All Forum Posts by: Craig Grella

If you're going to partner with the seller you want to have everything out on the table. The last poster is correct though, these deals are the wild west.

It's not uncommon for partnership and JV agreements to spell out exactly what each party is expected to do. I've negotiated jv agreements down to who does what and when, like Party A will pay for all development costs, party B will pay for all operating costs after construction is complete and certificate of occupancy is issued, party c will contribute the value of land as imputed capital (as determined by an appraisal) and zero cash.

You'll do the same for returns. For instance, you might specify that after all debt is repaid, all parties will receive their initial investment plus a 10% return, after which time party a will receive 60% of the cash flow, party B will receive 30% of the cash flow, and party c will receive 10% of the cash flow.

There are a million iterations you can go through. The point is to make everyone happy.

Find out what kind of return the seller/owner is looking for, meaning what would make them happy when this project is complete. Would they like to have made a certain amount of money at the completion or a certain % return on their overall investment.

From there, you'll work backwards. You should already have from your comps or market study estimates of what the property will return to you on an ongoing basis (if rental), or what it would return in a lump sum at sale.

After debt is repaid you can figure your net profits to the overall LLC. If that number is enough to give your seller/partners what they're looking for and also give you a return you can be happy with then you are set. Put it all in writing. consider using an analyst to make sure all the numbers work out and an attorney to make it all legal.

Call me for help. I enjoy working on these.

Good luck with it.

Assuming a$43k initial investment (All cash), with a 5 year hold at $750 per month income, subtracting out 20% for expenses, and a sale in the fifth year at $75k yields a return of over 20% per year, slightly less when you account for taxes/capital gains.

Using debt at 50% instead of purchasing all cash jumps the return into the mid 40% range per year.

Better than the stock market.

Someone posted a comment about this not working for more mortgages.

For those with two or more mortgages you can use a weighted average for all the loans and enter them in as one payment. This will suffice, even if the terms are not the same, because you are analyzing on an as-is basis.

If you want to analyze out further, or work in present value analysis for weighing a choice between two investments, you might want to step up to a more sophisticated spreadsheet.

Dave is right.
Doesn't matter what kind of property it is.
Use separate LLC's.

It doesn't take much for a tenant to trip and fall, break their leg, and own your building.

Some municipalities may require you to pay excise or real estate tax when you convey property from being held personally to an LLC or vice versa.

Still, some municipalities allow a tax free transfer between personal to LLC holdings when the property is being transferred to a single owner LLC. Meaning, if you own the home personally and transfer it to an LLC for which you are the single 100% owner.

Practically speaking, in this market, most banks are happy just to get paid on time so you probably wont see too much trouble from them. However, the local government will most likely not be so lenient. If tax is due, it will eventually catch up with you.

alot of interesting replies here, but i saw a note on financials and i wanted to add something:
every property i have bought personally or helped negotiate i have put a clause in the purchase and sale agreement for delivery of financial statements including current and accurate rent roll, expense figures (including actual statements), and tax returns, both personal and business (portions referring to subject property claims). In some cases i've asked for notarized copies of such documents.

I'm a licensed agent/broker myself, so i say this with love and affection for other similar agents, all too often the numbers you see on the MLS or sites like loopnet suddenly change when you get the tax return from the owner.

For example: I made a blind offer on a property based on a listing another broker sent me for a 16 unit. I visited the building and met the owner. We discussed the property as we took a tour and he went on to tell me that his repair and maintenance budget is zero. I found that hard to believe because when i met him he was in the process of painting and cleaning two units that were recently vacated. Maybe he gets paint and carpet free. WHo knows?

Anyway, when i got his tax returns he listed $8,000 a year for repairs and maintenance. $8,000 is more than zero.

Get the financials. if they don't want to give them that should be the first red flag. Doesn't mean you can't move forward, but if you do, you have to accept the risk.

You can find vacancy rates from several areas. The first is the census. Depending on what area you're looking in, they may have 2008 info reported on quick stats.
SEcond would be to try local RE firms like CBRE, Grubb&Ellis, etc. They usually give out free market reports on a local level.
You could call an appraiser who has access to tools the above companies have.
You can also do a demographic analysis of the area taking into account housing stock and demand.
You can call your local bureau of economic analysis - they usually keep this info on a yearly basis as well.

Typically these types of lenders will give you up to 65% of ARV as a max loan facility, but will only extend an initial amount equal to 65% of the current value, which may or may not cover purchase and rehab costs. Just make sure to get their offer in writing and read thoroughly.

Richard said it best.
It's not so much how much you have to put down, but how much return you're getting for that money. In my opinion that's the most important metric, return on invested capital.

If you leverage your property to 100% with minimal or no cash flow you're pretty much banking on equity creation (debt reduction) or price appreciation. I think if the current market has taught us anything it's that those two exit strategies aren't very viable right now.

When evaluating your potential investments, analyze them unleveraged first, then at various points of leverage to see where the risk and returns fall. That might give you a better view of the playing field.

Hope that helps.

Good luck.