Trying to come out with a business model (Rental income)

[Ricardo Funk Hernandez]

I currently own a couple of properties and I have this idea to look for potential investors and create an actual business. I'm located in Central Florida.

First of all, the idea is to buy properties and use them as rental income properties. Now, let's say I want to buy a house for:

Price: $50,000 

Down-payment (20%): $10,000 

Misc, closing expenses: $2,000

Instead of needing $12k to invest I would look for an investor that put $6k and I put another $6k.

If that property rent's for $1,000 and the mortgage is $500, let's say the property management is 10% ($100, I would do the property management), that means that I would make:

$200 in income and $100 in property management.

and the investor would make $200.

Once the property is paid numbers will change etc.

My questions are:

1. Does it make sense or should I change something?

2. Do I need to open a LLC for each house we buy?

3. How can I make the person part owner if the person doesn't qualify for a mortgage but I do?

4. To actually get the capital for my side of the downpayment, I heard about "refinancing a house" that means if I buy a rundown house, fix it, then I can actually get a bigger mortgage which means I could get more money to invest in other properties?

Any feedback is welcome

Thanks!

[Mitch Coluzzi]

@Ricardo Funk Hernandez - this really depends on your financial goals, your current financial picture, and your personal ability to perform.  For some folks, partnerships provide structure and a much needed push to excel. 

I'll address your questions individually to the best of my ability.  It could make sense, it depends on your situation.  In this scenario, you are giving away 50% of the equity and 50% of the profits for 50% of the relatively low buy-in.  

1) Financing is possible as a percentage OF HARD COST or APPRAISED ARV value, whichever is lesser. So, you can hypothetically get into these properties, through a standard investment bank, with little to no money down if you have an established game-plan.  Basically, you can utilize sweat equity (if you have the skills) to make the down payment up.

2) Some people open LLCs for each and every property. This is a cumbersome in my opinion; but you will want to keep a separate operating agreement / LLC for each set of partners you work with, if you proceed with the model proposed. The operating agreement will help from either party getting greedy over time and renegotiating terms.

3) There are creative ways around it but... safer for you both to be listed as guarantors.  I do not know any commercial banks that are going to forego a personal guarantor without significant commercial assets in the entity...

4) Yes.  Buy, Rehab, Rent, Refinance.  You can do it... find a commercial bank that isn't going to make you "refinance" every deal though.  

For me, equity partnerships do not make sense and never has.  I can pay a bank much less money than most creative financing models AND retain 100% of my equity.  We got started doing pure flip and sell until we could afford to hold onto a few (this was possible with savings + a W2 job to back up my funding).   Then we transitioned into blending the models (flip some and a modified value-add remodel to hold on the rest).  We were patient and grew the hold portfolio over a few years time while maintaining significant capital growth via flips.  I have been full-time investor for several years now, never looked back and glad I patiently waited without partnering...  

Present day: Here's what we do... we simply add each property as collateral against our overall line of credit. The available line of credit keeps growing monthly as we make payments against it that cover interest plus an amortized amount of the total loans. This allows us to maintain a very flexible financial model, if we want to buy a property... we have enough available on the LOC to purchase it outright without a financing contingency, appraisal or otherwise. The property closes, a trivial mortgage for intended value is added secured by a $1.00 note. Then we can have it appraised (if necessary) and our line of credit is expanded. The note is adjusted as needed internally... mortgage is what secures lien-hold rights for the bank.