The First Deal - Money and Partnerships

[Calvin Douglass]

Hey all,

My partners and I have big plans--feel free to check out my profile page for a little background info relevant to the below discussion.

My team and I just got off our weekly conference call. We checked in on some action items, discussed a few unfinished clauses in our draft operating agreement, chatted about some LLC structuring strategies, reviewed naming/branding/logos, tweaked our Google Drive folder structure, etc. Really exciting stuff...

When discussing LLC structuring, we pooled our knowledge gained from Bigger Pockets and other sources and elected to start our venture as a single LLC which will acquire and hold our first 5 properties. We were discussing initial capital and financial strategies moving forward, and we hit a bit of a road block.

We intend to pool small funds to get things rolling. We'll pay for licensing, home inspections, and other small items out of pocket. We have solid access to private capital at 8% to the tune of ~$150k, but we don't know how to best utilize these funds. In the perfect world, we'd want to limit our use of private capital to the initial downstroke on our first property, and we'd want to minimize the capital stack to 20% of the initial purchase price. We would ideally leverage this 20% private funding using a traditional lender (most likely a small local bank or credit union) who would provide the additional 80% to get the note on the property, and then go back to our private capital reserves for the renovation costs.

From our experience in purchasing our personal homes, we know that a traditional lender is going to look through the last 6 months of our bank accounts to gain a solid understanding of our financial situation. The problem is, if we start an LLC in January and the LLC has a 2-week-old bank account full of private capital, we'll have no income to show and 6-figures of debt. We would be stupid to think that any sane traditional lender would work with us in this scenario--on paper we'll be a huge liability, even though we're a well-organized, educated and decisive group with roots in the industry (and heavy financial backing, to boot!).

Is our best bet to use 100% private capital to go after our first deal? Once purchased, renovated and rented, we could shift this leverage to a traditional lender via a conventional refinance, with no seasoning or other bull to deal with. On the downside, we'll be paying 8% instead of 6% (or lower), but on the upside we won't have to deal with banks. Can anyone lend some perspective?

Thanks,

-Cal