Company to purchase SFRs?

Question

Howdy!

My goal is to purchase a house in College Station, Texas with 3 other recent grads and rent out to college students. My question is, what are a couple first steps I would need to begin working towards my goal?

I was thinking step 1 would be to start developing a business plan. This will help us define how the business would initially work and evolve. Having a completed business plan will be helpful to present to the bank when we ask for a loan to buy the first rental house.

Is there a template business plan for this kind of company? Would a 25 page business plan be too lengthy?

Step 2 would be to create the company. I haven't done enough research yet to know much about this step. I thought it was necessary to form a company because I have 3 friends working with me, is that not the case? What kind of company should it be? A Partnership? LLC?

Thanks for your time! I joined BP yesterday and I'm loving all the resources and community.

-Jacob Hollister

Eric Tait · Answer

Hey Jacob,

In Houston there are hard money lenders that will lend you up to 70% of the ARV (after repaired value) of the house and then lend you a 75% LTV fannie mae loan as your long term financing. It is possible to have less than 10% out of pocket in doing a transaction like this if you are able to identify a property that is undervalued and needs rehab work.

We have completed 7 of these transactions here in Houston over the last 12-18 months.

Clay Manship · Answer

Hey Jacob-

I am a recent grad too, trying to do the same thing in the greater Indianapolis area. I am closing on my first deal currently and moving ahead with #2 this week.

Form an LLC. Make sure everything is spelled out in writing, and BEFORE there is any exchange of capital/money. Make sure principals get equity share equal to the amount that they put into the LLC--doesn't matter if your buddy wants equal share or not. Make them pay as business partners.

Most importantly, understand your strategy. Are you flipping? Buying and holding (sounds like it)--how many years down the road? Who is paying for maintenance? Is there a shared pool of reserves to dip into? Who is sourcing deals, raising capital, and are they getting a kick-back for their work?

All very important things to consider...but relatively easy to figure out. Write everything down and keep researching. Work hard and everything else will take care of itself.

Aaron Montague · Answer

@Jacob Hollister Write everything down BEFORE any money changes hands.  This is finance so you can get creative, but it must be on paper.  Even with it on paper there will be hard feelings, poor choices made and rude words exchanged.  But this is all part of building a team.

I like partnerships because I get to work with other people's money.  My hope is to find partners that don't want to get their hands dirty, don't mind a set back or two and enjoy quarterly checks in the mail.  Sometimes this works, sometimes it ends being horrible.

I haven't found a conventional financing institution that is writing investment loans for less than 25% down in quite a while.  Please let me know if you find one, I'd love to chat with them.  I mention this because you are going to need more money than you think to actually close on that 100k dream house :)

Ben Hughes · Answer

You are playing with fire Jacob.  Personally I wouldn't do it but if you do make sure you have everything spelled out in a contract so there are less risk of you all hating each other.

Jacob Hollister · Answer

Thanks for the quick replies.

@Steven, I agree with you and will do more research on the LLC taxed as a partnership.

@Elizabeth, good idea on living in the home and renting the rooms out, but I live in a different city now (Houston). I'll look into that down here, I live close to University of Houston Clear Lake and could rent a room to those students. Could I get an FHA loan on my personal home and still rent a room?

As for the College Station house, I just finished my undergrad this May so I don't have significant savings yet. I was aiming to purchase a house around $100k and out $20k down. Unfortunately, it would be awhile before I could afford that on my own so I was thinking about partners.

Elizabeth Colegrove · Answer

I would be VERY careful about going in with others. I would definitely have a business plan. Can you buy it by yourself as a personal property and than rent rooms out?

Steven Hamilton II · Answer

@Jacob Hollister ,

I'd consider an LLC taxed as a partnership for all of you just to be safe.

Company to purchase SFRs?

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