All Forum Posts by: Everett Fujii

One other thing I thought of.

Make sure you have a something about dispute resolution procedures. With 2 people in the LLC what happens if you cannot agree on something? There's no tie breaker. Does one of you have final say over the other? In larger disputes (usually about money) will you bring in a mediator? Is it binding mediation?

You can't possibly address every single potential situation.  So having a catch all procedure worked out when/if you disagree with your partner is always a good idea.  

Given the history I would say this.

I will send a company out there.  Provided we are able to give you 24 hours notice to enter the unit if the company is either unable to inspect because you didn't prepare, or does not find an active infestation of bed bugs then any and all service/trip charges will be billed to you.

@John Whitridge

Ok, I'll say one thing about your structure then move on to some other items.  

If you are doing a 75/25 split and the same on the profit side then I would expect that each of you is doing about the same amount of work.  If you are doing the majority of the work (finding the deal, managing the rehab, etc.) then you are devaluing your time.  If you were to be doing all the work then on a 75/25 money split I would expect the profit split to be in the 50/50 range.  

Make sure literally as much as possible is in writing.  This just protects both of you.  

Here's some other questions/discussion points.  

Whose managing the GC/subs?  Someone needs to be at the property at least 3-4 times a week while work is on going and I would argue someone needs to be there daily to check on the progress.  Not only to check on the progress but to make sure things like the right color paint/grout is being used.  Who will make the phone calls when/if they don't show up?

If you are using a hard money lender then they will probably require you to escrow the rehab budget and will provide rehab draws based on completed work.  Whose going to submit those?  Meet the inspector?  Ensure that each line item is being accurately paid on (i.e. if you request a 50% paint draw whose tracking that to ensure that the GC/sub doesn't then request more than 50% as the final paint draw).  

There's a lot of small decisions on the property itself that you should get hashed out.  Like are you staging?  What color/tile/fixtures are being used.  Nothing major, but does one of you think that they will be making all those decisions while the other wants to have a say in all of them?  

Once ready, who is the primary POC for selling the property? Does that person have individual authority to accept/reject an offer? Usually you set some general parameters on this (i.e. purchase above X amount, concessions no more than Y) and then discuss anything after that. But it still helps to have those discussion up front versus having to continually call the other partner to discuss the latest offer. I would also recommend adding a resolution to the LLC docs that allows each of you to individually sign on behalf of the LLC. Otherwise title will require that both of you sign closing docs. Not a big deal, but I had an investor who was out of the country and hadn't put this in. We had to do some maneuvering to get signed docs completed.

Whose doing the K1's and tax return for the entity?  What CPA (if any) is going to be used.

Whose ensuring that all applicable state paperwork requirements (i.e. meeting minutes) are completed to keep the LLC in good standing?

If you are using things like a credit card for materials and accruing points, what happens to those if a breakup occurs?  Same thing with any type of rewards account (i.e. Home Depot Pro Rewards).  

Cash calls.  Are each of you required to put in the same 75/25 split if a cash call is needed?  Does that cash call get any return or is it treated like a 0% interest loan?  Does it have priority on the sale and any subsequent distributions?  What happens if one partner doesn't have the cash and/or refuses to put it in?

These are just the ones off the top of my head.  I'll post more as they come to me.  

@John Whitridge

Unfortunately I have more experience with bad partnerships than I would care to admit.  

Are you and your partner both putting money in and sharing the duties?  Is your partner putting in the majority of the money with you putting in less money but doing more/all the work?

There's a few more recommendations/discussion points I can perhaps give you a heads up about, but it really depends on the share of the workload that each person is taking on.  The points I brought up are primarily if your partner is putting in all or a majority of the money and you are doing all or a majority of the work. 

@Derek Luttrell

There's two main factors that go into whether something is all bills paid or not.

The first, and primary, is the area.  Do the surrounding complexes primarily provide all bills paid?  If so, then you are stuck providing that.  You can certainly charge less rent and require people to pay utilities, but then you have to play the game of how much less to charge and still get people to rent from you.  

The second is whether or not the complex has individual meters for electricity, gas, and water.  Although, even if it doesn't you can still bill back a percentage.  I don't know if this applies in Illinois, but in Texas you can only bill back a certain percent.  This is to cover things like watering the lawn, exterior house lights, and lighting/heating of common areas (i.e. hallway).  If a complex is not individually metered then it is impossible for tenants to get utilities turned on in their name.  Well, not impossible, but there's no way anyone would/could/should get utilities turned on in their name and be responsible for someone else's utility usage. 

One of the tenant based reasons for all bills paid has to do with credit history (or lack thereof) and even legal status.  Some places provide all bills paid with the understanding their tenants are unable to get utilities turned on in their name, for whatever reason.  

That is the easiest option, and cheapest.  

Be aware that the investor might have to share in the downside risk.  In my deals the investor is the member and I am the manager.  But my financials are sufficient enough that I sign for the guarantee on my own as I can cover it myself.  If you cannot do that, then the lender might require your partner to sign on and guarantee the loan also.  

Standard pitfalls with LLC's (and partnerships in general) are to make sure you discuss who is responsible for what and what will happen if things go bad. Not discussing what you both will do if things go wrong is not a sign of weakness, it's a sign of understanding and realizing that no matter how good a plan you set the possibility that things might go wrong exists.

Are you doing all the work and your partner is only responsible for money? If the project takes longer and the LLC runs out of money does the investor put in more money at a better return? If the rehab costs more what happens? If you want to sell does the investor have a say? If you want to sell and the investor doesn't, what happens?

It's always best to discuss the bad and what to do when/if it happens than to just hope nothing bad happens. 

The answer to your questions are yes.

In my experience investors tend to look for tenant paid utilities over owner paid (aka all bills paid).  Generally this is for two reasons.  All bills paid typically have a lower tenant profile and are more often associated with low C class to D class units.  Not a rule by any means, but you'll find all bills paid in the lower rental classes than the higher ones.  The bigger reason is the fluctuating cost of utilities.  Any up tick in cost is basically free rent for the tenants.  Another reason is the one you mentioned.  When tenants aren't paying for utilities they care a lot less about conserving them.  My mentor once told me the best way to figure out if a unit is all bills paid is to go see which complex has open windows during extreme hot/cold times.  

And yes.  In general if a complex is all bills paid the rent should be higher to compensate.  I don't know that I believe an all bills paid property is operating at a 24% expense ratio.  Those usually fall into 50-60% expense ratios but it is also very area dependent. 

I'm not familiar with Indiana, but you should be able to just send them notice (and proof if they request it) that you have purchased the building and you can have them sign an addendum that says the new owner/landlord/leasor is X and that all rent checks need to be made out to X. 

You shouldn't need to draw up a new lease unless you want to change the terms from a MTM to something different.  If you just want to change some terms (leasor name, types of payments taken, etc.) then an addendum should suffice.  Again, I don't have experience in Indiana so I don't know if there are any rules or regulations which dictate this type of stuff.  I wouldn't imagine there are, but I've seen enough wacky stuff that only applies to one state/county/city that it wouldn't suprise me.  

If they don't sign anything then I would let them know that you are giving them notice that you will not be letting them renew their MTM lease.  This should get them to wake up and realize they need to sign it.  But I would also stress that you need to be prepared to prove you are the new owner.  Trust goes both ways.  

In my experience the absolute vast majority of the time I've had to do this a simple letter stating the new policy (who to make checks out to, when to drop it off, when it's due, etc.) is more than enough. 

Depends on what you want to do with the tenant.

If you are just looking to reach out and get them to sign a new lease agreement, then call them.  Be prepared to provide proof that you are the new owner though.  Get their email, that's the easiest way.  

I would also, however, send a certified letter letting them know what they need to.  I.e. who to write the rent checks to.  That way you protect yourself from never answering or just lying and saying they never talked to you. 

This is a tough call because you are comparing two quite different scenarios.  If you were comparing two complexes both in the same relative area with the same relative rents then the question is conservative (higher units) or more aggressive (higher rents).  

I think your question is more about the location than rents vs units to be honest.  A primary location would still have demand, even in a downturn.  So you might have to reduce rents, but the idea would be that the primary location wouldn't suffer from demand problems like a secondary or tertiary location might.  

So I would turn back to the old rule of "location location location."  Less unit but a better location would be my answer.