All Forum Posts by: John Blackman

Hard Money lenders will usually only loan up to 70%-ish (varies by lender and terms) of the current value of the property. You will need to come up with the remaining 30% somehow.

Many HMLs don't care of you are good or not. They have your property at 70% of cost and if you fail to make payments, they get the property at a discount, all the more gain for them.

I am ok using hard money for short term flips. At the end of the project it's usually still not that expensive, especially if you are only borrowing for a few months.

My primary advice for you would be to make a money map of your project. Know how much money you will need for every week and phase of your project. Include interest payments to the money lender. Be sure to schedule your draws so you can get your money pipeline full so you aren't waiting on cash. Once you have your money map all set, add 10% across the board for your first one. You can make this smaller as you do more projects.

It is important to keep in mind that most money lenders will not advance you the funds to start your rehab. So you'll need 30% of the cost of the un-rehabbed property as well as enough cash to start phase 1 of your rehab. The HML will then reimburse you for your first phase of rehab work when it is complete to the HML's satisfaction.

Once your rehab is complete, you'll also need carrying costs until it sells, and if you cross a calendar year you might need to pay taxes too. With your money map and schedule planned you should have the confidence you need to start. Just follow the plan, and try to hit 90% of your inflated budget. You should accumulate a margin of error as your project goes one. That margin is your safety net that doesn't require going to a credit card or family member.

Once the cash starts moving, the game is on. Good luck.

An LLC agreement is probably your best bet, but your Real Estate lawyer will be able to tell you. Most of your operating agreement in Texas will be boiler plate language. The key points you will want to get clear are (imho):

1) Equity split - keep in mind that legally these percentages apply no matter how much extra equity is contributed to the project after you sign your docs. In almost every deal I've done, some extra cash usually comes into play after the initial amounts are contributed. So make sure you contribute in amounts equal to the shares specified in your equity split in your operating agreement.

2) Control - This one is the most important. This will hamstring your project if things go sideways. I prefer to let one person have final control even if it's not me. You have to trust that person obviously, but the old saying of too many cooks in the kitchen will start to drag your projects. Time delays are a loss, you'll make change orders, those are a loss. Making a small mistake with a dictator in my opinion is less expensive than having three people argue about finishes for two weeks while your GC is waiting for you to get your ducks in a row. Dictatorship is the best form of government when it comes to construction. You can mitigate this with good planning so your GC can make progress without having to get details or decisions from you.

There are many other nuanced points of your operating agreement that you will want legal counsel for. The two above are the most important in my opinion.

Something else to be careful about is tax time at the end of the year. If you do a lot of these with different partners you will end up complicating your tax prep significantly which will cost you.

Good luck with your investment,

The Fed typically does not move their rate more than a quarter point at a time. If they do two quarter point moves back to back I might start to worry. Bernanke is a inflation wrangler and still needs to keep rates low to make the 'recovery' stick. The economy is getting better, but we're not out of the woods yet. You should have plenty of time to see rates start to go up. I'm not making a prediction, but make sure you can get out of your deals in 6 months or less and you should be able to handle any inflationary spikes.

I believe you can do this, but only up to a certain amount of equity. The bank is likely to be very conservative with the property value and will not likely let you cash out more than 80% of the value of the property as determined by the bank. This does depend on the bank though, both rate and property value.

There may be some special restrictions for HUD homes. I don't know what if any there are. I'm sure your refinancing institution will let you know.

Just to give you some heads up. Refinancing right now is taking a long time. Most personal refinances are taking about 3 months. I just finished refinancing my personal home this week, and I started the voyage on November 15th. Your mileage may vary of course.

Also doing a cash-our refinance may freeze your ability to refinance for some time.

All of that being said, if you have a lot of equity in your house, now is a great time to refinance as rates are very low. As long as you believe you can confidently generate a return with that cash higher than your financing rate, then it's a smart play in my opinion.

Hi Mike, I'm also a recent returning user. There's a wealth of info and great minds to pick here. I'm already getting to know folks and saving time and mistakes from the contacts I'm making here.

Welcome!

I have the same problem and after a few of these do not include partners in LLC deals unless I know and trust them and they bring partner level value to the transaction. Partners will take on the risks and associated management duties of the business. If you want your family to participate in these deals in a passive way, I suggest a simple unsecured promissory note with a fixed rate of return that is less than the performance of the asset you are going to use the money in. The difference is yours for sourcing and managing the deals.

This way you have simple fixed debt on your books and your assets cover it. Send them a 1098 at the end of the year. Simple as that.

They don't have any recourse if something goes wrong as the note will not be attached to the asset. This will only work for friends and family who trust that you aren't going to bail on them.

For non friends and family investors you can go through the LLC route, although after trying this a few times, I will never do it again.

The other route is to offer a private placement. That is a lot of work and expensive, but the right vehicle for raising a substantial amount of capital.

The above is just my experience and certainly not a hard fast rule. There are a lot of ways to do this.

So I need to find a RESNET qualifier to certify the property. Time to go vendor shopping. Thanks Steven.

Is anyone aware of how to qualify a home you built as energy efficient via this irs form?

http://www.irs.gov/pub/irs-pdf/f8908.pdf

My tax accountant mentioned this to me and this is the first I've heard of it. Austin does require you to pass an energy audit in order to get your certificate of occupancy but those standards may not meet the same federal guidelines.

Here is the key text from the pdf:

50% energy efficient standard. The credit is $2,000 for a dwelling unit that is certified to have an annual level of heating and cooling energy consumption at least 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit and has building envelope component improvements that account for at least 1/5 of the 50% reduction in energy consumption. A manufactured home meeting the requirements described above and the Federal Manufactured Home Construction and Safety Standards (FMHCSS) requirements (see 24 C.F.R. part 3280) is also eligible for the $2,000 credit.
Comparable dwelling unit. A comparable dwelling unit:

• Is constructed in accordance with the standards of chapter 4 of the 2006 International Energy Conservation Code as such Code (including supplements) was in effect on January 1, 2006,

• Has air conditioners with a Seasonal Energy Efficiency Ratio (SEER) of 13, measured in accordance with 10 C.F.R. 430.23(m), and

• Has heat pumps with a SEER of 13 and a Heating Seasonal Performance Factor (HSPF) of 7.7, measured in accordance with 10 C.F.R. 430.23(m).

All of our AC and heating units are SEER rated 13 or higher, and I found the construction codes for the IECC chapter 4 and in reading them we appear to meet all of those requirements. However I don't have a piece of paper that says we passed them all from a 3rd party inspector. I have the energy audit from a 3rd party inspector for the City of Austin's requirements.

Does anyone know if such inspectors exist, how much they cost, or what proof is required to claim this deduction? This could be a significant tax savings and I think it's a great federal program to make sure you build efficient homes. I know I am certainly incentivized to get the credit assuming it doesn't cost me more than the price of the tax savings.

Thanks in advance,

I use IRAServices as linked above. They are very hands off. Once you have it all set up, you're ready to get to work.

You do have to be careful with the tax implications of using SDIRA money as well as borrowing with an entity that receives funds from an SDIRA. IE, better not to do it.

I've also heard good things about solo 401ks but don't have one. I'm not too keep to switch as my SDIRA is working for me for flip projects that I use the capital for. I don't use the capital for any buy and hold, it's all flip projects.

I like www.wix.com as well. It's in HTML5 and has some great plug-ins that allow you to embed Dropbox folder, WordPress blogs, cash registers and lots of other useful tool.