All Forum Posts by: Harrison Smith

@Steve DellaPelle The state of Maine provides a model lease that includes this, it is recommended by the state due to issues they have seen. Massachusetts may offer a model lease as well, check the state website to see. Otherwise, I would add a section after the term that outlines the residents and that they are the only ones allowed to reside there and the person signing the lease is responsible for their actions while residing there.

@Kristina Heimstaedt nailed it though. Your obligation is to the person on the lease, so you need to be clear with the person not on it that they are a resident only. You work directly with the leaseholder only. The he said she said situations are never good, so just shut that down right away. 

Check on your state website and see what they give for guidance on leases. Massachusetts may allow for other solutions that we haven't come across. 

@Steve DellaPelle I have run across this one time and the reason for it was that the significant other had poor credit and an eviction on their record. They knew they wouldn't get the place with that on the application.

What I do on my leases is I name everyone living there. The lease is based upon those people living there and the person signing the lease is taking responsibility for the property. In the case that the BF wasn't going to be on the lease, then the woman would be naming him as a resident and accepting responsibility for him. You would be covered in that regard.

Ultimately, its your call if you allow him to stay off the lease. This is where knowing your area and vetting the woman is so important. If she is solid and you are comfortable, then name him as a resident and let her put the lease in her name. 

@Mark Wurtemberg In regards to those questions, all of that is negotiable with the money partner(s) and may be different for each deal. That is why it is key to establish a relationship and be able to have those conversations early on.

In my experience, here is how it worked:

1. This is all dependent on the partner. Generally, I like to pay out quarterly when there is recurring cash flow. It is less administrative and lets a bad month or one time charge get absorbed by other months. I have seen money partners that want annual and some that want monthly, so its really person dependent. I would recommend disbursements should be less frequent early on so that more cash can be kept on hand while things stabilize and then I would go more frequently once cash flow stabilizes and you are comfortable projecting what that cash flow might be. It's always better to have extra money on hand then realize you won't have enough to meet a disbursement and have to tell the money partner that the check they were expecting isn't coming. 

2. The 8% is paid only if it can be. If the 8% can't be paid, then an interest coupon is taken in lieu of payment. That coupon becomes a liability owed to the partner and it will be paid first once cash flow allows. In early stages, this is common where the cash flow isn't stable enough or sufficient enough to pay the 8%, but the partner is entitled to the 8%. As an example, if the partner is owed $8,000 in preferred return and you can only pay $4,000 this year, then $4,000 is put into a coupon and paid as a priority next year. If cash flow is strong next year, then the money partner would get the first $12,000 in preferred return ($8,000 annual + $4,000 coupon). It's a way of maintaining the guarantee to the money partner and deferring the interest payment if you can't make it. Be prepared, you may not see a cash return for a while as you keep the money partner whole, this can be a tough situation to deal with if you are an impatient investor.

3. There are many exit strategies that can be used. Typically, there is a buyout option in the agreement or the money partner exits once the principal is paid in full. It depends on whether or not they want to stay in for the long term. I have structured things where the partner stayed on after repayment but took a reduced equity position once principal was returned, I have bought them out for a small premium over capital contributed, and I have had them exit upon repayment. If your money partner wants to stay in long term then you need to structure things in a way where you have equitable returns once you are on equal footing with the partner. This can be a difficult conversation to have, but it is critical. The exit can be the most uncomfortable part of the deal. If you bring the deal and they bring the money, then having an equal partnership long term might be in your best interest. You can refi the property or pay them down some other way and then do another deal with their money and keep growing the partnership. The more deals you do the more favorable terms you can start to negotiate if you continue to be successful. 

4. You can track this many ways. What I have done in the past is that I have used Quickbooks or other software (even seen it done in excel) and on January 1 I created the interest coupon due to the investor as a liability and then applied any payments to that partner against that until it was either gone or the new year started. I then created a new interest coupon for the new year and made payments either against the prior one (if a balance remained) or the new one. Every year there is a new and clearly distinguished liability on the books that I am working to wipe out so I can get paid. It's a clean way to track it, see the current situation, and gives you a visible reminder of how close you are to getting paid! Seeing that balance and watching is get closer to 0 is very motivating because you know there is a check for you if you can get to 0. I call it the "Race to 0" and enjoy the battle of getting to it. 

I realize these are really long answers, but I hope they are helpful. Feel free to ask more questions or message me directly to discuss further. There is a lot of flexibility in how you structure these things and the key is to create a win-win situation so that you can do more deals and build out scale at a rate faster than you could have done on your own. 

@Adam Stroik I have used waterfall type structures in the past. The one thing I learned early on and have heard over and over again is that you have to "honor the money" and give them preference. Without the money, you have nothing and you are better off owning a small piece of something vs. all of nothing.

I have structured deals where the money earns a preferred return (this is negotiated with the money partners as to what they expect to get back) and I have found this is normally around 8%, could go higher if its a single money partner putting it all up. That partner gets all returns until their 8% preferred return is satisfied, then there is a split after that point. Sometimes the money get preference here too (70/30 or 60/40) and sometimes its even. Either way, the money gets the majority return and this is fair to compensate them for their risk.

As an example, if a money partner puts $100,000 in and they have a preferred return of 8%, the first $8,000 of annual cash flow goes to the money partner. Once they have received the $8,000, the remaining return above that is split between the money partner and yourself at whatever ratio you agree on. If you offer a strong return to money partners, they will want to do more deals with you and you will attract more money partners and you will gain with the scale you can achieve quickly. 

Build a good reputation, "honor the money", and deliver the results and you will see your RE business expand as fast as you want it to. 

Thanks everybody for a really fun evening of discussion and sharing. It was great to meet you all and I look forward to the next one. 

Thanks @Ivan S. for putting this together. 

@Wave Taylor There is so much more to an offer than just the price. @Nick Hakim mentions many of these things such as reputation, deposit amount, closing timeframe, etc. Another big piece of this is whether or not you want inspections and are financing the property. In both cases, there are usually contingencies in the P&S that let you get out of the deal if the inspection is not satisfactory or you can't get "conventional, market rate" financing.

If a cash buyer comes in and offers less money than you but waives all of the inspections and contingencies, a seller will see that as a stronger offer because it is more likely to get to closing. When you are offering, think of your offer from the perspective of the seller and determine whether or not you would accept it. If your offer is full of stipulations and contingencies, a seller may not care if you offer the highest price because they see you as the least probable to close. 

A motivated seller wants one thing, to close on the property. Make sure your offer gives them a reason to think that will happen. This may require that you offer more than asking to compensate for that, but don't overpay if you can't justify it or don't have to. 

@Canesha Edwards Your model is assuming those expenses are annual, but if you are only putting in monthly expenses then your NOI and other return metrics are way off. Your model is assuming $3,132 in annual expenses because that is what you have put in, some of those expenses look to be monthly amounts (taxes, insurance, mgmt fees, etc.) and that is way overstating your return.

I also agree that reserves are low, especially considering its a Class C property that likely has deferred maintenance. I would review your numbers and make sure you are entering things correctly, or your model is going to steer you the wrong direction. 

@Adam Hultman Your best bet would be private money, either through a private lender or family and friends. Worst case, you could even look for hard money lenders. BP has a directory of lenders at www.biggerpockets.com/hardmoneylenders. 

I utilize a couple of lines of credit that are secured by other assets, but unless you have something to secure it against that likely won't be an option. If you own your primary residence you could try getting a HELOC or see if a family member would take out a HELOC that you could use and pay back. The rates are usually very low and work off of simple interest (rather than compounded/amortized), so the cost to repay is generally lower overall.

Whatever you do, make sure the cost of returning that capital is factored into your numbers and the timeframe to return is realistic. Set clear expectations, get everything in writing, and make sure everyone understands what they are getting into before you move forward. Good luck in working towards your first deal!

@Ivan S. I will be there. I am looking forward to it. 

@Ivan S. Just discovered this thread, its great that you are setting something up. I am going to try to clear my schedule and make it. It would be nice to meet some more investors in this area.