All Forum Posts by: Jason Miller

Good evening BP-

I may have an opportunity to purchase a duplex using seller financing but I wanted to know what sort of contingencies would be prudent in this case.  I haven't received confirmation that the seller owns the property outright but let's assume they do for the sake of argument; I don't want the deal if it's some strange subject to or wraparound arrangement.

I'm assuming inspection, and some provision to ensure clear title?  Possibly insurance?

What are some recommendations?  Thanks in advance-

Jason

There seem to be hundreds of creative ways to get into an investment property, but I have a question for lenders about using mostly borrowed money for the down payment.  Is this really possible?  Let's say I've only got 5% cash, I borrow 25% for a total down payment of 30%, is that going to fly even if my borrowed money was off the books or my private lender didn't want a 2nd position mortgage?

I'm asking because I wouldn't want to bring down payment money to the table in bad faith if a lender is truly expecting that all funds that I bring to not be committed or due anybody.

I've read that lenders don't want the borrower to be over-leveraged and have skin in the game, I get that.  I just want to be realistic about my expectations as I raise capital for my investments.

@Mike McIntosh, welcome!  You're in good company here, I've been lurking for some time but I've found tremendous value in the short time I've been on these boards.

@David Oldenburg, I'll message you to learn more about the Roseville group, I'm very interested.  I'm also signed up for the Sacramento club put on by @Tapan Trivedi.

I look forward to meeting you all at one of these events!

@Account Closed,

I can't bring any other argument that will work; I think you've got value and money confused as being the same thing.

What sort of downside do you envision where person C's lack of an equity position is a liability?  If the entity/property is insured and sufficiently capitalized (regardless of whose capital), then it should be able to withstand SHTF.  Person C may be short in the event of a cash call, that's the only risk I see.

If you want skin in the game, C carries the mortgage in this scenario and is also on title whereas A&B are basically passive participants.  They may lose money but they can always walk away and invest in another deal that comes down the road if this one tanks.  If there's concern about C mismanaging the asset, then the property should be put in the name of the entity so there's recourse for A&B in case things go sideways.  If things really go bad, specify liquidation order in the operating agreement and have a lawyer draft it.

I fail to see, even as an investor, how C is the riskiest part of this equation.  Risk is defined as uncertainty in the outcome of events (or probability x consequence).  In this case, there is no uncertainty (risk) as to capital structure, only uncertainty (risk) in whether the deal is profitable or remains profitable - as in all investments.  The true objective risk here is therefore no different than somebody buying an investment property all cash.

If this model were really that risky, how do large commercial syndicates or REIT's succeed? How do entrepreneurs across the country leverage crowdfunding and other forms of OPM to fund a business with little to no initial capital of their own?

So try another explanation of how C represents the risk on me.  Saying C is inherently irresponsible, and threatens the viability of a real estate investment because he has no cash - is not your best approach either.

@Account Closed Your point is well taken, and I've seen and heard it over and over again since I've started my research into REI. True, low credit does not devalue A&B's money, however there is still plenty of value to be brought by person C. To diminish that by inferring person C has good credit but is assumed to be fiscally irresponsible is silly. What if person C has been supporting a family, while paying back college loans (undergrad and grad), owns two well-used cars and an average suburban home, all the while making a good salary but not good enough to have surplus for down payment? I think there are probably a few of us on these forums that fit this description. Just like everyone else, we're looking for our first shot to prove ourselves.

@Corine Haener, there are several options you can exercise when structuring the entity that will provide some assurance to the other partners. I plan on forming an LLC first, so that any due-on-sale clause issues are avoided on transfer, but still utilizing the LLC as the means to secure the partner's capital contributions against something (the property). The operating agreement can be used to slice and dice the cash and equity flows equitably. For example, person C doesn't see a dime on the back end until persons A&B have been paid back, with either preferred interest or a proportionate share of the overall gain in value. P&L distributions can also be disproportionate to initial capital bases, giving person C some cash flow in the near term as compensation for finding the deal, arranging the financing, etc.

I still think your arrangement is a "fair" starting point.

Ok, I'll wade in on this as I'm wrestling with a similar arrangement in my head.  Right off the bat, I don't see how Persons A/B get 1/3 each since they have differing capital contributions, unless A is contributing something else like a service or other non-financial duty.

As far as "fair", I think it's relative to your prospective partners.  If A&B's credit is no good whereas C's is great, and C is taking on a large amount of operating, day-to-day responsibility, then yes I suppose it could be considered fair.  On that note, in the event of a vacancy, I would say that it's unfair that person C bears that carry until it's rented again.  The "cost" of vacancy is an operating expense and should be borne by the enterprise as a whole, from reserved funds for that purpose.  In the same way profits would be split 3 ways equally, losses (however temporary) should be likewise be treated proportionately.

Again, on the subject of "fair", I think 1/3 all around is a reasonable starting point but it will depend greatly on the specifics, the partners, and the deal.

Just my $.02

I'm looking for ballpark insurance quotes in order to start tightening up my financial projections, are there any recommendations for investor-friendly and knowledgable agents in the Sacramento/NorCal area?

Thanks,

Jason

Hi Jeannie, I wouldn't mind heading up that way for a meetup, keep me posted!

Thanks!

My goal is to have net rental income equal to my day job in 5 years.  That's not to say I'd quit at that point; it would be more financially productive to reinvest the earnings to achieve the long term wealth goal.  I am just a huge fan of options.

I plan to start by getting right into a rental, preferably multifamily, <10 units.  I am comfortable with either a residential or commercial deal, and the truth is I'm somewhat property agnostic - if the deal makes sense and is marketable to my equity participants then it makes sense.

Hello BP,

My name is Jason and I've been lurking here as well as reading every REI book I can get my hands on since the beginning of the year. I am moving into real estate investing, on the side to start, with the ultimate objective(s) of long term wealth and income generation (surprise!).

I've spent quite a while researching, meeting with experienced investors, and preparing my business plan in preparation for my next step: assembling my team.  I am looking for recommendations for all key team members, from attorneys to insurance brokers in the Northern California area - better yet in the greater Sacramento area.  I would appreciate any guidance/experiences anyone can offer.  Who has been the best team member for you?

In the meanwhile, I'm looking forward to a long and fruitful career in this business and getting to know everybody here!  Thanks!

Jason