All Forum Posts by: Zach Scherschel

Quote from @Jack Chastain:

Quote from @Zach Scherschel:

As someone that has invested solo with my own capital and in a partnership, I highly recommend starting solo and getting your first prior to partnering and jumping into an LLC. I recommend you have your friend do this as well, then, if you're both still on board with the plan and have learned lessons individually, open a 50/50 LLC.

I had 4 investment properties before getting into an LLC partnership. I had an established system that worked, decisions that were timely and didn't have to define/redefine any roles. My partner I started the joint LLC with for a bigger property, hadn't invested in RE solo and it created a steep learning curve for us. Roles and responsibilities, communication with 3Ps and decisions were all learned through mistakes and we eventually sorted it out but the pains you go through on both your first REI and partnership, may drive you away from investing more long-term.

Start small, as referenced by @Hamp, house hack or acquire a 2-unit and live out of half. Then, once you've learned some ins and outs, scale in a partnership if you think its still for you. Make sure you have a sound "operating agreement" (OA) when you do so and define Roles/Responsibilities prior to purchasing with anyone. 

Happy hunting, hope this helps!

Thank you for the response. I do not have much capital, as I have been paying off student loans. Would it be smart to open the LLC on my own and have 100% ownership, in order to use capital from the LLC? I think that is the only thing holding me back is the limited capital on my end and that is why I am looking into using an LLC to gain access to outside lending.

Hey Jack, as an individual investor in a single piece of REI (some will argue, this is my opinion) it isn't necessary to have an LLC to purchase nor does it provide much other than an additional tax filing for you/your CPA to take care of. An LLC is simply a "pass through" entity, meaning the government is just going to look at it as if it were your own personal income, so while your LLC will hold a separate business account and money, realistically it will just look the same as you making that on your W2.

Some will say that it offers an additional layer of legal protection if you were going to get sued due to negligence or an injury at the property, however, an umbrella insurance policy (which I recommend), will offer the same protection, if not better protection, than an LLC will initially.

All of this to say, an LLC doesn't solve the problem of limited capital. If that is a hindrance, I'd look into creative financing solutions, house hacking, seller financing, private capital/promissory note from someone that does have excess capital, etc. In the beginning though, buying without an LLC is much easier and more streamlined for you than purchasing REI through your LLC.

Hopefully that helps a bit, feel free to message me on the side if you want to chat more. 

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $415,000
Cash invested: $97,000

4-unit house purchased using commercial lending at 7.86% int for $415k with 25% down. Off-market, 4 blocks from hospital, perfect conversion into 2 mid-term furnished rentals (furnishedfinder) and 2 long-term annual leases. Furnished units up from $600-650 to $1,800 and $2,000/mo and long-term leases up from $700-750 to $1,150 and $975. 1 vacant unit converted upon purchase and 3 other leases ending 7/31 for conversion or increase.

What made you interested in investing in this type of deal?

Off-market deal brought to me by my broker/property manager that I work with. He immediately flagged what a great building it was and how far under market rate the rents were.

How did you find this deal and how did you negotiate it?

Off-market, was going to list for $430k, offered $405k and met at $415k. Fully in-house deal at my agents brokerage between him and another agent.

How did you finance this deal?

Commercial loan at 7.86% and 25% down.

How did you add value to the deal?

Worked with the selling/buying agents directly to understand the sellers needs/wants, worked with both agents to negotiate down the commission considering it was essentially the flick of a couple pens for them to get it done without marketing or back and forth.

What was the outcome?

Purchased the property at $415,000 and had it fully leased at new rent levels within 4 days.

Lessons learned? Challenges?

Furnishing a 1 bedroom in 3 days is a lot of work. Prep and give yourself a bit more lead time if you're thinking of taking on a fully furnished unit project. Also, expect issues with old buildings, like internet/cable lines that are dead and need to be fixed by the companies.

As someone that has invested solo with my own capital and in a partnership, I highly recommend starting solo and getting your first prior to partnering and jumping into an LLC. I recommend you have your friend do this as well, then, if you're both still on board with the plan and have learned lessons individually, open a 50/50 LLC.

I had 4 investment properties before getting into an LLC partnership. I had an established system that worked, decisions that were timely and didn't have to define/redefine any roles. My partner I started the joint LLC with for a bigger property, hadn't invested in RE solo and it created a steep learning curve for us. Roles and responsibilities, communication with 3Ps and decisions were all learned through mistakes and we eventually sorted it out but the pains you go through on both your first REI and partnership, may drive you away from investing more long-term.

Start small, as referenced by @Hamp, house hack or acquire a 2-unit and live out of half. Then, once you've learned some ins and outs, scale in a partnership if you think its still for you. Make sure you have a sound "operating agreement" (OA) when you do so and define Roles/Responsibilities prior to purchasing with anyone. 

Happy hunting, hope this helps!

Quote from @Ross Bennett:

Really good advice on doing a cash out refi based on appreciation. Question though - would you say that is still a good move with the higher interest rates we see today? I snagged this place when interest rates were still good and the rates I see today look ugly. Assuming if I pull cash out and refi I would be subjected to a worse rate?

Yes, you’ll be subject to the fluctuation in int rates, however, you can get creative and move to 5/7/10 year ARM options that are typically offering a pretty significant reduction to int rate in comparison with the traditional 15/30 yr options.

Something to consider, run the analysis on and see if the math makes sense. Happy to chat through more and assist in that as well, it’s how I’ve grown my portfolio from 0 to 14 units in the last 2 years.

Nice work! The first one is the hardest to pull the trigger on and then once you're in, you're hooked. 

Now, I'd use that appreciation as leverage and pull some of the cash out of your first investment to help fund the next one! Look at your rent levels differently as well, for more cash flow from your first. Frequently, property managers will only look at like units, take a look at median income for the broader area and take 33% of that for what might be feasible and "test the market". 

Great work!

Learning, listening, mentorship, process and refinement. It's an entrepreneurship, regardless if you have a full-time job still, taking the risk and then taking action based off data and advice is critical. Knowing that I wasn't the first to do it and then building a network allowed me to avoid critical pit-falls. Oh, and BP podcasts and forums!

@Daniel Hinojosa aligned with what @Mike Smith mentioned. 

Additionally, these closing costs are incredibly high, are you buying down points or is there another factor in there? For a 2-unit, I wouldn't expect appraisal/inspection to cost more than ~$1,000-1,500 total, Loan Origination Fee somewhere between .6 - .7% of loan value, and lender legal expenses ~$400 - 600. So without further information, I'd be looking vetting some other lenders. 

As an example, I'm closing on an 8-unit complex in WI currently, where the all up closing costs are $5k total. 

Also, is the Leasing Fee something that the Property Management company handles at a fixed cost? Most will build it into overall monthly expense or charge a % of Gross Monthly rent for the unit their leasing. Maybe yours has a different set up, which might be good but if they're charging you $130/mo for a leasing fee and you're generating $1,650/unit, you might want to look at the math on that and negotiate, ie if you have a tenant living in both units for 2 years, you've now paid $3,120 in Leasing fee for them doing no work vs potentially paying a 1-time Gross Rent multiple for a leasing fee when they need to find a new tenant. 

Hope some of this helps! The rest of the analysis looks good! 

If you're looking out of your primary state, I'm assuming you're also going to have the property managed by a company - I'd lean into your property management company and ask for their list of lenders and potentially any out of state investors they manage for. 

I do all of my investing out of my primary state and got a list of lenders from my property manager on the first purchase and have used the same lender for the rest of my purchases after. 

Just another way to use your network!

My business partner and I live in WA and WI respectively, you can call a local lawyer in either of your states to establish your partnership/LLC in one or the other, the person in that state will just have to be the "Registered Agent" of the LLC and have their home or office established as the "Principal place of business" - you can also ask the lawyer you establish the LLC through, to put their office as the "Registered Agent".

While working with them, I'd just ask if there are any limitations on where you can potentially purchase properties - to date, we have LLCs established in both states with properties purchased through them outside of the two primary states. This is what has worked for me, although is certainly not legal advice, as I'm not a lawyer, just my experience!

Hope it helps!

If you haven't, I recommend starting with some reading/e-book listening to Best Ever Apartment Syndication Book by Joe Fairless and Raising Private Capital: Building Your Real Estate Empire Using Other People's Money by Matt Faircloth. 

Both have provided a lot of initial insight and value I've put together a business plan and started developing a team for this. If you're past this stage but haven't read either or both of them, still great value to add to the list of research you've done. 

Best of luck!