Is creating an LLC conglomerate a bad idea? (Crowd funding)

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Is creating an LLC conglomerate a bad idea? (Crowd funding)

Matt Hintzke
Redmond, WA · Member since 2016 · 16 posts · 4 votes

Excuse my potential bad use of terminology here as I am very new to REI and am trying to get creative on my financing strategies.

Basically, I have been looking into REI around the Seattle area (I live in Redmond, Wa) and want to get into the market while its still on the rise and while I am young (I'm 25). The issues I have come across are:

1) Finding a MFH in an area I can live (close to mine and gf's work) in order to qualify for an FHA loan has been pretty rough. There just aren't a ton of MFH on the market for a reasonable price

2) Investing out of this market (say, Spokane, where its cheaper) is hard as well because I have to purchase and manage a property that is hours away by car, and this being my first investment, I'm not sure how well it would work to be so far away.

So I'm sort of generalizing my concerns, so maybe someone has suggestions on how I can achieve #1 given my sitation.

This leads me to this idea. Create an LLC or some kind of legal entity where I can pool together funds from friends and family to make investment purchases. Esentially it would be a small scale REIT, so instead of having to put down $50k on a loan myself, I get 10 friends/peers to put down $5k each and make the same purchase.

Obviously there are legal ramifications for doing such a thing such as properly dispersing profits, etc, but is this something people do? Can it be done? Is it legal? Are there any major issues with trying to crowd fund the investment in such a way?

Any suggestions are welcome! Thanks

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David Clinton III
Real Estate Coach · Coeur D Alene, ID · Member since 2013 · 458 posts · 295 votes
10y

@Matt Hintzke, If it's tough to find deals on the market, I would recommend aiming for deals that aren't on the market.  There are dozens of "mom & pop" MFH owners out there that are aging and tired of owning their properties and have considered selling in the back of their mind.  I would find a local title company, get yourself a list of criteria, and ask them to give you a list of property owners.  Start sending out hand-written yellow letters to drum up interest.  You may send out hundreds of letters, and get dozens of phone calls and a few interested sellers and maybe one deal.  But to get started, all you need is one...

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  • Landon Eskew
    Rental Property Investor · Spokane, WA · Member since 2016 · 43 posts · 18 votes
    10y

    In my opinion, yes, it can be done, but you're looking into a bigger mess as far as the government is concerned.

    Lets preface this with I don't know exactly how this works either, but after a certain amount of people are involved you have to report as a Real Estate Investment Trust (REIT) and have to file extra forms related to your business and also after a certain threshold you also need to report members and their distributions to the Securities Exchange Commission (SEC) so they know as well.

    Being young (as am I) you are going to run into a lot of dead ends trying to apply for a residential loan with a business name.  No bank will want to consider it and it would be too risky to them.  You're in a horribly inflated market compared with the rest of the nation and would be better off looking outside of Seattle as a beginner.  There's lots of rough laws in city limits that are pushing out current investors and renters, so it would be wise to do all your homework on Seattle before you take anymore steps.

    The way to become a successful investor is to make sure the math works out on a property before buying.  It would seem you're eager, but that eagerness can lead to emotional decisions about a property and you'll end up down the wrong road if you jump on the first MFH that has a gorgeous view or was just recently updated inside.  This is a business and you need to be disciplined in your actions.

    No matter where you live you need to factor in a percentage that goes towards property management, even if you plan to manage it on your own.  Hopefully one day you'll be big enough to actually NEED that service, and if you didn't plan for it at the beginning then whatever profit was left is either at zero or in the red.  For the time being, consider that percentage a bonus to your new company or else see yourself as a property manager for the time being...  Whatever helps you rationalize leaving that cost in there.

    As far as #1 - you're going to be looking for a while.  Figure out what makes a good property actually GOOD and narrow your search range down to those.  I also encourage you to listen to all of the BP podcasts as they are a treasure trove of free and lucrative information.

    My vote is if you can't scrape together more than $5-10K on your own for this idea, then how are you going to fix a broken pipe or a leaky roof that has a tenant in it when it comes time?  You going to call your other nine investors up and try to split a roof cost with them?  Don't bother.  Do your research and make a good business decision based off of that and hopefully build a strong business model for the future.

    I rarely have a keyboard in front of me and usually do short replies on my phone.  Sorry but not this time :)

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  • Matt Hintzke
    OP
    Redmond, WA · Member since 2016 · 16 posts · 4 votes
    10y

    @Landon Eskew Thanks for the advice.  I keep seeing different people saying "this way is the best" or "no, this way is better" which is expected seeing how everyone has their own ways of investing. However, this just makes my decisions even harder because I cannot get a good grasp on what my goals should be prior to purchasing.

    I can see how including many investors into the equation can make it difficult, but what if we simplified the scenario by just using 2 investors, me and a friend.  It makes it a lot easier to split 50/50 on things like expenses, but still halves our individual requirement for a down payment which means I can get into the market in half the time.

    I am eager, of course.. but that doesn't mean I am eager to just buy any old property and expect a return.  I'm more eager to learn and understand 100% what my goal is before I even make a purchase. I want to know what all my different options are when trying to finance the investment and then what it is going to take to get there.

    Many people would just say budget and save until I can afford a 20% down payment on a property all by myself. In this area, that is over 100K in cash which could easily take 5-10 years to accumulate with other debts like student loans, car loans, rent, marriage, etc to pay for even if I do slim my spending down to just the necessities.

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  • Landon Eskew
    Rental Property Investor · Spokane, WA · Member since 2016 · 43 posts · 18 votes
    10y

    You're on the right track with getting a 3.5% FHA loan for the first one - you only get the chance to use it once so use it wisely. Make sure you meet all the criteria for the loan well in advance to better your chances. That can take a 500K property from a 100k up front to a $17.5K cost.

    However, going out of town and scoring a 200K property means your 3.5% is only $7K.  Are you really sure you need to invest there right now?

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  • Matt Hintzke
    OP
    Redmond, WA · Member since 2016 · 16 posts · 4 votes
    10y

    @Landon Eskew Well the issue with the out of town FHA is I would have to live at the residence for a year, correct? I don't think it is very possible for me and my gf to just get up and live somewhere else with our jobs. If I did go out of town, I would expect to pay the full 20% down and start renting out right off the bat, which is why I think an FHA near Seattle is really my only option if I want to enter the market in the next year or 2.

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  • David Clinton III
    Real Estate Coach · Coeur D Alene, ID · Member since 2013 · 458 posts · 295 votes
    10y

    @Matt Hintzke, If it's tough to find deals on the market, I would recommend aiming for deals that aren't on the market.  There are dozens of "mom & pop" MFH owners out there that are aging and tired of owning their properties and have considered selling in the back of their mind.  I would find a local title company, get yourself a list of criteria, and ask them to give you a list of property owners.  Start sending out hand-written yellow letters to drum up interest.  You may send out hundreds of letters, and get dozens of phone calls and a few interested sellers and maybe one deal.  But to get started, all you need is one...

    2Reply
  • Matt Hintzke
    OP
    Redmond, WA · Member since 2016 · 16 posts · 4 votes
    10y

    @David Clinton III That is a very creative way to find deals, however I am not totally sure what a title company is and how I would go about approaching them.  Typically, companies don't just give out the contact information of their clients, so it seems out of the ordinary for a place like that to do this. Is that a normal thing to do or will I seem to be out of the norm for these guys? Thanks for the help!

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  • David Clinton III
    Real Estate Coach · Coeur D Alene, ID · Member since 2013 · 458 posts · 295 votes
    10y

    @Matt Hintzke, A title company's goal is to have you become their client and use their services when you eventually buy real estate.  The service they offer is title insurance, which insures that the title to a specific property is free from defects and nobody but the buyer has claim to the property.  It is standard for a title company to insure the lender and/or the buyer in the majority of transactions in the US.

    If a title company believe you will become a real estate investor and use their services over and over, all the better.  In return, they are often happy to give or sell information that is basically public record (that is, the name, address, and demographic of a given property owner and details of that property), but they have the easiest access to.

    I recommend calling a local title company, explain that you are interested in making a mailing list, but are unsure where to start. They will be happy to help, since finding and collating data is often part of what they do.  Stewart Title, Ticor Title, and First American are all places to start in Seattle.  I've had a good experience with Stewart in Spokane, but their website seems to be down.

    1Reply
  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
    10y
    Yes, a bad idea.
    0Reply
  • Matt Hintzke
    OP
    Redmond, WA · Member since 2016 · 16 posts · 4 votes
    10y

    @Al 

    @Al Wilson would you mind explaining? I am curious to know why it would be so bad.

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  • Matt Hintzke
    OP
    Redmond, WA · Member since 2016 · 16 posts · 4 votes
    10y

    @David Clinton III Thanks for all the info! I will definitely read more about title companies and how they can help in the process. Sounds like it could really be of use!

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  • Ian BroadieBusiness Member
    Real Estate Broker · Gig Harbor, WA · Member since 2015 · 41 posts · 22 votes
    9y
    I knew I would find you on here as soon as you said house hacking. Your post sounds a little close to small scale syndication and you would definitely want to talk to an attorney before attempting to do that. Shoot me a text I want to call you tomorrow and chat, I love that your looking into rei!!
    [email protected]253-514-5592
    Ian Broadie532 Reviews
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