All Forum Posts by: Account Closed

What is your relationship with the investor? Do you want the best deal you can get, or are you concerned with being fair to a friend/family member?

If you want the best possible deal and they are happy with 10%, I would give the investor an equity interest since you'd likely have to pay 10% for debt financing from other sources. All things being equal, equity investors typically require higher returns since equity is riskier than debt. Since your investor's upside is limited, you are able to issue relatively "cheap" equity. Others' views may differ.

You should really get a lawyer to draft the operating agreement since it sounds like you plan to do this for multiple properties.

(As an aside, how do I tag someone's name? Can't seem to make it work.)

@zacp.,

While 10% is obviously a better return than whatever your investor might be getting in bonds or a savings account, it is not a great risk-adjusted return. A lot depends, however, on whether you are giving your investor debt or equity. If he has a secured, first position lien, then 10% is solid, close to market return.

But if you are giving him equity and capping his return at 10%, then that is not a fair split because he has all the loss exposure. I would say a 50/50 or 60/40 split of the profits is much closer to "average" (if there is such a thing) between the money guy (him/her) and the sweat equity guy (you). Look at your example. Putting aside whether the numbers are realistic, the investor's upside is about $3,000 with all the risk, while your upside would be multiples of that with no money in at all. It's a "bad" deal because better terms are available and the risk and return are disproportionately skewed in your favor. But, if he's happy with it, great.

Zac,

You don't have to pay a $12,000 down payment, that equity is already there if the house appraises for $60k, as in your example. So, the simple breakdown is: you pay your investor back, plus interest (let's say $33,000), several thousand dollars goes to closing costs on the re-fi, you pocket the ~$10k net difference between the $48,000 and your lender payoff/fees/etc., and you own a property with ~$12k equity (assuming you could actually resell at 100% gain one year after only putting in $5k).

Yes, it would be a sweet deal for you. Not so much for your lender, which is why the vets are expressing skepticism.

If the judgment is in the five figures, talk to a Virginia attorney. If it's less, probably not worth it, sorry to say. Make sure your judgment is perfected against any real estate he owns in VA. In some states, you could hire an asset investigation firm to see what assets he might have and locate his employer.

If you farm it out to an attorney, make sure you pay a contingency fee versus hourly rate. Fair warning that most collection attorneys run very high volume practices focused on picking the low hanging fruit (this doesn't sound like it qualifies). All of this depends on the size of the judgment and how much time you want to spend. General ideas, not legal advice.

Now that "@Daniel Guillermo" says that, I got the name wrong - I am also with IRA Services Trust Company.

@Adam Demchik I use IRA Trust Services and can highly recommend. When I was researching this earlier this year, they had the lowest fees which was my main criteria. They have been responsive to my few requests, but I set up an IRA LLC, so I don't have any involvement with them at this point other than the $40 or so quarterly fee.

I had to go back and forth with them some on the form of my LLC operating agreement, so if you want a copy of the agreement they've approved (saving yourself the exorbitant $5,000 or so fee that the attorneys that do this sort of thing charge), send me a PM.

The tenancy/JV question depends on PA state law, but that would be a reasonable structure in GA. Safest course is for both of you to be on the title, depending on your relationship, although technically you could take title in one name and file the JV agreement cross referencing the deed, so as to give notice of the joint interest. examples of why you might take in one name only is if one of your is investing through an sdira (limited to non recourse financing in event of refi), potential 1031 exchange, or one of you has legal issues.

I had this come up on my last flip. Property appraised at $5k over purchase price but underwriter first asked for a list of repairs and then receipts, claiming profit margin was too high. I provided rather than risk delaying closing, after obtaining assurance that info would not be provided to buyer. Closed without a hitch. My impression is that underwriters are concerned with papering files for sale on secondary market based on recent lawsuits requiring mortgage buy backs.

I like IRA Trust Service Co. Cheapest fees I found in researching the big players (my main criteria) and quite responsive.

Chris,

From a rehab-and-flip perspective, this would probably be a pass, based on the purchase price + estimated repair cost being a too-hefty percentage of ARV (87%). Most people aim for 70-75%. While that's not your plan and certainly not the end of the analysis, it is a factor that you might want to consider as far as whether you are getting good value and if this deal is worth doing.

The easiest way to determine cash flow is to plug your all-in price (purchase + rehab costs), interest rate, estimated taxes and insurance into a (BP's!) mortgage or investment calculator. That's your rough monthly break-even costs. Then account for a hefty vacancy and repair charge by discounting your estimated rents by x percent. The difference between your discounted rents and your costs is your estimated cash flow. I'm sure this is laid out more eloquently and in more detail in @chrismusic's thread.