How to use OPM

Question

Hey everyone! I've found a partner who's willing to finance a short-term while I will be in charge of operations. Considering we haven't locked down a market yet (debating between Shenandoah or Blue Ridge) would it make more sense to put a set amount in an account for the down payment or bring them a deal first? Any advice on how to use OPM or thoughts on the Shenandoah or Blue Ridge markets would be greatly appreciated!

John Underwood · Answer

If I were the money person, I would want to see the deal first.

Andrew Steffens · Answer

I do not think so, I think the mortgage broker will combine your qualifications into a one application and give you an approval based on that.  From there you can calculate approximate cash contribution from money partner and outline your responsibilities as the operating partner into an operating agreement or joint venture agreement. Example:

Mortgage approval up to $600k

20% down payment = $120k

Closing costs = approx 1.5% $18,000

Furniture costs approx $30,000 based on $20 per footv at 1500 sqft home

Money partner agrees to contribute all necessary cash approx $168,000 to purchase and set up STR.  Operating partner agrees to operate manage property (includes marketing, housekeeping ops, maintenence, accounting, etc etc).

Open joint bank account.

Very simplified version but I hope it paints a picture.  Good luck!

Dan Thomas · Answer

@Gabriel Oquendo

I think both of the prior responses are great advice. I would add....does your partner have rei experience? The reason I ask is it seems like everyone wants to be a rei until it is time for cash to leave their hands. It is very normal for people to have second thoughts or get cold feet. I would want to make sure this person understands the risks involved fully before getting any deal under contract. It would be unfortunate to not be able to close a deal because your investor backs out at the last minute.

Chris Seveney · Answer

As mentioned, a lender is not going to put money in an account. When we finance short term stuff we wait until we have an asset, then we will underwrite the deal and use a title company like a traditional closing.

Andrew Steffens · Answer

I agree with John about settling on a property and running the numbers.

However, if it were me once the market and property were identified I would form an LLC with an operating agreement that states what each members contribution and responsibilities are.  I would then get an EIN and a bank account and transfer the funds in order to close on the property and then use as an operating account for the income and expenses so everything can be tracked.

I have done deals in a similar fashion as a partnership.  There are other ways to do it, but this way is easy.  If you both qualify for traditional financing you could do an operating agreement/joint venture agreement and open joint accounts in a similar fashion.

Kate Stoermer · Answer

So an example: partner and I had an agreement on funds we could bring to the deal and generally what that would look like. We agreed verbally on general details like partnership split and responsibilities. We found the deal, but decided to bring in additional funds and use PML to fund a cash offer as a mortgage/promissory note - not a partner. We used our funds to renovate and set up, and financed into a DSCR after 6 months, paying off the PML and pulling some of our funds back out.

We didn't pull the trigger on LLC or bank account or anything till we had an accepted offer.  It doesn't take long to set up, and we changed the offer from personal name to business name before hitting the closing table.

Some things I advise folks having seen partnerships go south - Get really clear not just on who does what but contingency plans. You say you will do operations; is your partner going to have any say on operations? If so, what?  Will you get paid for doing it? (I "gave" year one and we had an agreed on commission for PM starting in year 2 to reflect I'm 24/7 managing). Where are the lines of authority?  How much will be put back into the property vs pulled as profit. Personal use is always one if there is interest - get clear on what's allowed or not.  Exit strategy is huge as well - this was probably the biggest tense point in negotiations for my deal.   Good luck, hope this helps.

Jacob St. Martin · Answer

When you are using OPM I think you should always have a specific deal before you open an account or transfer any money. I think it is great to network and gauge interest for when a deal comes but bring them something before you take money because if you take the money first it is idle and they are getting no returns while it is sitting there unless you can pay some return out of pocket which I am sure you aren't doing because you are using OPM.

Cassidy Burns · Answer

Reach out to @Michael H. Cook about the Shenandoah Valley, he's working with a lot of Short Term Rental Investors currently.

Alexander Felice · Answer

Your partner is going to wire the money at closing and will be first position on the lien. No reason to take their money without a deal

Dan Thomas · Answer

You don't need to be pre-approved but depending on the deal it may help.  From my experience for commercial properties there is no pre-approval.  You get a deal under contract and bring it to your lender.  It helps to have a conversation with a lender in advance (if you are serious...don't waste anyones time) to explain your situation and see if there are any red flags.

For single family or 4 units and under a pre approval is also not needed but does go along way.  Two years ago when the entire market was red hot most listings in my area required a pre approval or proof of funds with the offer if I remember correctly.  It does show that you are serious and are likely to close the deal and not waste anyones time.