What do you think of this investment?

Question

I need your input on this investment that I want to offer to private investors, let me know if you think this sounds fair.
          
          Here is a little bit about what we do.
          My company is Liberty Estates, LLC. We buy, sell, rent, and manage real estate property all over the United States, we have more than 50 years of real estate experience.
          As you know, it has never been a better time to invest in real estate; opportunities are endless. We are experts on buying, remodeling and renting foreclosure properties. We are always seeking new investors, large or small, to expand our company.
          Here is an example of an investment that we have available for you and/or your investors.
          
          We guarantee you a yearly 10% net return on your money, and a profit at the time of resale.
          
          This property has a market value of $72,500, it is rented for $8,400 a year, has a property tax of $1,100, insurance rate of $500 and a yearly management fee of $840.
          
          Market Value	$72,500
          Gross rent income	$8,400
          Property Tax	-$1,100
          Hazard Insurance	-$500
          Management fee	-$840
          Total net rental income	$5,960
          
          Your participation in the investment can be as follows:							
          Your buying price will be $59,600.
          Your participation can only be up to 70% of the total investment; we keep 30% of all our investments to ensure good management and control of the property.
          
          To resume:
          
          Market Value	$72,500
          Our sale price to you	$59,600
          Our 30% share	$17,880
          Your 70% share	$41,720
          
          As soon as you invest with us, you are making a profit. Since your share of the investment is 70% and the market value is $72,500, your capital just increased to $50,750.
          
          You invest $41,720 and your capital increases to $50,750, which gives you an immediate profit of $9,030.
          
          You will also receive a 10% net return on your initial investment every year.
          $41,720*10%=$4,172 per year
          
          In case the property increases only 3% a year and we resell the property in 5 years for $84,047.37,

You will then receive a capital of:
          $84,047.37*70%= $58,833.16
          
          your capital gain:	                                             $17,113.16
          Total interest received over a 5 years period: 	$20,860
          Your total investment profit:         $37,973.16 or 91%return
          	 
          All investments are guaranteed a 10% net return with property that have already been rehabbed and rented.

Jon Holdman · Answer

OK, now I have to disagree.  The NOI is NOT $5960.  I agree, that's what you calculated, but you've left out vacancies, which are guaranteed to happen over five years, and maintenance, which is also guaranteed over five years even if the house is brand new right now.  I would consider the $4200 a better estimate (50% rule) than the overly optimistic $5960.

If you're getting people to buy units in an LLC, vs. buying a property or lending on a property, I assume you're done your Regulation D filings and are only offering these to investors that fit within the guidelines of your offerings.  Otherwise some guys from the SEC will wanting to have a chat with.  Especially if you're making these offerings publically.

Brian Levredge · Answer

It appears you're making money up and down the deal and the investor is limited to just the rent collection for his return.  I don't consider instant equity to be profit if it is still locked in the property.  For it to actually be profit, it needs to be unlocked somehow.  So my real return in the money I get back from the rent, which you claim to be 10%

Here are my issues.  You mention you sell the house to me.  I assume you are profiting off this part of the transaction since it has already been rehabbed?  What are other hidden costs?  You are making 10% off the PM.  Do you have lease up costs like advertising, commissions, etc.?  Like everyone else has said, there is no way your NOI is realistic at all, which further puts your ability to follow through on your return guarantee at risk.

It just seems to me that you are wholesaling and offering management services on top of that.  In addition to the money you make off reselling to me, you are also making money on the PM side, which you should, but you also get 30% of the deal.  Seems like a lot of money.

Jason S. · Answer

1. What happens if the market goes down?
2. Who is backing the guarantee if "rents" go down?

I see a lot of need for disclosure.  There are a lot of SEC rules when soliciting money from investors - especially investors not "known" to you prior to the solicitation.

3.  Are you using single beneficiary per home or multiple?  Who is on title?

4.  What about renters that do not pay?  In California the rules are heavily weighted in favor of the renter - you can get tied up for months without rent - are you still offering the guaranteed return?

5.  I see "hazard" insurance - I assume it covers loss of rent.  I had a friend who's tenant's child stole mercury from a local factory, spilled it in the home, and then they had to pay for a full fledged environmental clean up -  just asking to ensure that you are not on the hook for a guaranteed return if the extraordinary should occur.

Just a few of my initial concerns.  There are others.

Rodolphe Brun · Answer

Thanks for the inputs guys,

Vikram C. · Answer

Rudolphe, if the GSI is $8,400 then the NOI is probably around $4,200 and if you are going to have an LLC for each home then the NOI is probably even less.  Assuming a 10-cap, which would support a 10% yield, we have a market value of around $40,000 per home.

Where do you come up with the $72,500 market value?  It appears as if you are getting more than 100% of the market value of the home right now in return for 70% of the ownership.

Why should someone believe that you company has the ability and willingness to pay the 10% yield if things turn sour?  You guys might file for bankruptcy the same way most other companies do when they are unable to pay their bills.

In my opinion, the business model itself is not a bad one but I think this business, like any other, can only work in the long run on a large scale if you are able to offer honest good value to your clients.  Right now, it does not appear to offer that.

Rodolphe Brun · Answer

1) We are not planning on selling any time soon, we are keeping the properties until the markets recovers even if it takes 20 years, we make sure than our properties have a good rental income.
2) Our company is backing up the return. Even if the property doesn't rent, we will pay you the 10% return.
3) We are setting up an LLC for each investment, where the investors can own up to 70% of the shares.
Our company always keeps 30%.
The title will be held by the LLC, we do it this way so if an investor wants to get his money back, we can buy the shares back from him without having to sell the property.
4) Most of the properties are located in Pittsburg PA, it takes us an average of 3 weeks to evict a bad payer. Yes, we garantee the return no matter what. This is how we do it. First we manage all of our properties ourselves, and we set  our rent under the current market, that enables us to get a larger choice of tenants and we can then be more selective, also we own a lot of properties, so if one doesn't rent we have income to back it up.
5) All of our properties are insured so in an extraordinary case like yours, we would be covered.

Thanks for your input, I will make sure to cover all of that in our presentation.
Please ask more questions if you have any.

Ralph S. · Answer

Rodolphe

Seems you're looking for a lender, not an investor/buyer.

In simple terms, you're offering a 10% return on a 70% LTV, no?  Just using an LLC instead of recording a mortgage.

Actually, it seems you're getting more than 100% LTV, while still maintaining control and being able to say, "all properties owned free and clear!"

Is there a reason you wouldn't just leverage your properties in a more conventional way, at a lower rate?

Have you done any of these?  I get the impression from your post, saying "I want to offer to private investors" that you're just testing this creative financing idea.

Bad idea to guarantee the return.  Guaranteed to fail.

I think you'll run into legal issues, too, but not sure.  Not a lawyer.

Vikram C. · Answer

Rudolphe, on these lower-priced properties an investor would want to buy at a 10-cap at least.  The NOI is not going to be as high as you have calculated for the reasons Jon mentioned.  So astute investors will not be willing to pay much more than $40,000 for the home in your example.

I understand you are only getting that much from the investor when you sell, but you are selling only 70% for a price at which a normal investor would expect to get 100% of ownership.

Rodolphe Brun · Answer

The NOI is $5,960.
We sell the property for a price of $59,600 when the actual market value is $72,500 (this is appraisal value and what a broker would list the home in today's market).
Market value is different than purchase price because we want our investors to get a good deal when they buy.
Also, each LLC that we create owns one, or several properties, free and clear of any lien.  Why would we go bankrupt on a company that has more assets than debt? We have been doing this for many years, we are free of mortgage and all of our investors are happy with what we are doing. If you wish, you may contact them and ask all the questions you want. We have nothing to hide.
Also, remember that all the properties that we offer to our investors have already been remodeled and are rented with a good tenant in place.
Also, you can choose between getting a monthly or yearly payment.
If you do not feel comfortable with creating an LLC, we have no problem going with a tenant in common title. Most of our investors like to group with friends or family members, and that is why we like the LLC better, because if one of the partners needs to get his money back and wants to sell his shares, we do not need to sell the property.

What do you think of this investment?

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