it in Ohio

Originally posted by @Luke Carl :

@Dezmin McCoy @Paul Sandhu

It is rather mind boggling the number of people that see Paul crushing it in Coffeyville yet NO ONE wants in on the action. On this thread he actually got LOLed!

Maybe it’s time for me to give up on the mountains and give uncle Paul a call.

@Paul Sandhu The last thing you need is this man strutting through Kansas with his Ca$h Flow hat and amazing head of hair doing deals! They will end up taking down your statue and putting one up of @Luke Carl instead!! 

Thank you all for all of this information. If it makes more sense we will just include 3 total people on the paperwork. But I didn’t know you had to be in the same household to purchase a vacation home together. Ugh. Back to the drawing board!

Originally posted by @Mike Anderson :
Originally posted by @Luke Carl :

@Dezmin McCoy @Paul Sandhu

It is rather mind boggling the number of people that see Paul crushing it in Coffeyville yet NO ONE wants in on the action. On this thread he actually got LOLed!

Maybe it’s time for me to give up on the mountains and give uncle Paul a call.

@Paul Sandhu The last thing you need is this man strutting through Kansas with his Ca$h Flow hat and amazing head of hair doing deals! They will end up taking down your statue and putting one up of @Luke Carl instead!! 

They could take down my statue and put up something like Mt. Rushmore on the bluffs by the river with our 2 likenesses engraved into the rock.  it could be called Mt. Paluke.  Never mind.  There are enough vandals in this town.  Someone will spray paint a moustache, a phallic symbol or something like that on the carving.

@Dezmin McCoy Wow, a lot of opinions on here LOL. Here are some general Fannie Mae (not lender specific) guidelines.

1. Fannie Mae/Freddie Mac will not allow Conventional loans to close in the name of an LLC. This is not lender specific and applies to any FHFA backed mortgage per the Fannie/Freddie guidelienes.

2. If you are purchasing as a vacation home, it truly needs to be a home you will use from time to time for vacationing and you can absolutely use it for overnight rentals when not using it. If you purchase with 2 other couples then it really kind of turns into a "timeshare" for lack of better word which is not allowable for a Conventional loan. However, if you purchase as investment property instead, it would meet the occupancy requirements and if you chose to go this route the min down payment for an investment property per FNMA is 15% (not all banks allow it, but these are the actual guidelines).

3. If you must purchase with 2 other couples, I do recommend (as did someone above) choosing one representative from each couple to be on the loan.  At the end of the day, if you all want to be on Title, you can be.  Just remember, if something happens down the road and someone wants to sell, or refinance, etc... ALL 6 of you would have to agree and sign.

4. To address the long-standing question and mythical answers of "can I quit claim into an LLC" the answer is yes, BUT

Unless the previous borrower requests a release of liability, the servicer must process the following exempt transactions without reviewing or approving the terms of the transfer:

a limited liability company (LLC), provided that

  • the mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and
  • the LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

The servicer must notify the borrower that a property transferred to an LLC must be transferred back to a natural person prior to any subsequent refinance application in order to meet Fannie Mae's Selling Guide underwriting requirements.

Here is where this can be found under Fannie's Guidelines:  

https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-D-Providing-Solutions-to-a-Borrower/Subpart-D1-Assisting-the-Borrower-with-Property-Related/Chapter-D1-4-Transfers-of-Ownership/Section-D1-4-1-Information-Relating-to-Transfers-of-Owner/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer/1041300841/D1-4-1-02-Allowable-Exemptions-Due-to-the-Type-of-Transfer-09-09-2020.htm?touchpoint=guide

And to address the "buying as 3 couples" - I would strongly recommend you not go down this road LOL.  I have worked with many clients who are friends and it can get really rough.  Unless you all have very similar taste/style, think the same way about investing, negotiating, etc... the odds are stacked against you that you would all ever agree enough to even close on a property.  What if a couple of you are more apprehensive but the others are excited?  One of you get's hung up on the fact that a seller won't agree to fix every item on the inspection report, but the rest of you are reasonable and only want major items addressed?  All it takes is one to be stubborn and refuse to sign to mess it up for everyone else.  Only you know the dynamics of your group and I won't say it's never worked, but I will say it's rare.

Hope all of that helps!!

Originally posted by @Alex Sabio :

@Justin Anderson I've used Parker, have you transferred into an LLC?

 Yes, and no issues at all.  I waited until servicing transferred, though.  (Someone today told me it may not be necessary to wait so I don't know if that's necessary to reduce the risk of it being called)