New to Real Estate · La Verne, CA · Member since 2020 · 23 posts · 13 votes
Hello Again Everyone,
I am still slowly saving money for my out of state (OOS) investment property. In the meantime my gears have been grinding on how I can speed up this process, short of, selling some (cough, cough) illegal substances or knocking over some banks.
I starting thinking about marketing myself to my family and friends and gathering funding for a down payment from them to create a Joint Venture (JV), where I would pay them interest (at a rate that is better that the savings account that they currently have that money in) over a relatively short period of time.
But I don't want everyone's name being added to the note on the property. I just want a legal document stating that they will receive from me no less than "X" interest over a period of time, or quicker, "Y" from me for their "Z" contribution towards a down payment for an investment property that I am purchasing for me. Etc Etc. Basically stating a deal between me and the investor only with them having zero ties to the property.
Has anyone every done anything like this? Please let me know! Help a NEWBIE out!
@Michael Ramos What you are really looking for is creating a partnership with your family members. They are owners in the partnership, and the partnership will own the real estate. You will be working with the commercial side of the bank, which typically entails higher interest, higher down payment, and often times short terms and amortization periods. You can structure it so that no one in your family owns more than 19% of the partnership, even if they are putting in all the money. Confirm with some lenders, but most commercial lenders require anyone with ownership of 20% or more to sign the loan, so limited to 19% keeps them below that threshold.
Here your family has a clear legal document outlining their ownership and terms of the partnership. The lender will not require them to sign on loan and you can outline the upside you receive from your ownership of the partnership, maybe as a general partner. I am not sure what type of properties you are thinking about, or the money involved, but unfortunately, you are going to be paying an attorney for this structure, and it could see it costing a couple thousand dollars or more, depending on your attorney.
Alternatively, if you have family that will finance the whole deal, just make them a lender in the first lien position. They put up the cash at closing and you run the deal.
Alternatively, if they are willing to take the risk to invest in you, maybe they will add the risk of signing the mortgage too, and have their name on the title, while letting you run the project.
At the end of the day, there are a lot of ways you could structure it, and it really depends on you and your family. Of course there is risk with all of it, but you hear about millennial buyers offering cash on properties which is really mom and dad's money, with the expectation that the kid will get a mortgage after closing to pay off mom and dad. I can guarantee most of those have no formal documentation, and mom and dad don't show up on the deed. It is trust in the family. You are looking to do a similar thing, but to do it formally requires attorneys and money to get it setup.
If I am getting this correct...you have no experience. You don't have the capital. But you want the people closest to you to take that risk and also limit their recovery options? I would go back to the drawing board. When you don't have experience of the necessary capital, you don't get to dictate the terms. What are they buying into anyway? What's your secret to their success as a new investor? Why would they give you money? Things to think about. This usually happens when you are trying to rush it. If you do what you want to do, you won't know those people in a year and they will never talk to you again. Do not take money from friends and family as a new investor.
@Michael Ramos, I was JUST talking to my wife about this! Following this discussion for more insight.
I would also add that it would be beneficial to build a portfolio and a good track record before you ask them to risk their financial savings? I may be wrong. But, with the good real estate track record, it would be much easier to get a "Yes, here, take my money!"
Thank you for your response, I see you are HIGHLY successful in your own right so please do not take the following as if I do not recognize your accomplishments. I respect what you are saying but I disagree. You don't know me.
Correct, I have no Real Estate Investing experience. But I do own a home.
I never said I don't have capital to put up for the down payment. The problem is I don't have enough. I would be pitching in myself with everyone else.
All investing is a risk. And we all know (other than keeping it in a savings account/under a mattress) that Real Estate is on the safer side of investing. And as I just stated I am also risking my savings. What do you mean by "Recovery Options" though?
I'm not going back to the drawing board.
As far as dictating terms, I am the one with the knowledge. For those people in my circle, we were never brought up to invest. Me and "my people" are the ones that have been paying you and all the other established landlords/investors rent all these years. I am breaking the mold for the people around me and at the same time I will help them understand the power of investing in Real Estate and why it's better to buy than rent. So when I tell you that I have ENOUGH knowledge and guidance (a mentor) in my corner you're just gonna have to trust me on this, so please indulge me.
As far as what they would be investing in...I am in with a fully renovated, managed turnkey Real Estate consulting firm. They buy in strategic locations where there is growth for the future with high ROI's and Monthly cashflow. Again, MY PROBLEM is getting enough for the down payment for these homes. Otherwise, I would be managing this duplex in Iowa that I've been drooling over by now.
That is what they are buying into. That's my secret to their success and how I would pay them back. That's why they should invest their money with me instead of their bank over and over again. These are the things I have thought about. So NO, I'm not rushing. I'm preparing for the NEXT "Iowa" multifamily to become available to me that cashflow's amazingly with a great ROI, not only for me and my family but to reward the trust my extended family and friends put in me with their money and show them what their money should have been doing for them all this time. I won't take any money from anyone who does not understand what they are getting into. I will explain the contract and the risks to them FULLY and then we will sign the contract thereafter only if the person wants to proceed.
I look at this just like if I was leaving my parents house and asking them to help me out with a down payment on my first place to house hack. But with an actual contract saying I'd pay them back. So please Mr. Green, if you have any further questions that I can answer for you please let me know and I will be happy to answer them for you. And If you have a contract like the one I am asking for please let me know as well, I see you specialize in TEAM building so perhaps you are privy to this kind of thing.
Or if there is anyone else out in BP that can help me out, PLEASE get back to me, with a contract like the one I'm asking for or with any questions of your own.
@Michael Ramos What you are really looking for is creating a partnership with your family members. They are owners in the partnership, and the partnership will own the real estate. You will be working with the commercial side of the bank, which typically entails higher interest, higher down payment, and often times short terms and amortization periods. You can structure it so that no one in your family owns more than 19% of the partnership, even if they are putting in all the money. Confirm with some lenders, but most commercial lenders require anyone with ownership of 20% or more to sign the loan, so limited to 19% keeps them below that threshold.
Here your family has a clear legal document outlining their ownership and terms of the partnership. The lender will not require them to sign on loan and you can outline the upside you receive from your ownership of the partnership, maybe as a general partner. I am not sure what type of properties you are thinking about, or the money involved, but unfortunately, you are going to be paying an attorney for this structure, and it could see it costing a couple thousand dollars or more, depending on your attorney.
Alternatively, if you have family that will finance the whole deal, just make them a lender in the first lien position. They put up the cash at closing and you run the deal.
Alternatively, if they are willing to take the risk to invest in you, maybe they will add the risk of signing the mortgage too, and have their name on the title, while letting you run the project.
At the end of the day, there are a lot of ways you could structure it, and it really depends on you and your family. Of course there is risk with all of it, but you hear about millennial buyers offering cash on properties which is really mom and dad's money, with the expectation that the kid will get a mortgage after closing to pay off mom and dad. I can guarantee most of those have no formal documentation, and mom and dad don't show up on the deed. It is trust in the family. You are looking to do a similar thing, but to do it formally requires attorneys and money to get it setup.
You aren't asking for help. You are asking for everyone to tell you how to do exactly what you want to do, but you don't have the experience and your way may not be the right way to go about it. You wax and wane between having no experience and then saying that you built landlords by paying rent. What does that have to do with people answering your questions and trying to help you. Too many investors just ask questions in search of an echo chamber to verify what they want. Good luck. Read this again in six months and let me know how it went.
What "fully renovated, managed turnkey Real Estate consulting firm" are you going to use that "cashflow's amazingly with a great ROI"? Do you know this because you have worked with and already accomplished this with this company? I love your enthusiasm and confidence, they are hallmarks of a good investor and yet, they are also qualities that tend to blind us before we even start.
@Jonathan Greene is not trying to discourage you, he is offering you wisdom from a long experienced career where he has met many people with your same leanings. I would bet he has seen some become successful and many more fail. A wise man fist learns from the mistakes of others and limits those he makes himself.
I think your “partnership” idea has more merit in that you are using a turnkey company (although I am skeptical of the type of returns you are expecting). The turnkey company helps with your lack of experience (and no, “building” landlords or owning your own home, while valuable experience, is not the same as pure investing experience) but does not eliminate the need to add some built in protection to your investors (family) in the form of collateral. This is especially important if you want to maintain your familial relationships and enjoy a longe and prosperous investing career.
My advice would be to create a partnership like @Evan Polaski mentioned or at the very least put your family on title, take a smaller portion of the equity pie and give that to your investors (family) to show them you value their money and risk, and look at this potential deal as a oppurtunity to build relationships that you can build the rest of your investing career off of.
Thank you for your response to my question and post. I haven't heard of doing a partnership with friends and families this way. Just a few questions and comments I have for you.
Why would something like this have to work with the commercial side of the bank?
And how or what changes in terms of me (and everyone else) qualifying for a commercial loan apposed to a "regular" real estate loan?
So if they own (up to) 19% of the partnership...then does that mean that is the ROI that they will expect to make on their investment? (I understand this sounds like a stupid question but I have to ask it #newbie :)
I like this "clear legal document outlining their ownership and terms of the partnership." and that they don't have to sign on the loan. This is exactly what I'm looking for.
Please explain "...you can outline the upside you receive from your ownership of the partnership," I do not understand this.
As far as the properties that I am looking into they range from $90k up to $315k, so the downs are anywhere in the 25% range for these properties, not including the closing costs. But regarding the attorney fees I'd just pay those out of my own pocket I guess. Worth it.
I don't have a well off family or (enough close) friends with money to buy outright and pay them back. Good idea though, I save that for down the road.
Again, thank you so much for your knowledge with this topic. Please get back to me at your convenience.
The company is R e n t to R e t i r e m e n t .com. I have had a great consultation with one of their sale reps and I have spoken to Zach (the owner) directly and is very accessible on this site. Since my consultation in January they send me their amazing inventory with all the ROI and Monthly cashflow details that make me wish I had started doing REI 10 years ago instead of last year.
To that point of my experience, I know I'm a newbie, no one has to remind me. I didn't say I just started doing or looking in to real estate last week. I am very up front with it and understand that I don't know 25% of what an experienced investor knows (whatever you consider an "experienced" investor) and just because I own my own house and because I've been reading a butt load of books and hours and hours of BP podcasts DOES NOT replace the experience of actually owning and managing a REI property. Of course. I'm just asking questions here Jon. I'm looking for already traveled paths through this RE forest. And I appreciate everyone that has ever responded back to me here on BP with constructive criticism and knowledge, including yourself with the great sage advice regarding others mistakes.
The types of returns I am expecting are usually above 12% ROI and the monthly cashflow ranges anywhere from $200 up to $1200, just depends on the deal. They buy in up and coming areas with great rents and renovate the home as new (they even go as far as to say that their renovations should last up to 10 years) and assign property managers for you to manage your new property.
I loved your advice in that last paragraph. Thank you for confirming @Evan Polaski 's idea for this kind of "contract" and I have ZERO problem taking less of the "equity pie" to make this happen. Building relationships through an endeavor like this (as a newbie) is what I am about right now (along with teaching people I know how they can make more money faster than a savings account) I need investment people to know I am trustworthy and accessing the trust that I have already built with friends and family is something that I do not want to break doing this kind of deal, thus screwing me 2 ways instead.
Thank you for your knowledge Jonathan. I appreciate you taking the time to respond. If you have anything else to say after this post please feel free.
Are you basing the return of this turnkey vendor's proforma? Can you share the numbers with the group so we can give you input.
Turnkey vendors (not all but many) have very unrealistic estimates for vacancies, repairs, etc. Just remember real estate is about value creation. And you realize value when you buy. The turnkey vendor giving you a discounted property, fully rehabbed with the highest quality (cutting into their margins) at a price below what they would get by selling it to a non-investor homeowner, is quite a tall order and introduces some conflicts of interest if you think about it.
Not saying turnkey is all bad but it needs to be thoroughly vetted like anything else.
Great Question Andrew. Attached is the breakdown of the numbers that they have provided to me for this property.
The one thing that was missing was Capital Expenses. When I asked them about that they told me that when they rehab their properties they (I'm paraphrasing) "should be good to with stand the next 10 years. Where at that point we recommend to refi the property and pull out any money for Capital expenses at that time. Or sell the property".
Let me know what you think.
And not just Andrew! Please anyone chime in with any questions or concerns, I'm all ears (or eyes, in this case).
And just so we don't get to off topic here. These types of properties (see above) are the reason I created this thread. As a newbie, these seem like no brainers but also as a skeptic, it seems to good to be true. But for the last 3 months or so I have not spoken to any investor that says "this is BS they are leaving out x, y and z so its a scam yada yada yada." EVERY investor that I have ran this across has been more like " Oh wow, well it sounds great but it also sounds to good to be true so be careful and do your do diligence".
So it leads me to think I have analysis paralysis and I just need to pull the trigger and take a leap on a pretty safe bet. Which is why I am looking to gather up between $50k to $100k "family and friends group funding" to pull the trigger on one of these properties. (which is the whole reason I created this thread and not talk about this company).
If there are any Real Estate Lawyers/Attorneys that have ever put together a contract as Evan Polanski mentioned please reach out to me I would love to speak to you.
A rule of thumb most experienced investors will tell you is assume 50% of rent will go toward operational expenses. With the remainder you still have to pay the mortgage then the left over is cash flow.
Personally I use 7.5% repairs reserve, 7.5% Capex reserve, 5% vacancy reserve and 10% property management. That's a total of 30%, then I have to pay PITI. And whatever is left is the cash flow I can reasonably expect.
Personally I think their estimates for reserves and insurance are way too low and you won't actually see those returns in reality.
I'd also vet the rental amount they have listed there with other property managers in the area.
One benefit of have a separate lender, agent, PM is that they should all be serving as checks and balances for your purchase decision. With turnkey you've really handed over a lot of trust and due diligence over to them and don't have others on your team validating what they're saying.
Thanks man. I appreciate that feedback. I will keep those numbers in mind and I might steal those for myself. I was basically using their same numbers and adding 7% for CapEx. Even still my numbers came out to around $800-$900 cashflow/month.
Regarding the PM, I will take your advice and confirm the rental prices when I interview them.
The benefits that you mention there at the end of your post are great checks and balances no doubt but I have been in contact with (5) people (that I have met through BP since Dec) that have used this company and they have all said nothing but awesome things about this company and their legitimacy. I honestly cannot find anyone that has anything bad to say. It's weird. I should probably check with the BBB now that I think about it.
