Is this strategy Legit?
Hey guys, I want to apologize if a similar strategy has ever been discussed, I've been a floater on the forums for a long time now and haven't seen anything like this, so I decided to actually post for the first time. Even if this question has been asked before, I think my story is unique enough to be entertaining at least.
About three years ago I was approached by an investor who had done 4-5 deals, all long term holds, I'll call him Mike to protect his identity. He and I became quasi-friends over time and I actually looked to him as a mentor. He introduced me to real estate investing by telling about his rentals and how he got into it. He never offered to take any money from me or point me to any specific properties, he only recommended books for me to read and answered general questions for me. I decided to make the leap into real estate largely thanks to his teachings and bought several properties on my own. Again, my deals were not linked to him in anyway (you'll see why I'm putting emphasis on this later).
Two years went by and out of the blue he invited me to go to Vegas with him. It actually lined up with a bachelor party the few days before so I agreed. Looking back and telling the story now, it sounds like an episode of "American Greed." He paid for everything, the flight, the food, the hotel and even gave me an apple watch when I showed up. Then he told me the reason I was there was not just to drink and gamble with him but actually to meet his partner. I had heard of his unnamed partner several times before, but all I knew was that he was a deca-millionaire and Mike's mentor who owned a lot of real estate. I showed up to this arranged meeting wearing a suit, and I'm glad I did because they were wearing custom $2K suits in this low lit bar. At first it was an intense interview of me, and then we ate dinner and I was told to go back up to the hotel room or go back to the gambling floor while they talked. Later I got a text to return and when I came back things were more relaxed, they said they had discussed it and that I was "in." So that's when they started telling me their plan, and why I'm here asking if this is legit, because it sounds crazy.
Their plan was to tag team a property, each with our own LLC's. The first guy's LLC would find a great deal, high rent possibility, low price, good area etc. He would buy the property at low cost (preferably at auction) with 20% cash down.
For illustration purposes say its a $100K property, guy #1 finds and buys the property putting down $20K and borrowing the other $80K from a bank.
Guy #1 would renovate/repair if necessary and put a renter in there with as high rent as possible then put it on the market. Guy #2's LLC would come in and put in an offer at as high valuation as possible, whatever his bank's appraiser would allow. (funny how appraiser's price matches the offer isn't it?)
Illustration: Guy #2 offers $200K. Guy #2's bank approves with 20% cash down. Guy #2 pays $40K his bank pays $160K. The rent is covering the mortgage.
So now Guy #1 is getting paid $200K, pays off his $80K mortgage and now has $120K cash free and clear. Guy #1 pays Guy #2's LLC $40K after closing and so now Guy #1 has $80K profit, and Guy #2 has a solid cash flowing property for 0 money down.
Guy #3 has spent the whole time saving up his own $20K down payment to buy another property and repeat the process, except that now Guy #1 has the funds to come in and buy Guy #3's property 20% cash down.
Rinse and repeat until all 3 guys have cash flowing properties and a solid $40K in their bank accounts. Then restart the cycle again and again until each guy has 5 cash flowing properties worth $1million and $200K cash, 100% OPM (because the banks shoulder it). At that point stage 2 would commence where we form a trust combining the 3 LLC's (now 15 properties total, book value $3 Million). The trust can do other things such as leverage their portfolio or even REIT and IPO.
My obvious question was how do you transfer large sums of cash between the LLC's? Their plan was to let the process take place over several years and via several methods. The 10K cash/year "gift" rule, employing the other LLC's services for repairs and renovation, and other means of which lowering the tax burden as much as possible, but still being legal.
I thought about it a lot, and risks were that I end up buying a dump at the higher valuation and they cut fence and run without giving me "back" my down payment. But they assured me that, 1) why would they "run" from a machine that is working and generating cash over and over again, and 2) every property would be considered and approved by the group before being put in rotation, so we would each agree that it is worth the higher valuation before giving the go ahead to move forward and so the worst case scenario is that I would be left with the deed to a cash flowing property.
Help me out here, what do you guys think?