All Forum Posts by: Jonathan Twombly

@Karell Nixon The best way to get deals is by building relationships with brokers.  This takes time.  But it is more productive than spending time on Loopnet, which is where the bad deals go to languish when the brokers' good clients have turned them down.  Start Googling the brokers in Jersey City, identify from their listings which ones deal in multifamily, reach out to them via LinkedIn, and start to build a relationship.

Reaching out cold and asking for deals will be useless.  They will ignore you. They get dozens of inquiries from unqualified buyers a week.  To get through to them, you need to build a relationship and demonstrate that you are qualified to buy.   You can demonstrate this with a professional looking package that describes you, your qualifications, your team and, very specifically, the kinds of deals you want to buy.  But you only send this to the broker after you have established a relationship with them.  

The best way to start a relationship is to get an introduction from someone you both know.  A personal connection is even better than a professional one.  But be sure you are 100% ready to meet the broker before you take a meeting, because if they perceive that you are a time-waster, you will never get another chance.

There is no rush in this business.  Success comes to those who take the time to do it right.

@Oren K. www.npsrentassurance.com

@RJ 

@RJ Harden

Look up Reed Goossens.  He's the expert on how foreign investors can invest in US property.  He runs an entire podcast on this topic.

@Justin Westmoreland

I got started by syndicating a 102-unit property.  But I was in a unique position - I'd been in the business for a few years and had made investor relationships already.  

But a lot of problems arose that I did not anticipate - namely the net worth requirements for getting debt on the property.  One of my partners had a big balance sheet, and he co-signed on the loan, but even though the debt was non-recourse, it freaked him out and I had to drag him kicking and screaming into it.  After 2 deals, he flat-out refused to sign any more, and I had to find a different balance sheet partner, someone from the real estate world who thought was no big deal to sign on a non-recourse loan.

This experience led me to think about what I would do if I were starting over again.  I would definitely go smaller at first, to start with properties that are within my personal net worth (or within the net worth of a willing partner group) and then build up from there.

You lose some of the advantages of scale this way, namely that apartments under 125 units can be tricky because they require labor costs that cannot be spread over as many units.   But, if you are buying in a single market, you can start to share these costs between properties and spread them over more units as you grow.

And, as you grow, your net worth will rise and you can do bigger and bigger deals, either on your own or with syndication partners.

If I were starting all over, my plan would be to start with deals I could support on my balance sheet alone.  (I'm talking about the debt here, not the equity, which I would still syndicate.)  As my net worth grew from the carried interest I would get on each deal, I would try to make each deal just a little bit bigger than the last one.  I would definitely stay in one market until I had enough units there to make all the investments very efficient, and then I would consider moving to another market and establishing another node.

I really encourage people to think big.  Do not stay within small buildings.  But start there, and then grow to bigger and bigger properties over time.  I think this is a sustainable way to do things.

@Eric Smathers Chris O'Neal of Moody & O'Neal CPAs in Mt. Pleasant.  They are a commercial real estate tax firm and have been assisting me as long as I have been in the business.

@Ralph E. Ralph, @Chris Martin is correct.  

Liability insurance and limited liability are two different things, and if you're in business you need them both. Let's say you have your property owned by an LLC. The property is worth $200K and you have $500k of liability and umbrella coverage on the property. What happens if someone slips and falls on the property, suffers a horrible injury, sues for $1 million, and wins?

In that case, they recover $500K from your insurance, and they take your property and that's it.  Even though the award is more than the insurance and property value combined, they are limited to that recovery.  That's what "limited liability" means - your liability is limited to the asset.  

Now, what happens if you have $500K of insurance, and no LLC - you own the property in your own name. In that case, they get the insurance money, the property, and they still have a judgment against you personally for $300K. In many states the statute of limitations on judgments is 10 years. So, for the next ten years, they can garnish wages, come after other property you own, etc., until the judgment is fulfilled. Unless you have the assets to pay them, you're probably looking at personal bankruptcy.

What happens if you have no insurance and an LLC? The plaintiff gets the property and that's it. Your liability is limited to the value of the property. They will probably sue you and try to pierce the corporate veil, which requires them to prove that you didn't really operate the LLC as a separate entity, so to avoid that, you must keep really good books and observe all corporate formalities.

Before you go and say that you don't need insurance if you have an LLC, stop right there. Most claims are going to be for less than he value of the property. Without insurance, you will pay any claims out of pocket - or rather, the entity will. You might have to sell the property to raise cash to pay the claim. And, in any case, if you have a mortgage the lender will require you to have insurance to stop this possibility from happening. So you can only get away with having no insurance if you own the property outright. And, sometimes, if you have no insurance, the court will cite that as a factor for piercing the corporate veil. So it's best to be insured too.

Of course, you also need a casualty policy because your liability policy and limited liability entity don't protect you from damage that happens to the property from storms, accidents, fires, etc.  

And insurance does not protect you from claims by creditors, such as workmen who are not paid for work on the property. Only a limited liability entity protects your personal assets from them. Of course, if you give personal guarantees, they can go around the entity to get paid. But assuming you don't, their only recourse is against the entity that hired them: your LLC.

SO, in sum, insurance and limited liability serve two very different, but complementary purposes. The confusion comes from the fact that the word "liability" is in both. Liability insurance pays a plaintiff on your behalf - up to the policy limit - if you are found liable. Limits liability entities (Inc., LLP or LLC) protect you by limiting what you must pay a plaintiff to the value of the assets inside the LLC, shielding all your other assets unless it can be proven that you played fast and loose with the LLC.

And just one last word on this subject. Gurus create this misunderstanding because they encourage people to get LLCs for TAX AVOIDANCE reasons. They tell you to avoid taxes by running personal expenses through the LLC.

This is EXACTLY the sort of conduct that will convince a court that you disregarded the legal separateness of the LLC so that the corporate protection should be waived and your personal assets exposed to recovery by the plaintiff!!!!

Don't do it.  

@Junior Salters The upstate is a hot area these days.  Cap rates are very compressed.  I'm surprised, though that the cap rates are so low for such a small property. 

Is it a C or C- property?  That really strikes me as low.

@Tony Loiacono

I'm a little concerned about you getting all the depreciation benefit forever in return for signing on the debt.  You will wind up with tax loss carry forwards and your partner will pay tax on everything.  Eventually, your partner will think this is extremely unfair and it could cause a rupture in the relationship.  I'd look into a different way to compensate you, like giving you a little more equity.  If the debt is non-recourse and subject only to bad-boy carveouts, then your risk is pretty well-contained.

If you are going to the trouble to negotiate what looks like a pretty complicated agreement, why not go ahead and do an LLC? Even if the majority of your assets will be in this deal now, if you are successful, it won't always be that way, and you will also want to start safeguarding your assets from each other as well. What you are overlooking by counting on umbrella insurance to protect you is the possibility of a liability award where the award exceeds the insurance. Without an LLC, your personal assets are on the hook, and in some states, the plaintiff can have up to 10 years to collect the judgment, so your next investment, the wages from your next job are all on the hook. The other thing is that insurance only protects against insurable losses. What if the creditor is not an injured person but a tradesman you cannot afford to pay? If they are dealing with you in your personal capacity, then they can just go after you personally. They don't even have to go after the property if they don't want to.

Basically, an LLC and umbrella insurance are not a choice. They serve different purposes. Insurance is to shift your risk to someone else for an insurable event. An LLC is to limit all your liability to the contents of the LLC, no matter the reason. You need to have BOTH, not one or the other.

No, not from a legal point of view.  It's a good idea to have a legal entity for liability limitation.  But you can always do business in a personal capacity.  It's called a sole proprietorship.  But you have unlimited liability if you do it that way.

Most states will allow you to do business as a foreign (i.e., foreign to that state) business, but many if not most require you to register your out-of-state entity in the state in order to get limited liability protection in that state.

@Tyron White  Slow and steady wins the race.  You have lots of time.  A plan of slow, manageable growth will lead to a fortune in time.

The best way to make money is not to lose money.  So be conservative and cautious.  Avoid the temptation to use too much debt.  Leverage accelerates returns when things are good and accelerates losses when things are bad.  So use it judiciously.

Never invest only for appreciation.  Only invest for current cash flow.  If anyone ever tries to get you to buy a property because it's going to be worth a lot more in a few years, find a way to politely end the conversation.

Learn how to analyze the cash flow from properties so you can invest for cash flow.