Newbie investing group....where do we start?

Question

Hello everyone,

I'm new to the forums, but have been reading the posts and articles here for some time now. I seek your wisdom!

A small group of friends and myself all work jobs with low hours and good income. We have a mutual interest in starting a purchasing group. I suppose before we even discuss our first purchase, we need to iron out the legalities of purchasing homes as a group. So I have a few questions as to where to start with this...

1. Should we Incorporate (i.e. S-Corp.) or LLC? What would be the pros/cons of one or the other?

2. How does purchasing a home work as an LLC or Corp.? Is one individual responsible for the proof of funds and then title is taken in the business name or does it work differently?

3. Are there grants available through HUD or other government agencies to get a group such as ours on its feet?

4. Once we have laid down the business foundation, I discussed with my buddies the idea of making our first purchase a cheap SFR ($40-60k) in the University area and offering as a rental to students. Any yeas/nays with this idea?

I know that is a lot to process, but I would appreciate any help you can provide for us on this subject. We're all new at this, and we just want to make sure it is done correctly. If any of these topics have been covered in exhaustive detail, I apologize, but please feel free to post a link to save time/aggravation.

Thank you all and I look forward to getting to know you all better as our group goes through this initial process!

Daniel Bruckner · Answer

Welcome to the world of investing.  While I agree with everything posted here, I will share some additional methods that could help land you in great opportunities as well as keep your investment group goingl with their eye on the ball and off the squabbling.
          
          Something I would suggest, though it may be time consuming going over here, is a method of purchasing every property in a land trust.  There is one "right" way of doing this and 100s of wrong ways.
          
          Depending on whether you need financing have your own cash funds, are going to be using private/hard money or whatever other methods of acquisitions (double-closes, flips, etc), when a property is bought through a land trust, the benefit of that is itt can be structured with multiple beneficiaries as "Investor-beneficiaries" with ownership rights.  The beauty of this system is that the property/ies are each individually held by a third party trustee and your group can set up ownership percentages at whatever level you want per entity (usually with no less than 10% beneficial interest, but "could" be less as well).
          
          Of course, you could always set up one master corporation which all of you are a part of and not go this avenue, I just find that it is a great way to protect everyone involved as well as how the profits are distributed throughout your group.
          
          Partnerships are exciting, sometimes wonderful and often full of action so, as the Indiana Jones movie where they had a knight who was overseeing the "eternal cup of everlasting life" said... "Choose wisely".
          
          I wish you the best and recommend that you continue to feed off this group here to keep moving forward rather than driving while you are looking in the rear view mirror.

Nate Kimball · Answer

As an LLC, what would be the best way to get a business line of credit established? I would assume that one or two of us with the highest credit scores would go to some bank and establish a line of credit in the business's name, but I'm not 100% sure on that.

Brian P. · Answer

Nate

Dealing with friends will let you know which really are your friends.

I have two experiences with friends, the first group is we were all investing and met once a week for lunch or breakfast and shared.

The 7 of us socialized and invested, mostly separately, on handshakes and just an IOU if money was borrowed, since 1957. Only 3 of us left now, but it was the greatest experience ever.

The other experience was with 5 friends who wanted to get in on the investing thing. I told them about a commercial property in foreclosure that I felt was a sure thing to double in value in one year if we got it at a price I mentioned.  They each put in $25k, which was the price of a new home in a good area. Within 5 months each one had bailed on me and I owned the property by myself with notes and trust deeds to four of them at a good rate.

I won't go into the details of how this project grew and grew but 14 months after we picked it up at the trustee sale I walked away with a check 9 times our original purchse price. I even threw a party and gave each of the five a check for $2,500 which equaled 10% of their original investment for the short time they were in the deal.but because thanks to them I got into the deal.

Of course I wouldn't have if I knew they were going to bail on me when we encountered the first few problems, and it looked like maybe I made a mistake..I could have told them your in and you're staying in. But I bought each of them out, the first with crucial cash and the other four with notes amd trust deeds..

Anyway, one of them saw the photocopy of the check behind my desk and told me his gift should have been $25k or more. I took him to the files, all nine boxes for this project and told him to read the files and see what I went through, and if you hadn't bailed after two months you would have gotten a full share. He called the others to complain and I found out 3 were my friends and the other two weren't, and I haven't spoken to those two since.

Steve Babiak · Answer

Regarding question 1: Get a partnership (and operating) agreement in place, defining every detail in advance (as much as possible at least).  Once underway, disputes may arise, and your agreements will be the governing documents that determine the resolution to those disputes.
          
          Re question 4: University students as a group can be very "hard" on rental property.  Set specific qualifying criteria for them so that you get the cream of the crop; graduate students, medical students (not just pre-med, but in the med school), law students (again, not pre-law) - these are the students moving toward a bigger payday ahead of them, and they spend more effort on studies than the partying.
          
          Also, get yourself a landlord friendly lease that complies with your local laws, and that includes specifics for college students. Understand how to have all of the college students get their lease co-signed by parents (preferably real estate owners) so that you have those co-signers to pursue for any non-payments and damages.  And if those parents own real estate upon which a lien may be levied... you will have a better position of strength.  If you can, find out how the real estate is owned so that you get all parties listed on the deed as co-signers.

Nate Kimball · Answer

Great info, guys...thank you for the insight on that. I can definitely understand where going into business with friends could turn ugly. The best we can do is set all of our guidelines and agree upon them beforehand, and in the event of unforseen circumstances (repairs, extra fees, etc...), resolve them democratically. I know you shook your heads at that, so...you know...just wish us luck :)

So as far as our group investment plan, this is the basic idea we had: we will each put $1k a month into a business account so we'll be contributing $5k/month as a group. I'm thinking buy-and-holds are a good plan right now in Vegas, and we're looking to buy cheaper SFRs (40-70k). As soon as we hit the 25% mark with some cushion for closing costs and expenses, we'll make our first purchase. With all luck, we can buy about 3-4 properties/year at this rate and, so long as I made wise choices, stay in the green if even $100/house.

Does this sound like a decent plan? Is there a point where we should refocus our money into paying off loans on the previous homes? Again, thank you for all of your wisdom and insight.

Scott M. · Answer

General:  Friends?  Hmmmm â€“ might want to think that one through.  Money and friends do not always mix â€“ sometimes they do and it is great â€“ but it is worth thinking about it before the problems start.  And problems will start â€“ just depends on if your friendships can handle it.

1.	Call an attorney.  Read all you want and I am sure there will be posts here suggesting one way or another â€“ but call your attorney or find one.
2.	If your buying with all cash then this is fine â€“ but if your going traditional financing then you canâ€™t really put the mortgage I the name of a biz â€“ maybe some lender here has a way â€“ but I donâ€™t really know of one for traditional financing â€“ private or hard money yesâ€¦..you will open up a biz account and when you make offers to show proof of funds you will show it in the biz name â€“ or go to one of the sites that are posted all over here and print one out in the biz name â€“ or the private lender will provide it etcâ€¦.
3.	I do not know.
4.	Universities can be good and bad â€“ get 4 guys in your house and you will have a lot of repairs to make â€“ and 3-4 months with no rent in the summer (maybe) â€“ regardless be sure you will have the cash flow to handle the maintenance on colleague age kids with all their accountability and responsibility and stuff :)

John Fedro · Answer

Hi Nate.

Haha, I have a property on kimball court. thats kinda funny...

Anyway,  Starting of with a group of like minded friends can quickly tern into sometime ugly.  friends fighting and profit sharing/work issues.

I recommend getting mark wardas book on corperation versus llc.

If you are paying cash for the home it can easily be placed in whatever name you choose.  The agreement between eachother and yourownership in the company can determine the profit sharing.

If you are financing the home, it made be hard to get a loan with under 2 yrs on your business, ect.  One person can finance (or use seller financing) and then the title can be moved into trust or corp.

Hope that helped... a good starting point!

happy investing  :D

-John