Best use of OPM for Buy and Hold? What do you think?

[Keith Miller]

Hello All,

I'm an investor in Missoula Montana, and am trying to figure out the best use of OPM for expanding my buy and hold portfolio. Both of my deals have both dealt with "backyard development", first I converted a garage into an ADU, and now I'm building two backyard townhouses. I'm trying to figure out how to use OPM to repeat this procedure, as it's been very lucrative for cashflow.

My first draft of a plan is to borrow in the neighborhood of $150K from an investor, put 5% down and live it in myself, and build a backyard ADU while putting sweat equity into the main house through tiling, replacing/refinishing cabinets, installing new flooring, etc. I can cashflow about $1,500 per month on the first house I did this with, so I'd love to do it again.

But I'm looking for feedback on what you guys think will work as far as partnerships or other structures to make this a win-win for both parties. I'm hoping to hold it after everything is done, so maybe that means just getting a bank refinance after the property has been improved and stabilized?

[Elizabeth Flowers]

Hi Keith, I would think that an investor is going to either want high interest or a share in the profits that they think is a realistic projection.  The latter requires a lot of trust in you as a fixer-upper and someone who can complete the project in a reasonable timeframe.  The return over time is what matters (aka not 15% but 15%/year).  Because many investments like this fail, investors often look for a return ratio that supports those other failures.  If 1/3 fail, and they want a 15% return total, then they're actually looking for more like a 25% return unless there is significant leverage (and depending on the home cost of each - it's obviously a speadsheeting situation, I am just throwing numbers around). 

[Elizabeth Flowers]

I would try to answer: "What do you think you could offer to make it a win for the investor?" and "Is it worth the risk of the leverage to borrow private money?"

I believe that you would refinance, yes.  You maybe could even refinance with the investor but I would recommend you go through a conventional lender for that if you can get a good rate.  Larger pools of money offer lower rates because their diversification and size offers them enough protection that they can do that.  

[Keith Miller]

Yeah, since I'm trying to hold it afterwards, refinancing with a conventional lender seems like the best plan. I got feedback from Ryan Frey today that investors would likely be skittish if I was occupying the house, as they would have a harder time repossessing it if I stopped making payments on their note. Montana has a "Homestead Exemption" which protects up to $250,000 of the value of your primary residence from creditor's claims, which means an investor wouldn't be able to get their money back if I failed for some reason. 

I'll have to figure out how to get financing for the ADU build from something like a construction loan, HELOC, a personal line of credit, or something like that.