BRRRR with a partner/investor

[David Roberson]

I have a couple of questions I was hoping to get some guidance on. 

My wife and I are wannabe investors who were initially enamored with flips as a way to build capital but always thought the idea of BRRRR made more sense in the long run.

We have yet to find our first deal but are getting things in order to do so, slowly making contacts in the area we would like to invest in. 

The BRRRR book arrives tomorrow so please forgive me if these questions are answered there.

We have a family member with significant cash resources who has shown interest in partnering with us in some way but I'm struggling to understand how or what the financial incentive is for them to work with us. Where would/could a partner fit in on the BRRRR strategy?

It seems like if you work the BRRRR correctly at a minimum you can get your cash back out but usually, you can't expect more. How would the borrower reap any benefits from that? I would like to build a fair mutually beneficial relationship with them but can't seem to grasp how to include them or incentivize them to use their capital.

Secondly, when we began talking to a HML when flipping was our focus we were told that we needed to form an LLC. From some things I've read, it looks like you can't or shouldn't use an LLC when you intend to BRRRR, is that true?

Thanks, 

David

[Shavar G.]

@David Roberson - I will attempt to address each of your points separately. FYI, I'm about three quarters the way through the BRRRR book by David Green and its a great read.

Point #1: How to incentivize a family member with cash reserves to "partner" with you.  

Why not pay them interest on the money they loan you??

Example:  

Purchase price on a property: $100k (your money)

Rehab costs: $50k (family members money)

Misc. Expenses: 5k (family members money)

All-in cost: 155k (shared expense)

ARV: $225k

70% of ARV: $157,500

In this example your family member contributed $55,000 to the rehab costs for the property. Once the property is rented out you can refinance and pull out most or all of your cash. I personally called (and I suggest you do the same) 17 different credit unions in my local area and spoke to representatives in both the residential mortgage and business services departments to determine what LTV amount they would offer on a fully occupied, renovated property that I owned outright. I found multiple banks that would go above 70% LTV on a cash-out refinance with no seasoning period. If a bank offered 80% LTV (I've found higher, it just depends on how you purchase the property which I will get to next), then you'd be able to pull out $180,000 (ARV of $225,000 x .80) in cash on this property (assuming it met or exceeded your ARV). The difference between the 80% LTV (or $180,000) that you can pull out and the $155,000 that you put in, is $25,000. With that extra $25,000 you can afford to pay your relative 10% interest ($55,000 x .10 = $5,500) easy on their money and still have money left over to apply toward your next purchase. Keep in mind that this is just an example, so its not meant to be exact, but you get the gist.

Point #2: I use my LLC to BRRRR and in the above paragraph I referenced speaking with the Business services department at local credit unions for that very reason. When I called the residential mortgage department, they offered to refi up to 90% LTV if I owned the property in my own name. I prefer to purchase property under an LLC for a variety of reasons. You have the option to do both, however I would suggest you speak with an attorney and accountant/tax strategist to determine which method you prefer and which is more advantageous for you based on your goals.

Hope all of this helps.