Buy and hold investing BRRR strategy with a partnership

[Robert Howard]

I would like for a couple of people to give me some feedback on this proposal I have drawn up. The deal analysis link is HERE. The proposal is below:

I propose that we start a LLC, create an operation agreement, and Federal tax id number. The agreement will set forth what both of us are expecting from the partnership. I have about $3000total, that I can put into the deal. I think we can get the property for $1000. So, I estimate roughly $2000 for closing cost and legal fees. The Warranty deed will be in the name of the LLC that we start; which I was thinking Bronner&Howard LLC or Kingwarhead LLC. If rehab is $15000, and I have $1500 left to contribute to the deal. That leaves $13500 to be funded. I know that both of us have great talents and bring a lot to the table. I know that majority of the cash on this deal will be provide by you. As, you know I take property management fees into account in my calculations. So, I propose that the 10% taken from the rent be render to you until you recouped the $13500. I believe with you receiving the extra 10% and me bring the deal should compensate for the $13500that will be provided by you for the deal. The rest of the cashflow after insurance and taxes will be split 50/50.

Roles inside the partnership

I have grown to have a great rapport with contractors and like to do research on how to make things work and be cost efficient. I would propose that I handle the rehab process and will consult with you about purchases over $1500. I will keep you abreast of the process and also consult with you about the phases of the project. Ie. When to purchase major appliances and fixtures. You have been property managing for a long time and know how to handle business. So, I propose you handle the Property Management and bookkeeping; which will include you handling the paying out of bills and dispersing funds. A bank checking and saving account in the name of the LLC will hold the tax, insurance money, propose reserves, and after the 18 months the Payments and Interest. All money would be deposit into the LLC's Checking account. Then cashflow split would be transferred via ACH bank transfer as to have paper trail for tax purposes. The two of us will need to come up with a way to keep the property and the progress we made from getting vandalized.

Numbers

I have attached one of the workouts to this proposal, so you can see the numbers.

The Attached analysis shows a Buy, Rehab, Rent, and Refinance strategy: As stated earlier we should be able to purchase the property at $1000 and it needs about $15000 in rehab, and I will estimate all other fees at another $2000, so that a grand total of $18000 needed for the deal. Rent amount charged $500/month. After taxes and insurance cash flow will be $385.08 a month, that is minus $50 for PM. That works out with me receiving $192.54 and you receiving $242.54. Now the cashflow doesn’t take into consideration repairs and replacing things over a period of time. I would propose that we both put $50 back into the reserve saving account equaling $100 total to cover repairs and maintenance. Must have some type of cushion. So, the payouts would change with me receiving $142.54 and you receiving $192.54. I propose that the reserve goal is $5000; which is enough to cover a roof. The above numbers will stand until the refinance. I remember you advising that you had a good relationship with a bank and get 85% loan-to-value at 15- years. I estimated an interest rate of 4.90% is probably what the rate should be at around 2018. So, I propose we leverage your relationship after we show the property cash-flowing and attempt to secure a loan in the amount of $18700; which of 85% of the tax assess value. I attempted to find comps in the area, but were unable to locate any. So, I will say that the $22000 may not be the actual worth. I hear that our county values can be deflated in some areas and inflated in others. But, if we are able to secure a loan for that amount we pull all of our original investment money out, plus a little to place in reserves, and have a mortgage payment and interest of $145.94, plus taxes and insurance total expenses equaling $210.85. Property management fee is no longer being factored, because you have recouped your initial investment. Now the new numbers after refinance are as follows: Rent amount charged $500/month. After, mortgage, interest, taxes and insurance cash flow will be $289.15 a month, that is minus $100 for reserves. That works out to $94.57 each, with no money into the deal. After the reserve goal is met the new payouts are $144.57. If, the reserves drop below the $5000 the partnership will start the monthly $50 individual donation until reserve is back fully funded. All repairs not covered by reserves will be split 50/50.

End Game and Contingency Plans

This partnership will be revisited after 5 years. At that time, we can elect to dissolve the partnership or keep it going. If there is a collective agreement to dissolve the partnership the property will be put up for sale and the profits will be split 50/50. If one of us elects to dissolve the partnership. The partner that wants to remain in partnership can buy-out the other partner for half of what the Ga Dougherty Tax assessor value is at that time. Ie. If they have the house assess at $30,000, the buyout will be $15,000 and attorney cost will be split between the partners. If, the partnership stays intact, it will be revisited every 5 years thereafter, and the same rules will apply at that time. If one partner should perish the remaining partner shall give the power of attorney half of what the tax assessor value is at that time of death minus their half of what’s left on the loan. If he is unable to provide the funds, he should put the property up for sale and split the profits 50/50 with the power of attorney. Also, the cashflow disbursements will continue to be split between partner and power of attorney until property is sold. If one of the partners should go through a nasty divorce, so to protect the property from being tired up in litigation; the property will be sold to the other party for half of the tax assessor value minus their half of what’s left on the loan. If one should become disable some rules as in death will apply.

Business plan

My plan is to make this a lucrative venture for the both of us by building a buy and hold portfolio of about 6 to 8 doors, by Single-family Houses, Duplexes, Triplexes, or Quadruplex within a 10-year period. This alongside the growth we have individually will help us reach our retirement and generational wealth goals. The growth and knowledge that both of us can learn from each other and the networking opportunities that we can present to each other are unlimited. Also, when we get enough capital, I foresee us trying some flips and developments. Attempting to leverage your knowledge about building houses and knowing, what a house should look like, that people of your status want. Splitting profits and losses 50/50.

Disclaimer

I don't know if I left anything out, the above Buy, Rehab, Rent, Refinance is completely hanging the hinges that we are able to leverage our credit together in the LLC. If the bank has an issue with loaning to an entity, we would have to do a quit claim deed with both of our names on it. From there you would secure the loan in your name and leverage the relationship with the bank. After that has been done, we would quit claim it back to the LLC for legal protection. There is a risk in doing that the bank could have a due on sale clause for changing ownership, but from my understanding all you would have to do is quit claim it back to us. I'm very interested in seeing what you came up with. I know that there are some important information left out like how much the legal fees will be exactly, but hopefully I acquire this before I send out proposal.