All Forum Posts by: Brian P Carolan

Hi everyone,

I am in the process of purchasing 50% of a single family home in Rochester NY that is owned by two brothers who inherited the property.

One brother wants to sell his interest to me and move to a condo in the spring. I would be partnering with the other brother(my friend) on this property to turn it into a single family rental.

The property is worth between 100-115k and has no mortgage or debt on it currently. I will be acquiring my interest in the property in December then we will be forming an LLC to hold the property. My partners brother will be renting the property from us after close for approximately 5 months. During this time we will be doing some cosmetic work to improve the property and get it ready to re rent at a higher rate once his brother moves out.

Rough deal details (more specifics still need to be agreed on)

The deal will consist of me giving my partners brother a small down payment with the rest being a loan that will be paid once he moves out. My partner will be subsiding 1/2 of his brothers rent until the date he moves out in order to keep his cost of living the same until he is out of the property. The rent to the LLC paid by my partners brother will be the same as the holding costs of the property. To make up for me making no profit during the 5 months the loans interest rate on my purchase will be 0% so effectively the rate will be the opportunity cost of getting higher rent for the few months he resides in the property. Also we will have access to do the cosmetic upgrades while he lives there and covers the costs. Also we will be splitting the benefit of not incurring a commission on sale so the purchase price will be lowered by 1/2 of the commission that would have been paid. My partner will incur all of the costs to subsidize his brothers rent as that is what he wants to do to help his brother out until he leaves.

Our goal once the property is renovated (minor cosmetic renovations such as painting, wall paper removal, replacing outdated linoleum flooring and updating landscaping) is to obtain a HELOC to finance the next deal.

After we use the HELOC to acquire the second property for cash plus potentially additional funding from my father as a loan we plan to rent it out after a few weeks of renovation. Once it's rented for the minimum time a bank requires we will refinance and pay back the HELOC/my father and use it to acquire a third property and so on.

The rental that the HELOC would be obtained on should be able to rent for 1,200 to 1,400 per month and will have 100% equity when we goto a bank.

Does anyone have experience with obtaining a HELOC on a single family rental in an LLC using only the equity in the property and the rental income coming in from that property to obtain the line?

We talked to a banker at Key bank and they said this would be possible to use only the property in the LLC and it's income to obtain the line of credit. They said they would potentially lend on up to 85% of the FMV of the property using only the equity and income generated by renting it out. The property would need to be rented for I believe at least 6 months and we would need to produce a lease agreement fir the tenant.

Based on your experience is this a common way banks will let you pull the equity out of an investment property?

Is there a better way?

Do the terms above seem like they are consistent with deals that you have done? If not what terms have you seen on similar properties?

Does anyone have any other ideas that may be better for us to consider than the HELOC?

Thanks for everyone’s help!

Brian

Thank you everyone for the replies, lots of great information.  I wasn't favoring 506(c) over 506(b) maybe I wasn't clear enough in my question.  I basically was looking to find a legal bypass to any accredited offering (b or c) without having to have the syndication allow me in as a non accredited investor.  I figured there was not really a legal way to do it but can't hurt to ask and see if anyone had uncovered something I had not in my previous research on the topic.

I want to use the LLC structure with my father purely as a way to allow me to invest less than the minimums on each deal and diversify more as I have a lower net worth than him and want to keep the risk I am taking at an appropriate level in relation to my total investment portfolio. The 75%/25% structure for our LLC would also allow my father to diversify a little more as well. My net worth is around $300K and my Dad's is probably close to 4 Million so I have some time before I can reach the 1 million mark unless my income were to meet the threshold at some point.

Based on all of my previous research and the replies above I think the best way for me to get our fund going is to go network and find opportunities that would accept our LLC and structure into its fund/deals. I know I could probably just check the box on some of the opportunities that are out there under 506(b) and never get caught which has crossed my mind but I figured I would't want someone doing that to my deal and possibly putting it at risk. Also as a CPA I wouldn't want to do anything that could possibly put my license at risk as I am sure doing that would be viewed as not ethical. Also it could come back to bite me at some point and people may not want to let me in their funds which would be worse than just doing a bit more work in the beginning. It is not like I am on a clock and need a deal now so I can be patient. I just wanted to try and eliminate the additional requirements if I could do so legally.

I also have some initial investments I made as a non accredited investor that I will be transferring to the fund so that will probably be the start of it once we finalize the operating agreement and other details.  Once I contribute my current deals and my father contributes additional capital to bring his interest up to 75% based on the deals and cash I initially transfer in I will then start the process to find additional deals to fill our fund through networking as suggested.  

Thank you again to everyone who replied above for all of your help! Any additional suggestions are always welcome as I love to learn new ways to doing things/investing.

Thanks,

Brian

Building relationships is definitely a good option which I will most likely be pursuing because it will also allow me to gain more comfort with the sponsor as well as invest clearly within the current law (even though it sucks).  

I am just curious if anyone on here knows of a legal way to do what I described above just because it would be easier if I were able to set up an LLC and have some way to get it to qualify on its own.  I just want to have the option invest in any deal no matter if it is 506(c) or 506(b) as many people just will not accept non accredited investors. 

I have found a few things I can invest in as a non accredited investor which have done well for me but from what I have seen the offerings open to accredited investors typically have more favorable terms.  If I could have a legal way to qualify under the SEC rules it would cut through a lot of red tape and allow me access to many more deals without any extra hassle.  

Not sure why the government thinks these rules based on income and net worth make you a good investor.  I think a more effective way would be to have some sort of education class/test that you could pass to bypass the rules and get some sort of certification that would allow you to invest.  The govt could probably make some good money charging for this to haha.

I am wondering if it would be legal if my Dad filed his own Form D under 506(b) once he purchased the investment and then sold to me under his exemption.  Not a securities law lawyer so definitely do not know if that can be done or if that is within the law.  Logically I feel like it should be allowed but if it was there would probably be people talking about it.

Hi Everyone,

I am looking to invest in a syndication deal that is offering units in an LLC under Reg D 506(c) which is only open to accredited investors that are verified.

I am not currently an accredited investor and I was wondering if it would be possible to get around these rules by using the following strategy below:

1. My father (who is an accredited investor) would form an single member LLC and use it to purchase the units in the syndication that I want to invest in.

2. After his single member LLC closes on the deal and owns the units in the syndication he would then sell me 25% of his single member LLC that just closed on the syndication deal. This would leave him with 75% ownership and me with 25% ownership in the LLC that now owns and interest in the syndication restricted to accredited investors that I wanted to purchase but would not be able to since I could not be verified on my own.

I believe if my Dad and I formed the LLC together to start we would not be able to purchase the units in the syndication as 506(c) requires verification of all members in the LLC at the time of purchase.

My first thought is that this strategy wouldn't technically be allowed under the law because it is basically the same thing as the example right above but how would anyone ever really find out if my dad later sold me shares in his LLC? Does anyone know the legal risk of us doing this?

Or would there be a way around this if my dad purchased the deal as described above but then Filed Form D under 506(b) for his LLC which would allow up to 35 non accredited investors to invest in his LLC. After he files Form D under 506(b) for his LLC that now owns the syndication he would then sell me 25% of the units in his LLC using the exemption for 35 non accredited investors under 506(b). Has anyone ever tried this strategy or know if it would be allowed?

Does anyone have any ideas that would allow my Dad (accredited) and me (not accredited) to invest in a real estate syndication that is only open to accredited investors?  

I just think it is such B.S. that the government is telling me I am not allowed to invest in a deal like this when I have the necessary financial knowledge and understand the risks involved.  If anyone knows a legal way around these rules I would greatly appreciate it.

Thanks,

Brian

Thank you both for the recommendations!

Russell,

Yes I would greatly appreciate a referral.

Thanks,

Brian

Hi,

My name is Brian Carolan and I am looking for recommendations on which banks to use in Rochester NY to finance the purchase of a 2-4 family rental property. 

Recommendations and reviews of banks/loan officers will be greatly appreciated.

Thanks,

Brian