All Forum Posts by: Greg Scott

The best strategy is to not quit your day job until you've built a portfolio big enough meet your income requirements.

You have three potential paths.  1) Build an active investing business, something that takes time. It is also not a linear path, so there will be bumps along the way. You will need a pretty good buffer.  It is best to have other income coming in. 2) You could just invest passively.  Since returns won't be as good, you will need several million dollars deployed to meet a $300k salary. 3) A hybrid of active and passive.

I was in a similar situation. I had moved some properties into the LLC but then had to move them back into my name to refinance and left them there, getting good insurance and umbrella.

I shifted to using my LLC as a management company. I signed a little agreement that my LLC would manage the properties and ran all revenue and expenses through the LLC. When the LLC had too much cash, I just gave myself a distribution.

Does this help?  (see pics)

Calling it a "Fund" means you haven't identified a potential purchase target. Many people won't invest in funds, including myself, and those that do only invest with people that have a long track record. You are much better off talking about this as a "portfolio" of two properties that you have already identified. You can either put the portfolio into one LLC or create two LLCs, one for each property.

Getting a good SEC attorney is more important than the cost.  In some respects, you get what you pay for.  On the other hand $24K would be ridiculously high.  I would expect to pay somewhere between $10K and $15K for the PPM and filings given your capital raise. (Local PSA work being separate.) If you have a 506(b) offering, you won't need to do the accredited verifications, but then you cannot advertise the deal.

I've worked with three different SEC attorneys. None of them ever considered a Delaware entity.

You are choosing between control and marketing. 

If you spend the time to properly market yourself, you may be able to raise the money, assuming you do it well.  If you abdicate the marketing to one of these platforms, you may be able to raise the money but have much less control over who invests. 

You may say "Who cares? I just need the cash.", but a rogue investor can suck up a lot of time. I've seen some of my friends waste countless hours trying to answer the unending questions of a lunatic passive investor.

Quote from @Devin James:

Quote from @Greg Scott:

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.

I definitely left out a ton of information with the goal of not making this a lengthy post.

But I do question your dislike towards Preferred Returns?

Aside from the misalignment of incentives, this little chart I created shows why I won't invest in deals with preferred returns.

The only thing we know going into the deal is that the returns are projections and projections are always wrong.  They may be high and they may be low.  Most returns will end up in some sort of bell curve like I've displayed below.

Yes, on a middling to poor deal, the passive investor wins out.  With a waterfall return, when a syndicator hits their projection, they are usually getting the majority of the profit.  If they happen to crush it, they get massive returns.  Because I only invest in deals where the syndicator gets a fixed %, I've had passive deals return over 400%.  In a waterfall, that same deal would have given me more like 100% or 150%. 

In the end, my portfolio gives me better returns because I accept the risk of having some deals give me marginal returns to be able to get the massive returns from the home runs.

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.

A radon mitigation system is simply a fan and a duct.  It is about as complex as a bathroom fan. The fan blows the air from one location up and out of the house.  If the fan is working the system is almost certainly functioning.

There are very cheap testing kits that involve opening them and placing them in areas likely to have radon.  The last time we refinanced an apartment, regulations required that we test radon in every bottom-level apartment, which was over 100 units. (What a big PITA!)  We had to place the tests in every unit and then re-collect them a few days later.  To avoid making residents fearful of potential radon, we simply told them that the bank was requiring an air quality test.  Fortunately, no radon was detected.

Smells like fraud.

@Brian Bisdorf

It sounds like you have already decided you want to go the Section 8 route.  In your original post, you asked whether or not Section 8 was a good idea. I pointed you here, where people with decades of experience are telling you there are some significant downsides.

In your other post, you said you were a flipper and this would be your first LTR.  Many of the people on this thread specialize in LTRs.  What sort of due diligence do you think you will be able to conduct on the prospective tenant that these investors have not done?