All Forum Posts by: John Corey

It sounds like you have created a pragmatic strategy for investing in a low priced area. Buying really low, holding for cash flow and expecting some extra issues finding tenants who want to stay.

Have you looked at financing a group of properties with 1 loan?

Have you looked at syndication where you bring in outside investors who are happy with cashflow only? I am guessing this area is not going to see much in the way of appreciation.

Randy,

Where are you based? Are the examples in your local market (30 min to 60 min from where you live)?

Strategies for very low priced markets are different. Others have pointed that out. A lender has an issue processing such a small loan. So, you need to work with private money or create bundles of homes which are refinanced with 1 loan and a blanket lien over all the properties in the bundle.

Have you spoken with a portfolio lender to see if you can put 3 properties together to secure 1 loan? I know a portfolio lender operating in DE. They were at a local REIA meeting. I suspect they would look at a package. No guarantees as to the outcome. Just that they hold the loans so they are a bit more flexible. It will be all about the cash flow.

Do you homework. If you are going to invest in more tax deeds it will be money and time well spent. A GA attorney who specializes in this area would be a good place to start.

In more general language, a Quit Claim Deed is a very weak document. You are saying that if you did have an interest in the property, you are declaring that you no longer have it. It does not indicate if you did have an interest or not. Just that you are waiving any ability to claim later than you did have an interest. 

How Quit Claim Deed would apply in this specific case is to be determined. Hence the suggestion you speak with a GA attorney. This way you will learn the fine details for future deals and protect yourself, if needed, this time around. They can notorize it while you are there if that is what you think is reasonable.

The challenge will be the credit check. The folks outside the USA are unlikely to have much of a credit profile in the USA systems. In addition, the lender's ability to go after the individual is limited. If the borrower was a USA company with assets and its own credit history, fine. If the loan amount was at a low LTV so the lender would only need to foreclose on the property and they would recover 100% of what they are owed, with all the costs rolled in, they may choose to take on the loan. It would be priced to reward the lender for the risk.

So, if you wanted to build a presence in the USA and are prepared to put in significant cash in the early deals, you can definitely get there. 

I invest in the UK and USA, starting out with the USA while I was living there. In other words, not exactly your situation. That said, I know a lot about what you need to do. Fire away with questions if you like.

It will take a few years before you will be on a really competitive footing in the USA (rates, terms, LTV). Well worth it if that is what you want to do long term.

While I see you point of view, it could also be said the sophisticated investors who are not accredited represent less wealth (cash to invest) than the people who are accredited.

The SEC is not there to help people grow their wealth. It was put in place to reduce the number of scams naive investors are exposed to. If that means protecting people from some stuff which might have turned out well, so be it. Consumer protection first. Accredited investors are effectively excluded from the protections. Too many consumers complain when they make a bad choice and there are enough of them to influence elections.

Be careful about using any metric that is based on cashflow.

Communities are stomping on STR. This means a political change invalidates all the past data for the community.

Coming all the way back to the original question that started the thread.

I think some property people think too narrow or short term.

If Tesla wanted to build a car, the start up costs (legal or others costs) would not make sense to build 1 car. If Tesla wants to change an industry and planned on building many cars, then the start up costs take on a different meaning. Profits come later. The first car will never cover what it cost to get it built.

The fixed costs and other hassles for the first syndication are always going to be bigger than what might be possible if you did not syndicate. Granted, most ideas around a JV could be illegal. Better to have a higher cost burden on the GP for the first, small deal than to pick a large deal which stretches the GPs skills beyond what they are capable of.

If a person is really committed to running a business which will involve many syndicates over time, the fact that there are some front loaded expenses on the first one becomes less of a concern to the GP. The GP does need to deal with the cash flow so they can keep the lights on. How profitable the first deal is for the GP is less important. The company is building a track record by absorbing a lower GP return on a 'small deal'. Call it brand building, creating an investor database of people who have already invested, etc. There will be work, cost and hassle for the first few deals. The sooner you can turn the initial deals into successes, the better the future will be. Being overly focus on the start up costs misses the bigger picture. A 3% extra burden on 1 deal sounds bad. 3% spent on being able to say you have syndicated, you have been through the process and you have happy LPs sounds much more trivial.

The question you need to decide is, do you really want to be a syndicator and all that implies? The costs to get there are a necessary evil. 
 

Taylor,

You are getting very close to 'speak with a securities attorney so you get correct legal advice'. 

If you and I agreed a loan, no profit share, no security or liens, etc., and no one else was involved, it could easily fall outside what the states and the SEC considers a security. While I would be earning interest, there is no joint venture where I am expecting to make a profit if you do the job you say you will do. 

When you describe pooling the funds, then the term needs to be defined. If you create 10 independent loans with 1 lender per loan, maybe it is not pooling in a way the SEC would care about. If you were getting 10 people together to put in the money for 1 loan, then it could be pooling in a way that the SEC cares about. This is where a competent attorney will listen to what you want to do and then advise on the best strategy. You would be tapping into their expertise built up over years and their insurance coverage for providing advice.

Some will say, oh, I will just arrange 10 separate loans. As a lender, I would want some protection. I would expect a lien. To provide 10 liens implies that someone gets a great position in the chain (the 1st lien) and someone gets a very questionable position (the lien in 10th). Assuming only 1 property.

As you might want to just borrow enough for the down payment and misc costs, the institutional lender will not be happy with the other funds being borrowed. Hard money lenders will be generally OK with it and that is why they will charge higher rates than the institutional lenders who do not allow you to borrow the down payment.

Advice on here is not really advice. It is more like background reading so you can get advice from a qualified professional. So you spend less time on dumb questions or not understanding the responses. Lawyers on here will not be able to directly advise online. They can make some broad statements. There are a number of do share and they offer some great suggestions, questions and ideas for further research. 

When discussing a series of deals, you would be raising funds, through a legal and compliant process, where you do not seek approval from the investors for each deal. You bring in the money based on a concept and maybe an initial deal. You would retain the funds after the deal and move on to another deal. If you are telling the investors their money would be secured at all time, you need to have a way to deliver on that promise when switching between properties. I have created structures to do this before. I am not a lawyer and this is not advice. I am stating it is possible to design a solution. 

There will be legal costs for the implies structure. Your estimate is about right. The key is to look at what you can afford if you could work through X deals, 1 after another. You also need to think about this longer term. What is the bigger picture. If you think you will be growing a business, then the start up costs might be high as a 1-off and still be fine as part of a business growth strategy.

First, the regulatory costs (legal, SEC filing fee, etc) are not crazy.  There has been a lot of problems with pooled investments. The masses tend not to understand. They get ripped off by the shady operators. So, since the 1930s you have had to deal with the regulations.

As Amy points out (remember - she is a securities lawyer so knows the topic), the way to deal with fixed costs (legal and SEC) is to spread them over multiple transactions. Rather than pool the funds for 1 deal, you pool the funds and then complete a series of deals. All the assumptions about a series of deals would need to be documented in the registration documents. If the crowd you are working with really are friends, they will form a view about what you are suggesting and make their decision. Strangers will want to see you do it a few times before committing. With friends you might have enough trust established.

So, any time there is a 1-time, fixed cost, see if you can recover the costs over a series of transactions. 

Sort of like buying a tool for a project where you know you can use it multiple times on future projects. The first project gets hit with the cash flow impact of the purchase.