What's the language for the investors? Do they have a minimum period for hold, or a time period they must withdraw ahead of time(like if they want to be paid end of Q1, they must state that by end of Q4). You're literally just a run on from being wiped. Yes banks can do that, but they also got FDIC insurance behind that'll get involved and a lot more. You have houses you'd have to liquidate.
Are your investors aware you're reserving 20% of total funds, have they seen the balance sheet?
With house prices dropping & rates increasing, I'm quite confident if they'd get a look they may hit the withdraw button. Now hopefully you don't have anything capex wise happen too especially in this Panhandle area with weather coming in. Otherwise, your investors will wipe your 20% reserves out and you'll be force to liquidate the houses to get proceeds over.
One run away from being wiped is exactly right. And what is the collateral backing the investors accounts? Houses that aren't going to cover the accounts. Is there any kind of government oversight here?
It's seeming more like fraud and a a scheme. What's keeping the OP from just taking the investor's money and running off to another country? Perhaps jail time? There has to be some sort of government regulation/laws in place
The houses more than cover the accounts and growth of interest payments with time. I'd be happy to talk you through all 33 SFRs one by one to convince you of that fact. Just DM me. Would also love to hear your investing story and what colors your attitude and reaction to my own. I have clients in Australia, Canada, and the US. I have ambitions to grow the business far bigger than it is now. What stops me behaving dishonestly? There is far more money to be made honestly than dishonestly. All of my clients have the legal right to sue me and none of my worldwide assets are shielded from them. For any of my investors to lose anything, I would first need to lose everything, and with a personal W-2 income that is of 50% of my total investor pools principal and over 8x my interest obligation, that is just not happening.
thanks for the explanation, I was confused as applied to single properties, but I think what you're saying is that you take money from investors and invest it in a portfolio of SFHs. you don't say "i need $X for a down payment for house A, and i'll pay you back strictly out of the cash flow of house A." instead, you invest the aggregated funds. is that accurate?
and you said most investors don't want a monthly payment - so when do they exit? say, 5 years - and they get their principal back plus the interest?
That's correct, investor funds are pooled and used buy a portfolio of assets. A Stairway 8% savings account isn't an investment that you exit. It's where you put cash that is not currently committed to a better deal. People use it as such. Maybe someone builds up their balance to $50k-$100k then makes a significant drawdown to purchase an asset. Maybe someone uses it as a place to store funds set aside for a rainy day. It's a tool. And a tool that comes with total access to all of the details of all the assets that back the fund, education on how to acquire similar assets, and all the infrastructure and legals to enable you to build a similar pool of clients and raise capital for yourself.
If you are interested in learning more, or leveraging the infrastructure I have built, please message me.
What? It's not an investment that you exit? It's for a rainy day fund or a significant draw down to buy an asset--that's an exit, no?
If your investors all wanted their money back today, what's stopping them?
Nothing stops all investors withdrawing all their money at once. I have sufficient cash, credit, and liquid stocks to satisfy such an event without selling a single house. Fractional reserve banking has existed for over 350 years. It's a sound business model I didn't invent.
What's the language for the investors? Do they have a minimum period for hold, or a time period they must withdraw ahead of time(like if they want to be paid end of Q1, they must state that by end of Q4). When's the exit period? You're literally just a run on from being wiped. Yes banks can do that, but they also got FDIC insurance behind that'll get involved and a lot more. You have houses you'd have to liquidate.
Are your investors aware you're reserving 20% of total funds, have they seen the balance sheet?
With house prices dropping & rates increasing, I'm quite confident if they'd get a look they may hit the withdraw button. Now hopefully you don't have anything capex wise happen too especially in this Panhandle area with weather coming in. Otherwise, your investors will wipe your 20% reserves out and you'll be force to liquidate the houses to get proceeds over. Your strategy has a lot of holes in it, you're basically leveraged 80% on illiquid assets that are coming down as rates are going up, and hoping you can see it through it with nobody asking for money basically? If you do, you'll do well. I don't think significantly well to bare this risk, but that's your call.
As for the language for investors, below is the 1-page summary of the 61-page PPM. No minimum hold time. If you want to put money in one day and take it out the next, that's fine by me. A single day of interest is cheap to pay and I'm happy to build relationships with clients simple by providing good service. No specific exit period. This is a savings account service. Yes, my investors are aware I run a fractional reserve investment bank that is ultimately personally guaranteed only by my worldwide assets. But these assets are substantial and sufficient to provide a meaningful level of safety. To be very clear, I can afford to cash out (through cash, credit, and stocks) all of my investors without selling a single house.
As for rates, all of my mortgages are 30-year fixed. The inflationary environment we live is has so far put upward pressure on rents. And yes, I share much more than my balance sheet with investors. W-2s, tax returns, the lot. My net worth is multiples my total debt obligation to clients, I run my business conservatively.
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Account Terms and Conditions
Maximum balance: $1.5M
The borrower agrees to provide a bank account service to the lender paying 8% per annum, with interest calculated and credited daily at midnight PST via balance(t+1) = balance(t) * (1.08)^(1/365). The account shall operate according to the following terms and conditions. Some of these conditions can lead to the account switching to a penalty interest rate of 25% per annum.
1) The funds in the account are secured with full recourse to the worldwide assets of the borrower, no matter how indirect the ownership structure is, no exceptions.
2) Deposits and withdrawals can only be made electronically to ensure unambiguous dates of transactions and secure transfers.
3) The lender can initiate a deposit by performing an electronic transfer to the borrower's account.
4) The date of deposit will be the date of receipt of funds listed on the borrower's bank statement.
5) If the received deposit would take the lender's account balance over the maximum balance, this deposit shall be returned in full within 7 days during which no interest will accrue on these funds. Failure to do so will result in the lender's account switching to the penalty interest rate and the deposit posting to the lender's account 7 days after receipt until the excess deposit is returned.
6) The lender can initiate a withdrawal at any time by sending an email requesting funds. Interest shall continue to accrue until these funds are sent. The funds must be sent within 7 days of the email requesting withdrawal. Failure to do so will result in the lender's account switching to the penalty interest rate until the funds are sent.
7) Transactions, interest, and current balance shall be provided via an online portal.
8) There shall be no fees or transaction limits associated with the account.
9) The borrower has the right to close the account at any time by sending all owed funds.
10) Even in the event of death or incapacitation of the borrower, this contract gives the lender full recourse to the borrower's estate, even after transfer to other beneficiaries of the estate, without exception or limitation.
Man I wish you would've posted this from the beginning - it was confusing thinking you were raising capital per house and paying dividends essentially back per property on an annual basis. I could not see how that would work. What your doing is a bit more complex than I thought initially.
I get it now though, you're essentially acting as a bank. Pooling private investor money and using it to buy SFH. The interest you're paying them just isn't realized to an extent since it goes into their investment account but is never withdrawn. You wouldn't see the "expense" of a withdraw unless investors started taking their money out and you had to pay out the interest. So a bank run is essentially the risk here with fractional reserve banking.
You have reserves to cover big expenses - got it. It's an interesting concept because I still don't think the house we discussed in particular here cashflows very well. If you remove the investor payments and run the numbers REI Nation uses you can force cashflow. If you run more reasonable/conservative numbers I think you come in right around breaking even as far as cashflow.
So how do you actually pay your investors? You "deposit" money in their account, and increase your reserves to maintain 20%, but that money doesn't actually exist until it's realized. Meaning that no money is actually paid to the investor until it's actually cashed out. So you don't pay dividends or anything like that. Is that right? I'm not familiar with this system, but I'm catching on.
How did you come up with the 8% figure to pay investors? Why not 6%? or 10%?
I am also struggling to see what you get out of the deal. Tax deductions for owning a SFR, ok. Mortgage paydown, ok. Cashflow - I'm not really seeing it, if so, it is minimal (that is my personal opinion based on numbers I would run anyway).
Also what gets me is this is an indefinite game essentially - what's the exit strategy? I don't think there is one besides sell everything and hope that covers all the investors accounts, which it won't. I don't know why but something about this feels illegal
thanks for the explanation, I was confused as applied to single properties, but I think what you're saying is that you take money from investors and invest it in a portfolio of SFHs. you don't say "i need $X for a down payment for house A, and i'll pay you back strictly out of the cash flow of house A." instead, you invest the aggregated funds. is that accurate?
and you said most investors don't want a monthly payment - so when do they exit? say, 5 years - and they get their principal back plus the interest?
That's correct, investor funds are pooled and used buy a portfolio of assets. A Stairway 8% savings account isn't an investment that you exit. It's where you put cash that is not currently committed to a better deal. People use it as such. Maybe someone builds up their balance to $50k-$100k then makes a significant drawdown to purchase an asset. Maybe someone uses it as a place to store funds set aside for a rainy day. It's a tool. And a tool that comes with total access to all of the details of all the assets that back the fund, education on how to acquire similar assets, and all the infrastructure and legals to enable you to build a similar pool of clients and raise capital for yourself.
If you are interested in learning more, or leveraging the infrastructure I have built, please message me.
@Austin Fowler how are you raising money legally and also publicly advertising these investments? I know this is really tricky to do without violating securities and exchange laws.
I have a regulation D 506c exemption. Happy to discuss the details if you are interested in trying this business model. Just message me.
I read this whole thread, and I am still not clear on what you're doing. Are you paying out the cash flow to investors, and banking (so to speak) on the equity you get from mortgage paydown?
What happens if a bunch of big capex hits all at once?
To more clearly answer the questions about cashflow, here are my numbers for November for my entire 33 SFR portfolio, which is still spinning up. I have two tenants behind on rent and 3 currently vacant properties and 3 more properties that were only leased last month so I only received partial rent. Nevertheless:
Total rent received: $41987.78
Total mortgage payments: -$35828.53
Total miscellaneous income (escrow excess): $3937.99
Total miscellaneous expenses: -$1401.35
Cashflow: $8695.89
These numbers are direct from my bank account and omit nothing. The income will grow next month as I will get full payment from 3 more homes and partial from one more newly leased. Note that $8161.95 of the mortgage payment was debt paydown. Note that there is no cash flow drain from the investor capital raised in savings accounts paying 8% per annum as this interest capitalizes. When withdrawals occur, I replace the withdrawn funds with new funds. My job is essentially that of a bank manager to tune cash on hand and credit facilities and liquid assets for smooth operation. I can afford to hold on to these assets indefinitely, and generate a sufficient return for my investors just from cashflow and debt paydown, even if these properties are worth what they are now in 10 years.
When withdrawals occur, you're replacing this capital wit new funds from new investors?
I'd point out that my tax return alone is over double my total interest obligation to investors, so no, replacing withdrawn funds with new funds is not the primary strategy. My November positive cashflow with 3 properties vacant, 3 with new leases, and 2 behind on rent was $8695.89. It will be higher in December. I keep substantial cash, credit, and liquid asset reserves, and manage these reserves as deposits and withdrawals are made to keep them stable. The net effect is to have an unlimited time loan with interest that capitalizes. You then just need to make sure your net worth is growing faster than your debt obligation, which we have a long track record of comfortably achieving.
Blindly believing a company that is profiting off you every step of the way (especially when you have relatively little experience) is probably a mistake. Ask anyone that's been doing this for years - maintenance/repairs/Cap Ex will run you more than 3.7% - this is a fact. And it if is 3.7% there is absolutely no room for error - if it runs higher, now what? Average tenant staying 6 years...I mean these are incredibly thin estimates and margins to be underwriting with (and to think you won't have repairs to make after those 6 years).
You can force a positive cashflow by adjusting your inputs - Maintenance/repairs/cap Ex to $0 (still negative cashflow) or let's even remove your "investor payments" - that gives you roughly $400 cashflow with $0 budgeted for repairs/maintenance/Cap Ex. Again probably not a good idea to force your numbers to make things work - there's a reason most people estimate their vacancy/repairs/Cap Ex much higher...it's because they generally run much higher than what REI Nation estimates.
So explain exactly how your investors get paid? If they are truly making 8% a year - there's an expense somewhere, at some point. If your capitalizing the interest and adding it to the principal and taking the "cashflow" then your loans are simply growing and you will now have compound interest on the capitalized interest. Selling or refinancing will be impossible without taking a huge L (especially taking all the tax deductions up front - you'll have recapture on top of this). Combine this with the low cashflow and zero margin for error...There is no exit strategy.
My November positive cashflow with 3 properties vacant, 3 with new leases, and 2 behind on rent was $8695.89. This is not a thin margin. That's after all expenses. December with be better with more income from the newly leased properties, one new lease, and we are working with the 2 behind to catch them up.
I'm certainly not blindly believing in REI Nation. I have 15 properties with them, 12 with a different turnkey provider, and 6 I bought myself through a real estate agent then fixed up for rent. Of all of these, the REI Nation properties perform the best. My non-REI properties certainly have higher vacancy and delinquency rates (much higher) but that is all budgeted for.
I've been running this business for 20 years. In the beginning based on Australian bank stocks and more recently on SFRs. I keep cash, credit, and liquid asset reserves to pay out investors whenever they wish to be paid out. When these reserves are drawn down, I then focus on raising more capital to replace the drawn down amount.
My real you-can-see-it-in-my-bank account cash flow is greater than the total interest obligation to investors, my debit paydown on its own is also greater, and my tax return from accelerated depreciation is over double that obligation, so there is no problem paying the investors.
When I buy an asset, I buy with the intention of holding it indefinitely. I could certainly sell the SFRs if I wished, but given their performance would not wish to do so.
To more clearly answer the questions about cashflow, here are my numbers for November for my entire 33 SFR portfolio, which is still spinning up. I have two tenants behind on rent and 3 currently vacant properties and 3 more properties that were only leased last month so I only received partial rent. Nevertheless:
Total rent received: $41987.78
Total mortgage payments: -$35828.53
Total miscellaneous income (escrow excess): $3937.99
Total miscellaneous expenses: -$1401.35
Cashflow: $8695.89
These numbers are direct from my bank account and omit nothing. The income will grow next month as I will get full payment from 3 more homes and partial from one more newly leased. Note that $8161.95 of the mortgage payment was debt paydown. Note that there is no cash flow drain from the investor capital raised in savings accounts paying 8% per annum as this interest capitalizes. When withdrawals occur, I replace the withdrawn funds with new funds. My job is essentially that of a bank manager to tune cash on hand and credit facilities and liquid assets for smooth operation. I can afford to hold on to these assets indefinitely, and generate a sufficient return for my investors just from cashflow and debt paydown, even if these properties are worth what they are now in 10 years.