All Forum Posts by: Account Closed

I'm aware that there are a few people on this site that have successfully built up rental portfolios by having passive investors getting a stated return on their money. I want to educate myself a little more about this and I know this is the place to come so here goes...

By day I'm am accountant in a local public accounting firm. I have a pretty good understanding of what works and what doesn't in my market as far as rental properties go. I can also save up money pretty efficiently and get into the real estate buy and hold strategy (long term wealth as my goal) and I'm not really looking to buy and flip because that doesn't really interest me too much.

1. How would you go about getting started using outside investors? Would I be better served making a few acquisitions with my own personal resources to build up a track record so to speak that I can deliver the returns needed to satisfy passive investor requirements before seeking outside investors?

2. Logistically speaking, investors who want to get a stated return (say 10%) on their capital I understand how the interest payments work but where I'm getting a mental block is that real estate is one of the most illiquid investments out there. If an investor gives me $100k to acquire properties that meet the requirement to provide the returns, what happens when the investor wants his principle back out of the deal? It's not like a mutual fund or something where we can just sell it off and cut him a check so quickly. How do these arrangements work mechanically? If I needed to cash out an investor who needed access to his principle but it's tied up in a now illiquid rental property would I need to seek permanent financing to get the investor his principle back? Do you set it up to where the money is tied up in the property until the rental income has hit the tax return for two years and he now has the option to get out? If I had to refinance the property to get the investor his principle back, who pays the refi fees? Do you treat it as investment expenses required to "cash out" the investor?

From what I'm picturing here, I, the landlord would tell the outside passive investor that I will give him a fixed rate on his money (lets say 10%) but that his principle is not available to him until the property qualifies for permanent financing.

Thinking about this from the passive investors shoes, committing money to a buy and hold project is great if I get paid my standard rate of return, but I may not be able to get my principle out of the deal for quite some time. Is this a common problem and how are you all who do this setting up these transactions mechanically speaking?

3. Soliciting investors. I know there are rules and regulations on how you go about seeking investors for your projects. What's the proper way to do this?

4. Are there investors on this forum who understand the illiquid nature of real estate that will lend on buy and hold properties for a stated return?

5. Would you keep the passive investor's money in place permanently or would you eventually seek permanent financing so you could own the property free and clear yourself?

Hopefully my questions make sense. If not, I'll clarify on my questions.

Thanks!

Thanks Bill. I'll see what I can do.

So you do not think it will be as simple as buying and rehabbing with my lender's cash, having my lender (family member) file a lien showing the total amount he is owed, and going to a bank or credit union to refinance it?

Do they treat it differently since he was an individual not a bank? Logically it seems that if a lien was filed and the entire refinance amount met their lending criteria, it wouldn't be a big deal.

I wanted to avoid the cash out refi because I know the cash out refi terms usually have lower LTV ratios. I was hoping with a well documented lien filed, it would be treated as a refi of any other mortgage that would go through as long as the property was not upside down (it wouldn't be).

I've got a potential deal in the works. I could be purchasing for $30k with $20k in rehab. I've got a private lender (family member) who is willing to lend me an interest only loan on the entire amount.

This will be my primary residence for a few years and the plan is to refinance him out after the rehab is complete.

Does there need to be any formal lending paperwork/leins filed against the property for the refi to go through without them treating it as a cash-out refi?

How difficult would it be to get the refi done? Good credit and plenty of equity in the deal, but I'd like to refinance him out of it with as little out of pocket on my end as possible.

Thoughts?

Steven,

I see, we were talking about two different types of audits. Financial Statement audits vs IRS.

Maybe we should join forces and be the tax planners and preparers for all of BP. That sounds like too much work though!

Bryan, you're spot on. The best trait is the ability to know what you don't know and willingness to learn from those who do! Being a rookie to the profession, one of the common answers I give is "I don't know all of the details off the top of my head, but I know someone who does!"

Great points!

I'm not sure we're in the same profession...A smaller CPA firm really doesn't have the staffing to handle audits as efficiently as larger firms. Most of the 1-2 CPA practices are tax only.

I do agree with you though that some of the most knowledgeable tax preparers don't have either designation.

OK, maybe not "most." But it certainly isn't rare to find a CPA who makes a significant portion of their income off other businesses or investments. In my network of CPA's it's not uncommon and my network is of smaller CPA firm partners in the southeast. If we throw big 4 firms in the mix, the partners there can draw $1m+/year in salary and with frugality it's not hard to see how quickly they can build up serious investment funds.

My point was talking about tax liability and assuming the CPA's should be lower is not really an accurate criteria...

Pretty bold assumption there. Many of the CPA's in my area, especially the firm owners/partners, are involved in all sorts of other businesses. One in particular comes to mind that still works his tax practice but owns a few hotels and a couple storage units. From the outside he looks like the humble, frugal CPA with his older used pickup truck, but he's killing it under the radar. In my experience this seems to be the norm, rather than the exception. Most CPA's are frugal but heavy investors and not very flashy so it can be deceiving.

The truth in this post is that not all CPA's deal with taxes. Many do audits, compliance, compilations, controllers, are CFO's, are CEO's, or do all other aspects of business.

If you go to a smaller, local practice then chances are they aren't touching many audits and the lions share of their practice is taxes and tax planning. Some even merge practices with Tax Attorneys for the tax and estate dream team.

I'm not sure I would compare a CPA to an EA. They aren't even on the same level. A CPA can do all the work an EA can do, but an EA can't do half the work a CPA can do. Just look at the CPA exam vs the EA Exam.

That said, an EA would probably do just fine for tax preparation only, but I'd much rather have my financial statements and books compiled by a CPA and since he's already got that intimate knowledge of your financials he (or she) can do the tax work too.

I'm not bashing EA's, but I'm not sure comparing to a CPA is even in the same ballpark. Most EA's work for outfits like Jackson Hewitt, etc. (not bashing them if you use them)

If you're a real estate investor you will have long term tax planning issues, likely financial statement compilations for lenders, multiple partnership returns, and some pretty complicated books. If you can find a CPA who also invests in real estate himself, that's the ticket, IMO.

I'm a rookie Accountant, someone like Charles Perkins would be your best pick.