All Forum Posts by: G. Brian Davis

Hey @George Drexel, I spent many years as a mortgage loan officer. The rule in the industry is that you must live in the property as your primary residence for at least the first year.

After that, you can move out and hold the property as a rental. But the other posters in this thread are correct, if you apply for an owner-occupied loan and never move in, you're committing fraud.

Best of luck!

Hi @Tyler Henkel, you have a few options.

If you go the software route, that's a strength of our own (free) software at SparkRental, or another strong option is Stessa.

Alternatively, you can hire a freelance bookkeeper through a platform like Upwork or Fiverr. For our business, we have a bookkeeper help out a little each month.

I would also recommend having a CPA actually prepare your tax return, as an extra set of eyes. The last thing you want is to misreport your taxes and incur the wrath of the IRS.

Best of luck, and keep us posted!

Hey Cain, glad to hear you're getting into real estate investing!

At the risk of bursting bubbles, most primary residences don't cash flow well as rental properties. The general rule of thumb, called the 50% Rule, is that non-mortgage expenses will cost you around 50% of the rent. These include irregular but inevitable expenses, such as vacancy rate, repairs, maintenance, accounting, insurance, property taxes, and property management.

Run the numbers through a cash flow calculator before deciding to keep the property as a rental.

Personally, I sold off all my rentals. It was just too much work and not enough money. Nowadays I invest small amounts every month in passive real estate syndications, by going in with other investors through an investment club. No stress or labor, and we each just get a K1 at the end of the year for taxes.

Keep us posted on what you decide!

Hi @Lamar Athill, glad to hear you're getting into real estate investing!

I started my career with rentals. One thing I wish I'd known before buying any properties was how to accurately calculate cash flow. It's not "the rent minus the mortgage." In fact, the rule of thumb in the industry is called the 50% Rule: that 50% of the rent will go toward non-mortgage expenses (vacancy rate, repairs, maintenance, insurance, property taxes, management, accounting, etc.).

I also didn't realize how many different skills were required, from financing to managing contractors to permits to city inspections to managing tenants or property managers. And many others.

Personally, I no longer invest in rental properties. I found it too much work and not enough return. Nowadays I invest relatively small amounts in real estate syndications (passive group investments). I recently wrote about this for BiggerPockets: https://www.biggerpockets.com/blog/dollar-cost-average-real-....

Feel free to hit me up with a message any time!

Brian

Hi @Lynwood Washington, congrats on starting your journey with real estate investing!

I'd be careful about refinancing, as it costs thousands of dollars in closing costs (lender fees, title fees, recording fees, etc.). Instead, you might ask a portfolio lender if they'd forego the down payment if you give them a second lien position on the other property as additional collateral. Alternatively, you could open unsecured business credit lines and cards to tap for short-term use to cover down payments and closing costs (there's a company that specializes in helping real estate investors do this).

But what I really wish I'd known about when I first started investing in real estate is passive investing options, especially syndications. I got rid of all my rentals a while back and now I only invest passively. The two main downsides are finding syndicators and deals to invest with, and the high minimum investment - $50-100K if you invest by yourself. I invest as part of an investment club, where each person puts in $5K per deal and we all get together every month to vet a new deal.

I didn't fully appreciate all the micro-skills required to buy rental properties, when I first started. Arranging financing, forecasting cash flow (it's not "rent minus the mortgage"), managing contractors, managing tenants, managing property managers, dealing with permits and city inspectors - it's a lot more than the average person realizes. I woke up one day with 15 rentals and realized I'd unintentionally built myself a part-time job that I didn't even like.

Quote from @Evan Polaski:

Thanks for confirming, Brian.  While I was trying to be clear about not having any experience with you, I don't know if many people understand the fund of funds or co-sponsor structures and if/how they bring any value.  Particularly with all the 506(c) offerings marketing themselves, and having $25k minimums, as many do, it is a hard sell to see how a Fund of Funds, who will have their own fees and carry make any sense.  

Clearly, what you are doing is different, as it is a membership model first and foremost.  Out of curiosity, are you only investing in 506(b) and Reg A offerings?

Also, if the groups that you are investing with offer any type of tiered structure, are you typically pooling enough capital to fall into a higher tier? If so, are you sharing that capital directly to all the members in your LLC? I have seen some people that don't come in as a GP or fund of funds, but they are pooling $500k+ together, which may get them an 80/20 split versus 70/30. And in these instances, the "fee" the pooler gets is that 10% difference, i.e. LLC collects the 80% of profits, and pooler takes their 10%, leaving the standard 70% of profits for their members.

Great questions Evan. We only consider investments that allow non-accredited investors, which in most cases means 506(b), Reg A, or Reg CF filings. We've also occasionally invested in notes that allow non-accredited investors.

As for better profit splits and preferred returns, we are just now reaching the size to be able to hit the higher tiers. We've hit it on one deal, and are hoping to hit it for this month's deal as well. The higher splits go directly to the participating investors, we don't take any cut. We try to make it very clear that we aren't selling securities, and therefore aren't allowed to take a cut of profits or investments. It's purely a flat fee membership model.

Quote from @Christie Gahan:

G.Brian Davis:  How do you handle funds that due a cost seg study?

Hey Christie, in most deals the sponsor does a cost segregation study, which helps accelerate depreciation. That shows up as an on-paper loss on the K1 for our joint LLC, which then gets split up proportionately to individual K1s for each participating member.
Bottom line: it works the same way for us as it does if you were to invest individually in a syndicate.

Hey, figured I'd chime in as the cofounder of SparkRental :-) 

To clarify: We're not a fund of funds. We're not a sponsor or capital raiser, we don't get a cut of any of the money invested. 

Instead, we charge a flat membership fee. If you think of an old school investment club where members get together every month to discuss and vet stock investments and then invest together, it's like that, but instead of stocks we focus on passive real estate investments. 

We bring in different sponsors each month to vet together and review their current deal. Any members who want to invest can do so (minimum $5K), and we form a joint venture LLC as the singular investor (the limited partner) in that syndication deal. Collectively, we meet the minimum investment for the syndication.

You're right of course that we're at the mercy of sponsors for K1s. We encourage all members to file extensions for their personal tax returns, because we just don't know when each joint LLC will receive K1s. And then an accountant has to split the K1 into each individual members' K1s. Accounting costs are shared among LLC participants, which do slightly reduce take-home returns, but that's the price of going in on these deals together with small amounts per person.

Hope that makes sense, and feel free to message me any time with questions!

Hi @Adonai Howard, happy to connect and discuss how we all invest passively in our Co-Investing Club. Reach out any time!

The restaurant industry is notoriously difficult, so congrats on creating success there. But it also means you should consider diversifying. 

Building a portfolio of rental properties requires both time and skill. It's a side hustle of its own, which is difficult when you own and are trying to grow a separate business. I personally no longer buy properties directly, but invest small amounts ($5-10K) in fractional real estate syndications. If you're not familiar with these passive real estate investments, they're basically group investments where you own a small piece of a large property. 

The biggest downside for the average investor is the high minimum investments ($50-100K). But if you go in on these with other investors (either friends/family or an investment club like ours), you can invest small amounts. That makes it a lot easier to diversify and ease your way in, rather than having to start with large investments immediately. 

Best of luck with the restaurants and real estate investments both!