All Forum Posts by: Jameson Collins

Thanks again Jonathan. 

We had discussed how this could all play out and I think everyone understood the risk involved. But you've definitely helped me want spell those scenarios out in greater detail. They're not expecting returns. If things continue the way they have there should be some excess there. If not, then they understand that too. I am certainly not leading them down a path of chasing short term gains. They are trying to help us out more than anything and if they can get a return all the better. The deal is that if things were to go sideways I'd be on the hook with covering the balance when they wanted their cash back. Those numbers are in the deal and it would just mean I end up with less equity than ideal and a higher monthly payment but still absolutely acceptable. But your are right that the mechanics of how that would look need to be completely understood and that both scenarios are covered in the agreement. 

Thanks again for spending the time with me on this!

Hi Johnathan, thank you for the thoughtful and thorough response! 

I agree with you completely that taking it seriously is the first step. That's the goal here and that is why I'm trying to get all the details worked out while time is on our side. This agreement is only a consideration because they have some cash they're not planning on using for a couple of years and believe that I can take good care of it in the meantime. For me to be interested, I want everyone to understand everything that is involved and the details of what will happen according to plan.  Managing expectations. The good thing is were a good team everyone understands that this is a complex and significant deal and that there is significant risk involved. Not a casual, hey here's some money, go do good.. Oh wait you did what?!  

 After a bunch of research I am leaning towards a partnership for a few reasons specific to our situation. I've reached out to a highly recommended RE attorney and should get a lot of help in the coming week. Feel free to give feedback in the meantime if you'd like.

Were doing this all remotely so proximity plays into our decision as well. Folks in CA, I'm  in AK and the deal is in OR. Reason for Oregon is adding property to portfolio, team already in place to manage remotely. 

Here is a VERY abbreviated version of my current action plan which is still under construction. any feedback or opinions would be much appreciated. 

1)Work out partnership details, have agreement in place, fill in the blanks at time of closing

2) Parents contribute cash for purchase. I manage transaction and closing with my team. We both hold title. They hold all equity they contributed plus recover any appreciation that may occur in future sales. I contribute capital through my time managing and receive all equity from rents minus expenses (Awesome for me I know)!

3) Assuming favorable market conditions (primary plan, have other options if not a good time to sell), after a few years of collecting rents, I finance the property and cash out parents. They receive their initial investment plus any appreciation and apply those funds toward purchase of new primary residence. 

That's my big blind spot that I'm trying to get figured. If they are cashing out of a partnership it would be ideal if they could apply those funds through a 1031 to a new purchase (assuming 1031 is still a thing). This is where the partnership could be a better option tax wise. If it were a loan situation we would pay them interest (applicable federal rate, basically nothing). They would pay taxes on that interest also basically nothing but how would they recover the appreciation? I suppose when I finance i could cash out that money and gift it back to them over time? sounds like a PITA. I have a lot to learn here and I'm not just trying to eliminate taxes but be efficient and get them the most out of using their cash for a few years. 

Thanks again,

-J

Great Dan, thanks for the reply! you helped me work through my question a little better. I guess I'm really wanting to learn more about what make a partnership legit. I understand the benefits of an LLC to some extent but also wondering if a written agreement and shared title something people do.

Thanks again

Hello all thanks for reading, 

I am working on BRRRR deal that is going to involve cash from my folks.
Here's the scenario briefly then ill get to my questions, 

Original plan, folks are going to contribute purchase price liquid. I will make purchase/rehab/stabilize rental.  House will be owned free and clear for a few years until folks want money back to purchase new primary residence. I will manage property and receive all monthly income. after a few years I will finance the property with the equity position I am shooting for. 

My questions are about Loan vs partnership. 

If folks made purchase and held title would me receiving all rental income get funky? Need to establish legitimate property management company? Could we just set it up as a partnership where they held equity and I managed property for the income?

Would it be better for them to just loan me the cash for a few years, we hold title and can repay them when we cash out? This seems to be the easiest and most tax eff. but I only say that because I don't know enough about partnerships. 

Let me know if you need numbers or anymore info. hopefully what I'm asking makes sense. 

Thanks again for looking!

As far as practice analyzing deals, I would highly suggest as exercise, run through deals in your current market, or any market you’re intimately familiar with. 
Even if they have no possibility of cash flowing. You need to get good at one system of analyzing so when you look at other markets you can see your blind spots. 

Accurately estimating cash flow requires two things, income and expenses. I'd argue that expenses are what you're most likely to have trouble accurately estimating in a market your not familiar with. PITI are constant and easy to estimate. Snow removal, flood insurance, unique heating and cooling costs, vacancy and CapEx are very nuanced by location. You simply don't know what to underwrite if you don't understand the area.

For example I can analyze a deal in Eugene Oregon (where I understand rent and expenses) in less than a minute and have a pretty good idea of cash flow. I’m moving to Fairbanks AK in a month and I have no idea what actual monthly expenses would be. So I’m working with people in the area who can help me underwrite correctly 

Starting practice in your area where you know What’s what will get you asking the right questions when you start to look at other markets. Try the four square method or whatever system that works for you but gets you writing it down on paper and forcing you to ask “what extra things will I have to pay for each month besides the mortgage”.

Just remember if you’re looking for cash flow, you won’t spot a good deal by the purchase. You’ll spot it by correctly estimating expenses and income. These numbers get you to your purchase price. It’s about how much someone will pay you to live there and how much you have to pay to keep them paying you. 


 

“No seriously I read it on bigger pockets... to increase your cash flow just add another door”!