All Forum Posts by: James Furlo

Good advice. I will ask.

Quote from @Jay Hinrichs:

 why do you think you cannot have more than 4 separate mortgages ?  a first second third and fourth. although for those investing being in 8th or 10th place is pretty poor position to be in.

good luck with it.. when you start to be an operator managing others money then you need to step into the real world of finance and how to set them up.

Myself I go the other way.. no 50k investors only large investors 500k to 1mil plus easier to manage and its me and one partner.. very easy. 

I wasn't sure if I could have more than 4 - that's good to know that I can (I promise, I'm not that much of a newbie :-).
And I hear you on partnering with larger investors. I guess there's a part of me that likes the idea of helping smaller investors get in the game. I realize it's harder to manage, but so far it's been a good experience. It's a balance.

Quote from @Jay Hinrichs:

Quote from @James Furlo:

@Jacob Sherman I'm typically raising $100K - $400K for the purchase and repairs of a SFH or smaller MFP flip (short-term).

A syndication seems like overkill, and some investors don't want to deal with a K-1 because it's not worth the extra accounting expenses for a short-term deal. Plus, syndicating often no longer makes me competitive because of all the fixed expenses (like creating the PPM, the LLC, and generating tax docs).

So, for those small deals, I've simply had people (2-4 people) lend directly to my LLC, backed by the deal in chunks of ~$50K. And they're all in lending positions 1 through X. It's simple/cheap to execute and makes filing for taxes easy for them because it's just an additional 1099.

But, I don’t love that they’re all in different positions, or that their names are now attached to the title report. Plus, I have a hunch (but haven’t looked into it), that this will limit my scalability.

So, I’m trying to see if there’s a different way to structure these loans that keeps things simple for my investors (ie. still getting a 1099), while still collateralizing the loan, and giving them all “equal” position on the debt.

What I’m doing is working (I think?), but I am curious to know if there’s a better way by grouping (or fracturalizing?) my lenders. I know of one person in Oregon doing it, but he doesn’t want to share how it’s done. And before I reach out to my securities attorney in Portland, I wanted to ask folks here about their experience and recommendations so I can have a more informed/productive conversation with my attorney.

I’m so grateful for the replies I already received. Thanks!

The reason the other guy does not want to share is because what he is doing is ILLEGAL if he does not have a real estate paper offering filed at the department of corporate securities in Salem.  Keep in mind Mr. Sherman is a lender from PA totally different rules and laws and 99% of lenders unless they were in this day in and day out would not really know especially west coast laws..

if this is Oregon deals what your doing is clearly illegal.. if they are all on the same mortgage. U can have 2 to 4 mortgages though someone is the first someone is the second someone is the third and so on an so forth.. But you cannot have them as co bene's on a single mortgage/deed of trust and prom note.. U will get in trouble if this is brought to light to a regulator at the department of corporate securities.. Now I think they could all be on an UNSECURED note .. I would check on that but then again does not matter how to list them its unsecured . Other way to set them up is have them minority members of an LLC.. you can have uneven profit distributions in an LLC so they can all have 5% ownership but with different profits and capital accounts .

@Jay Hinrichs Thanks for the clarification. What I'm currently doing is creating separate notes/mortgages with each person (in cascading positions). So far, I've only had up to 4 people lend on a single deal, and it sounds like 4 is the most I can have. If I want to scale to bigger amounts (or more lenders), I'll need to register it. Given the extra cost, my guess is that it'll make deals in the $400K - $1M range not workable with short-term notes (with a $50K minimum, perhaps increase it). And if I go bigger than $1M, it probably makes more sense to do a syndication.

Thanks again for the feedback. This is helpful.

@Jacob Sherman I'm typically raising $100K - $400K for the purchase and repairs of a SFH or smaller MFP flip (short-term).

A syndication seems like overkill, and some investors don't want to deal with a K-1 because it's not worth the extra accounting expenses for a short-term deal. Plus, syndicating often no longer makes me competitive because of all the fixed expenses (like creating the PPM, the LLC, and generating tax docs).

So, for those small deals, I've simply had people (2-4 people) lend directly to my LLC, backed by the deal in chunks of ~$50K. And they're all in lending positions 1 through X. It's simple/cheap to execute and makes filing for taxes easy for them because it's just an additional 1099.

But, I don’t love that they’re all in different positions, or that their names are now attached to the title report. Plus, I have a hunch (but haven’t looked into it), that this will limit my scalability.

So, I’m trying to see if there’s a different way to structure these loans that keeps things simple for my investors (ie. still getting a 1099), while still collateralizing the loan, and giving them all “equal” position on the debt.

What I’m doing is working (I think?), but I am curious to know if there’s a better way by grouping (or fracturalizing?) my lenders. I know of one person in Oregon doing it, but he doesn’t want to share how it’s done. And before I reach out to my securities attorney in Portland, I wanted to ask folks here about their experience and recommendations so I can have a more informed/productive conversation with my attorney.

I’m so grateful for the replies I already received. Thanks!

@Chris Seveney, @Jeff S. & @Jay Hinrichs - Thanks for your insightful input - it really helps. I think my next step is to do more research on fractionalized loans, and since I'm in Oregon, I'll talk with my attorney about the requirements/costs.

Thanks again!

Sometimes, I come across a deal where it makes sense to have more than 1 private lender/investor. So far, I’ve had them all on title at different positions.

But instead of lining them all up at different debt positions, is there a way to “bundle” these folks together? It would look like a single collateralized loan to the property, where each investor gets a prorated return (and right to the collateral) and still receives a 1099 as a lender.

I know I’ll need to work with a lawyer to set up, but I’d appreciate any help to point me in the right direction. Is there a name for this type of “group” loan? Or are there any key terms/phrases I can research?

If you have any experience, I’d also appreciate some of the pros and cons. A huge pro is that I can loan on bigger deals. Or, potentially, open it up to more people with smaller minimums. But I’m not sure about the downsides.

Thanks for the help!

I use the street name for personal reference. But, for some of the larger ones (10+ units), I also give them "official" public names with signs.

I recently bought a place - a 15-bedroom co-living house - on 14th Street. So internally, I call it Fourteenth. I'll admit that it's a little confusing to have 15 bedrooms on 14th, but I'm sticking to my system. But I'm also in the process of brainstorming building names since it currently doesn't have one, and that's a lot of fun!

Without knowing the expenses, I typically assume 50% of the income. That lowers your NOI to ~$116K. If we accept their cap rate of 5.6%, that puts the value closer to $2.1M.

If it were me, I'd take that two-minute analysis and float it by the seller. Admit that your price seems way off, so you must be missing something. Having a current NOI - after signing an NDA, of course - would really help you dial in a better offer. That might be enough to convince the seller to send you their actual expenses.

If you have the cash for an EMD, it might be worth getting it under contract and then doing the real due diligence to verify the real numbers. Again, my experience is that expenses are in the 50% range, so I would only do that if the deal makes sense with expenses in the 50% range after all the repairs and rent increases. Otherwise, it's probably not worth your time.

I like to say, "cat urine is the smell of money" because it's an issue people normally don't want to deal with it, and so a deal can be made if you're willing to deal with it. This seems similar but obviously more tricky since people are involved. Hiring an attorney is a great idea.

Some questions you'll want to answer:

1. How long have they lived there? If it's more than 10 years, you're out of luck.
2. Do they look like they live there? Is there furniture, or do they look temporary? It needs to be irrefutably clear they're trespassing, otherwise, you're headed to civil court.
3. Did the seller make any agreements with them? Even verbal-only? This could really muddy the waters for you.
4. What do you plan to do with the property? It sounds like you want to keep it as a rental and not move in. This could make it trickier especially since you said the building is in good shape. Maybe there's another "landlord reason" for termination/eviction that you can lean on. It probably won't win the case, but it'll help tip the scales in your favor.
5. How have other evictions been going in Oregon? Despite living in Oregon, I haven't kept up on how it's going. Do you have other investor friends or a local REIA you can ask?

I own a storage facility and discovered some squatters shortly after the lockdown. I called the police and they escorted them off the lot. I wasn't sure how they'd handle it because of COVID, but it was a clear sign of trespassing, and a storage unit is NOT a dwelling unit, so it was fine.

Personally, I'd make a plan with your attorney and go for it if the plan makes sense. Probably not the most helpful advice, but that's my experience and the questions that immediately come to mind. Good luck!

Exiting!

I like to start with rentometer.com to get a feel for the range. Then I go to Craigslist (and/or Facebook marketplace) to look for similar-sized rentals. I compare the condition and amenities to my rental to dial in the rent. When in doubt I go for the higher side of the range and if I don't get any bites within a few days (my market is pretty hot), I'll adjust down (tweak my heading/description/etc).