All Forum Posts by: Sam Alomari

Hi @David Campbell

Well, 50/50 is not necessarily a disadvantage even if you qualify for financing mainly for 2 reasons:

1- The deal is not going to happen without the investor's down payment

2- You are not paying back the mortgage from your own profit. It will be paid by the tenants, so you are building equity!

Is your partner funding the deal as a loan to the LLC? You can convince the investor to give you the $40k as a loan for as much as 10% interest. You'll pay back on 5 years and have 100% control. You won't make much money or no money at all during the loan period but you get to enjoy all the profit and the equity later.

If the investor is only considering equity partnership, then I suggest to lock his equity at 25% and structure the agreement so that it's 50/50 profit split until the mortgage is paid off then it's 25/75 profit split. Since you won't have the mortgage as an expense and since you are expecting to increase your rent over the years, his 25% after the mortgage is paid off is much higher than the 50% profit he is making now, so he should be happy.

If you decide to sell the property or if you wish to refinance once the property appreciated, you own 75% equity so you pull 75% of the refinanced amount.

If your investor is not interested in such structure, sometimes you have to accept less favorable agreement especially at the early stages of your investing journey. a 100% profit of zero is zero! so make your partner happy because without him your profit is zero.

Recently, an investor approached me and offered 25% EQUITY and 25% of the net profit while he will be funding a 100% of the total acquisition and rehab cost. I offered him the loan option but he simply said "I don't want my money back". He realized that he needs me to make it happen so he is willing to give me 25% for finding the deal and managing the whole process. It's a win win!

BP members can always give you many ideas, but I always recommend to run any agreements by your lawyer and CPA for professional advice.

Hi @Steve Crisp

Don't let it go for foreclosure! You have many options. 

1- List it with an agent for $25k

2- Sell it with a wholesaler

3- If you have the money, you probably need $10k to get it rent ready, then have a property management company manage it as a rental

4- You can offer rent to own after making minor rehab (what I call lipstick on a pig rehab)

5- You can sell it as subject to existing financing and collect a down payment. Someone will pay you a small down payment and make monthly payment to the mortgage

6- My favorite! Sell it with seller financing! You will find someone to pay you $30k for a seller financing deal, and you can charge interest! I've done this before. You can request $2000 - $5000 down and offer seller financing for 5 years with 8% interest. Then you can take that down payment and apply it to your Mom's mortgage balance.

I'm editing my comment because I just got another idea for you :)

7- Partner with a flipper. Yes the profit margin is small for a flipper if they have to buy and close on the property. Find a flipper to partner with you, you have the equity and they put the $20k rehab cost. Then you both will sell it for the market value (let's say $50k) and you both split 50% each ($25k minus 50% of closing cost). You will pay the $17k and walk with some cash in your pocket. A flipper won't mind $20,000 profit on $20,000 investment! That's 100% ROI!

@Tommy Spijkers Ops, I just noticed that you are targeting multifamily apartments but your cost per door is $40k-$45k. It's doable but again, I'm always concerned about the source of funds and if the investor is over leveraged then most of your income is gone and you still take the risk.

I personally like to set small achievable goals so that I can always assist my journey and adjust. It is very frustrating when you have a big goal that you are chasing. Your short-term 5 years goal is to own and manage 50 units. That is 10 units a year so it's probably easier to target one or two apartments buildings instead of multiple multifamily properties.

Many investors have done it and killing it everyday so you can do it as well.

Hi @Tommy Spijkers

I like your plan and I like people who invest the time to plan their investment strategy years ahead of time. However my key question here, do you know for a fact that banks in your area would be interested in financing $40k properties? In my experience, banks don't touch anything less than $50k.

Also how would you qualify for all your target properties? There is a limit on the number of mortgages banks can give you unless you have a good connection in a small local bank. Even small banks want to see a portfolio and a track record before financing your properties.

I'm not saying it's not possible, but you will be over leveraged and I don't see how it's possible without private money and partnerships.

Good luck

Hi @David Campbell

Congratulations for partnering with your first investor. Before asking about the form of partnership, I'm more concerned about the deal itself.

When you say $1,000 total cashflow I assume it's before any debt service, insurance, maintenance, management, vacancy and taxes. Please clarify.

I'm not familiar with your local market, but if the down payment is $40k, I assume the total price is $200k so you'll have $160k leveraged.

I always run the worst case scenario for my investments, but for the sake of this deal, let's run the best case scenario!

As a new LLC, and your first deal, I don't know that you'll find a bank to finance $160k but let's say you found a great financing for 30 years @ 5% interest rate. Let's plugin the numbers!

Mortgage: $856, Maintenance: $100, Vacancy: $100, Taxes:$167 (assuming 1% annual), Insurance: $125 (arbitrary number), Management: $0 (Self managed)

Your total monthly expenses: $1,348

Please note that we didn't account for CapEx or paying back your investor or even the LLC registration and maintenance! Again what do you mean by $1,000 total cashflow?

In case you meant $1,000 net cashflow after all expenses for the worst case scenario possible, then who is qualifying for the mortgage? If you are using your credit, then do you want to take the risk and the management headache but still get paid only 50%?

If your net is $1,000 and your investor is 100% passive and just putting $40k into the deal, his 50% profit is 15% Net ROI which is amazing! Most passive investor would accept 8%-10%

My point is, make sure you have a great deal before using someone else's money. Heck if you pay me 15% ROI, I'll put the $40k! LOL

Good luck

Hi @Jared Baker,

I agree with @Daniel Rutledge but I have 2 conditions that I would stick to before I make such a decision and not contribute to 401k or IRA plans offered by employers:

1- If your employer doesn't match your contribution.

2- If you are good with managing your money and confident that you can do better ROI on your own.

If your employer matches your contribution, why would you say no to free money? and if you don't know how to invest or if you might spend the money on a nicer car or piece of furniture then what's the point of spending after tax money on liabilities instead of assets?

Have you read Rich Dad Poor Dad? 

Best,

Sam 

Hi,

You missed insurance and taxes. Personally I acount for 8% vacancy, 10% maintenance and 8-10% CapEx, but CapEx depends on the property age so you need to figure that out. If you want to hold it long term, you need to do the math because you'll nees to replace tge roof, windows, water heater, and furnace at least once, and if you have carpet that will be replaced more frequently. Also you need to consider the turnaround cost after a tenant moves.

Where I invest, to evaluate the deal quickly, I consider 50% of the gross as expenses, then I calculate my ROI.

ROI= (annual rent x 50%)/acquisition cost.

If you have a debt service (mortgage) on the property, you should add it to your expenses.

Hi, is this your first investment property? I would eat up the cost since it's only a few hundreds. Maybe if you bought home warranty at timr of closing they'll fix it, but seriously if few hundreds are going to affect your ROI, the the deal isn't that good.

Hi @Troy Pirsich

Personally, I like buying in the winter. Here are some reasons to consider:

1- People don't move during cold weather, schools already started in September, everyone settled so a vacant property will cost the seller holding fee. So I get a discount.

2- Investors don't like managing rehab projects during the winter, so they shy away from such deals. I have less competition and my offers are likely to be considered.

3- I can save on rehab cost (labor is cheaper). Contractors usually give a decent discount because they aren't busy during cold weather

4- If the property needs a full rehab (2-3 months), you'll get it ready right before spring.

The two disadvantages I personally experienced:

1- If you buy a rent-ready property, you need to account for a longer vacancy. If you find a tenant, usually they'll sign an annual contract, so you have to deal with a vacant property next year during the winter if that tenant doesn't renew.

2- Higher vacancy during cold weather means a higher gas bill to keep the house warm enough to protect the pipes. 

Hi @Malia B. ,

Please understand that I'm not a lawyer, CPA, or a certified financial advisor, I'm addicted to the stuff but please seek professional advice and make sure you pick a good advisor because most of them aren't good. Having said that, please forgive me if I mistakenly misled you or provided false information :)

It's a very bad idea to hold real estate in a self-directed IRA or any retirement plan (from tax saving perspective). Real Estate by itself is a tax shelter, and the idea of holding a tax-shelter inside another tax-shelter actually cost you more taxes (-1 X -1 = +1).

Also, I learned that you can't depreciate the property over 27.5 years for residential and 39 years for commercial when it's owned by your IRA. The IRS already assumes that you are taking advantage of a real estate depreciation tax-loophole (advantage) whether you did or not! If you decided to sell the property, depreciation recapture tax will be triggered, so you will pay taxes on the depreciation advantage that you never claimed.

I strongly suggest that you read "Tax-Free Wealth by Tom Wheelwright" and "Loopholes of Real Estate by Garrett Sutton". Both are great resources and eye-opening.

If you really want to invest in real estate, you can open a self-directed solo 401k and borrow (up to 50% of the plan value or $50,000, whichever is less), and invest in real estate. Your solo 401k will receive interest, and you make money and enjoy tax benefits by holding your real estate in your name or your LLC (better asset protection). Believe me, $50k is very good to invest in cash-flowing properties in the Midwest.

If you don't want to borrow the money and buy real estate, you can lend it to investors and make passive income to grow your retirement plan!

Best,

Sam