All Forum Posts by: Erik W.

Try asking around in your circle of influence (family, friends, past co-workers, teachers, club members, church/synagogue) to see if anyone would like to be silent cash partner(s).  There are many people who have $$$ tied up in CDs or passbook savings accounts making a measly 1% interest at best.  Could you offer them a steady return of 6-8% or (even better) a share of equity and monthly/quarterly profit sharing? 

Equity partnership is a great way to raise funds and cuts out the middle man (banks) who demand lots of interest but pay only a pittance.  You remove that middle man by accessing that spare capital directly.  If you go this route though, be sure to spend a few bucks to talk to an attorney who is experienced with drafting these kinds of partnership agreements and any required SEC filings.  There shouldn't be any major issues if you talk to people with whom you already have a relationship as mentioned above, and you'll avoid some of the rules that general partnerships have to follow when advertising investments to the public.

Regarding zoning:  In my town, category RT1 "Residential Family Townhouse" allows up to 4 units per parcel.  A 5th unit would be non-confirming and possibly a violation that would incur penalties ranging from fines up to and including demolishing the 5th unit.  But before starting you'd never get a permit for it if you had to do new electrical and/or gas work.

Too, it may limit financing options.  Most banks consider over 4 units commercial instead of residential, so you also pay higher rates.

Since you're already thinking commercial, I'll throw in thought regarding non-residential commercial.  I took the leap in 2020 and doubled my portfolio.  Two shop/warehouse properties with 6 units each and a self-storage facility that has a small commercial building with a business in it.  There are several advantages I've found with these types of properties:

1) The eviction moratoriums that are causing so many headaches for residential land lords do not impact my commercial units.  

2) Many investors are now looking for multi-family rentals, which are driving up prices.  I had almost zero competition for the places I bought.  Got one seller to come down $27,000 on an already below market property, just by waiting a week and representing.  He'd had no activity for 3 months, and after seeing a genuine offer he was ready to deal.

3) Almost zero hassle.  You may have heard the old spiel about dealing with "tenants and toilets" from guys like Scott Meyer who specializes in self-storage.  It's true.  Commercials tenants are responsible for their own toilets per our lease.  Also most inside repairs are on their dime.  

4) All of my spaces are large metal boxes with concrete floors and steel framing.  Maintenance costs are extremely low, and they are immune to termites, dry rot, and a host of other problems that plague wooden structures.

5) Creativity.  I've managed to find additional ways for these properties to produce income.  For example, one of my warehouse/shop properties has about an acre of commercial land that isn't being used right how.  I'm getting bids for some compacted gravel and chain link fence to put up and will lease parking / storage space for boats, RVs, campers, etc.  It was "dead land" in the owners eyes, so I basically got it for nothing.  We based the purchase price off perceived rents of the warehouse shops themselves, and since the Seller had inherited the units vacant already they used old, out of date lease rents that were below market value.  So not only did I get a discount, I am able to take advantage of the excess land that the Seller wasn't savvy enough to see any value in.

Just a few reasons to consider non-multi family commercial.

I follow the old story/proverb to "dig for diamonds in your own back yard," so I invest in the city/metropolitan area in which I live.

The reasoning behind this are many.  I will cover several of the ones I think are key to understanding this strategy.

1) You can more easily keep an eye on a property that is near where you live.

2) You can know the land lord / tenant law in your one state easier than several states.  The same is true of judges, who will make or break your case when it comes time to enforce your leases.

3) You can more easily develop and maintain face-to-face relationships with contractors, investors, agents and city leadership in your area.

4) Even if you hire a manager, you will have to inspect how your manager is performing in person at lease 3-4 times per year until you have several years experience with that person/company.  We call this "managing the manager."  It's a lot less expensive and time consuming to be close by vs. flying all over the place.

5) It is often easier to attract "local money" to local projects when you live in that location as well.  It shows you have a vested stake in the community.  Some people won't care, but others will.

6) It requires less time and effort to maintain current knowledge of local politics, development, and economic trends in one area close by vs. many areas scattered all over.

To decide if you want to invest outside your area, you must find a rate of return in a market that more than adjusts for the extra time, expense, and hassle factor of you having to deal with all the above.  Some investors claim to do that, but it can be hard to measure. Too, what is it worth to be at home with your family, friends, and community each night vs. a "road warrior" investors travel the country and missing out on the joys and triumph in your home town?  To me, I live where I like to be surrounded by the people I love.  For a VERY SUBSTANTIAL GAIN, I would consider brief out of town trips, but this out of town investing seems to require a lot more than that.

We each have to decide.  I hope the factors I've laid out will benefit as you make your decision.

Shop local.  A decent-sized regional bank (10+ branches) is usually the most interested in these kinds of deal.

@Thomas Pollard, it does and doesn't answer my question.

Again, I'm naturally skeptical....but in this business you have to be careful.  I do not understand why an experienced real estate investor would go randomly Googling for people on the Internet to finance a major deal.  Maybe you have a KILLER website and he's unsophisticated enough to believe you have a lot of knowledge and experience in the industry (hard to believe, but possible....) or maybe he's a shark looking for an easy meal in a shallow pond.

No offense to you and your eager desire to get into real estate, but this guy sounds like a scammer.  Experienced rehabbers do not go looking for newbies who have zero experience to fund their deals.  They go to their experienced contacts with whom they have done many deals before and whom they know can deliver what they need.

Be careful and triple check EVERYTHING.

Hi @Thomas Pollard,

I'm not understanding what is going on here.  We have an experienced investor building a $3.8 M, 50-unit apartment complex, which is possibly 37% complete (but I don't understand if the 37% applies only to Phase 1 or to the entire project)....

What does he need for you to do?  Bring money, bring grunt labor, bring a heretofore unmentioned level of expertise in construction / project management / leasing / fundraising / ?

I'm naturally skeptical, so keep that in mind.  Not sure what you bring to the table that he can't get elsewhere far easier.  I would beware a sucker play that "sucks" time, money, and effort out of you but returns little or nothing.

VA is one of the most expensive loans you'll get in terms of the funding fee paid up front. It is also one of the most cumbersome in terms of paperwork and inspections, though FHA is no cake walk. Expect to kill at least one medium sized tree. *grins

Joking aside, one of the best ways to buy real estate and get a good deal is with a quick closing and few contingencies. FHA and VA loans are the opposite of that: they take a long time to close and are filled with contingencies. Sure, they are low down payment, but that comes at a cost, not just in loan fees but also in paying a higher price to convince the seller to go thru all the hassles.

To tie this into your question, the better price you pay and the lower loan costs mean you will have a much better chance of cash flowing positively or losing less.  The fact that you are getting free rent when having roommates or other renters helping pay should be factored into the equation.  So if your unit would rent for $800 or $1000 or whatever, work that into your numbers as if someone else were paying it.  You aren't getting any income from your residence, but your free living space is balanced by the expense of not receiving market rent for it.

Keep in mind: you will not be able to fully deduct expenses for any place where you are living.  Expenses will have to be apportioned at tax time based on what percentage is being rented for income vs. personal use, including depreciation I think.  The reduction of tax benefits must be considered if you want to compare apples to apples.

I am assuming that the $2K in reserves here is the ONLY SOURCE of cash the person would have if something goes wrong.  Nothing else they can tap into, period.  If that is correct, then anyone who says $2K in reserves hasn't ever had a roof replacement and a furnace go out in the same month.  You both can and will go under if you're not prepare to pay when the SHTF, and trust me...it does!

This month so far I've had a weather head get ripped off one house on new years day's due to an ice storm bringing down large tree branches, two tenants move out unexpectedly leaving damages, and had to replace a furnace.  Guarantee you that is costing me a heckuva lot more than $2K.  I carry significant reserves, so these are non-issues.  I fix stuff, write checks, and am finding new tenants.  

A lot of investors on this site poo-poo Dave Ramsey for being unsophisticated and not understanding leverage.  To that I say there are far more investors who never acknowledge that leverage is a doubled edged sword that cuts both ways, and there have been far more people who have lost everything because things didn't work out as rosy as their spreadsheet projections.  Having a significant rainy day / emergency fund is one of Ramey's key teachings because it gives you margin and peace when other people are freaking out.  Being able to make calm, rational decisions without being forced to liquidate can save your fortune, you marriage, and possibly your life.  And that's all worth something.

@Mark H. Porter, depending on what you're doing, perhaps.  But if we think about the PURPOSE of a cap rate, it is to tell what percent return on CAPITAL you are getting.

Example: turnkey property purchased for $100,000 that has NOI of $10,000 annually. Most investors will say that is CAP RATE = 10.

Now, what if you buy a fixer upper for $100,000 that has NOI of $10,000 annually but you had to spend $40,000 fixing it up to habitable condition. What's your cap rate? 10? Hardly.... if you were purchasing that building, you would want to know what the return is based on the capital invested, so the formula to express that accurate would be $10,000 / ($100,000 + $40,000).

Failing to take into consideration all the capital deployed into a project gives you an inaccurate outcome.

I know the "experts" will disagree, but I find the most useful formula for CAP RATE is this:

Annual NOI / (Purchase Price + Closing Costs + Holding Costs + Rehab Costs) = CAP RATE.

While not by-the-books correct, this is the measure all investors should be using.  I find many forget to include certain expenses, then wonder why I won't pay what they want when I come along and poke holes in their Sale prices.