Carolina, Puerto Rico · Member since 2018 · 19 posts · 11 votes
Hey guys, myself and a friend I met on bigger pockets found a deal in our area of San Juan.
$400,000 asking price
18 units. $10,500 receiving in rent.
It has some low cost units as they are not in great condition and some are quite small.
The location is great and has 17/18 rented long term at the moment meaning it will cashflow from day 1.
It is poorly managed and still booked because it is a desirable area walking to nightlife restaurants highway and close to airport.
Even a great spot for airbnb.
Monthly Income: $10,216.00
Monthly Expenses: $5,545.46
Monthly Cash Flow: $4,670.54
Pro Forma Cap Rate: 12.43%
NOI $129,000.00
Total Cash Needed: $80,825.20
Cash on Cash ROI: 43.45%
Purchase Cap Rate: 20.21%
The question is both of us have smaller deals and cash flow airbnb long term but never have partnered up, and would like to know if anyone could give advice as a starting point?
LLC 50/50. what terms should the contract say?
What type of financing should we go for?
Any advice on how to go about this would be great and helpful as we are excited to take on our first large deal.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
6y
Sergio:
Your annual NOI cannot be higher than your annual rental income. Your Cap rate doesn't add up. There are major problems with the numbers you posted here.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
6y
Sergio:
Your annual NOI cannot be higher than your annual rental income. Your Cap rate doesn't add up. There are major problems with the numbers you posted here.
Attorney · Columbus, OH · Member since 2015 · 22 posts · 15 votes
6y
Hey Sergio,
Let me address the LLC question (more my lane). With any partnership, be it business, real estate, whatever, make sure your operating agreement (the governing document of an LLC) states a few key things.
1. Expectation of the members (owners of the LLC).
Since you both have your own portfolios it's important that you are both aligned in the expectation of what the priority is. A good example of this would be if you (or your partner) found another property you wanted to snatch up. As an owner of the LLC you have a 'duty of loyalty' to the company that basically says you have to place the LLC's interests over you personal ones. In this case, you'd have to bring the property to your partner to see if it's something he would like to be involved in. If he doesn't - all cool! Go ahead and snag it. The expectation should be stated, though.
One way to do it is to have a firm understanding of what the 'business purpose is'. If you are going to be buying up apartment complexes with this LLC and you are going to be building your own single-family portfolio, then there wouldn't technically be a conflict of interest since the portfolios are different. Does that make sense? The long and short of it is transparency.
2. How you guys can break up.
It's so important to have an 'out' clause in your operating agreement. Without an 'out' clause it's very, very hard to get through to an amicable separation if things turn to sour grapes. This should include how to value each member's equity in the LLC, how that is calculated, how the separation of portfolio assets will go, among a whole host of other things (including what happens if you or your partner becomes disabled, divorced or passes away).
3. Compensation
Everything has to go through the LLC, right? But how does that break down in terms of the distribution of profits? Are you going to reinvest profits into the LLC until you reach a certain multiple on your money (and at that time distribute percentages of profits)? Are you both bringing the money? If so, how much, respectively? How are taxes going to be handled? All of these questions can weigh in regarding how you are legally (as well as morally) capable of being compensated.
Just some input regarding the structure of your LLC. All, of course, being educational in nature and not legal advice!
Best of luck!
*Goes without saying, but this answer doesn't create an attorney-client relationship. Further it is not and shall not be construed as legal advice.
Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
6y
@Sergio Baerga Your NOI based upon monthly cash flow is $56,046.48 which is a 14% cap rate based on a $400k purchase price. How much do you plan to spend on rehab, closing costs, etc?
I would imagine you will need to spend at least $5k/u if not more if some of the units are in poor shape. If the units themselves are in poor shape it could also be an indication that there is additional differed maintenance at the property. I would budget $90k-$150k for CapEx and reserves.
Let's say you need an additional $150k (could be more) between rehab, legal, lender fees, reports etc that brings your all in cost to $550k which is a 10% cap rate.
In terms of financing you are below the $1M minimum for Fannie/Freddie small balance so most likely you will need to go to a local bank or credit union.
*This isn't legal advice you should consult your attorney.*
Your operating agreement should lay out how decisions are made, who handles tax matters, how the equity is split, and how the order of cash flow is handled. Your attorney can help you through this process but first have a frank discussion with your partner. There's no standard formula, but typically all money is treated the same and if one partner is doing the majority of the work they should be compensated by either through fees or an out sized % of cash flow compared to their equity over a certain return threshold.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
6y
@Sergio Baerga Can you paste the actual spreadsheet here?
My biggest concern is you actually have a good deal and inconsistent data raises red flags. I've seen people that think they have deals but then forget about something massive like property taxes.