All Forum Posts by: John Corey

I have no idea why you think red tape is involved.

Think of it this way. You want a car and you want an expensive piece of office equipment for a business. Both where chosen because they offer good value for what you are doing. When it comes time to secure a loan for each, the what the lenders care about is very different. It is hard to compare the two.

A 4 unit building can be purchased by an owner occupant (OO) on OO terms and conditions. Potentially for a tiny down payment. The income from the three units will be a factor in the total income the person has available to pay the monthly mortgage. The risk of default is statistically lower for OO loans. The property would be the OO's home so they might be willing to pay more than they would if it was 'just an investment'. In some markets, the OO can live for free because the rent from the other 3 units covers all of the monthly costs associated with owning the property. When you sell an OO property some or all of the profit can be tax free.

For the commercial property, 5 units or more, the lender can not and will not make a loan based on OO criteria. The building has no premium as someone's home. It is a commercial property for all intensive purposes and the value is determined by discounting the net operating income (rents mines expenses). Commercial financing is generally higher than the cost of OO financing given the higher risk factor. In addition, the terms and conditions can be very different. Technically, a commercial loan can be called by the lender if the NOI drops. You need to check your loan agreement before signing. Expect there will be a restriction against you living in a unit.

So, my point in all of this is you can not easily compare one with the other. Apples and oranges? You need to do what is best for you. Just be careful about the details. I have seen people think a commercial loan works like a residential loan and get caught out when the lender calls the loan or takes other action.

What can a 2nd lien holder do so they have a valid claim to the excess? I seem to remember there is a way to file an action that puts them in line. It could be faulty memory. 

 I have not used the platform or looked at the portfolio.

A word of caution. When an investor does not have the time to select investments, handing control to someone else can easily turn out badly. If that happens, principal is lost. So, it would be better to just leave the money in cash until there is time. Having invested for over 35 years, I have definitely had a number of people come to me asking what they can do now that they have lost their funds.

If we were talking the stock market, an index fund makes sense. It performs based on an external index (no picking) and the overheads are tiny. Real estate is not like that. REITs would be the closest so an index of REITs might perform closest to a passive index.

A fund or manually built index depends on the party picking. They blow hot and cold. I have worked at multiple investment banks and the odds that a picker will outperform over an extended period are very slim. That is why there are 'gods' everyone writes about when someone finds one (Warren Buffett even through he really buys companies).

Amy,

I like what you share. Happy to post your link for you.

https://www.linkedin.com/pulse/why-private-money-investing-real-estate-involves-law-wan-cipp-us/

To others. If you good the title Amy provided without the quotes, you will land on a different article by another author. No idea what that one says. I just know it comes up first.

Google 'sec howey test'. And speak with a securities attorney. The Howey test is from the 1930s so the information might be new to you and yet it is well established. Many real estate investors who start with SFR never realize that there are regulations for fund raising. Or, they only find out when they are contacted by the SEC.

Two lawyers have commented in the thread. Reach out to them. There are a few others who also contribute on BP. There is a reason they put time into BP posts. There are many RE investors who need legal advice on the topic. The lawyers are very generous with sharing so take advantage.

I liked Amy's response. Note that she is a lawyer in the securities area.

As to the merits of a lawsuit. You really need to speak with 1 or more lawyers to see what they think of the case as it stands. Before you have to commit a lot of money to actually filing an action. It could be throwing good money after bad. And time. 

There might even be others you can file against if they helped. Still, we are talking about a lawyer on the clock unless your case is so good they take on the work for no up front fee.

You are in business and this 'investment' might be a costly 'education'. Signing up for more 'education' has to be weight against the benefits. 

To somewhat duplicate a prior reply I posted, you will not be able to obtain owner occupied financing for 5 units or more. Hence the reason that 1-4 units tend to be priced at a premium compared to MFR (MFR starts at 5 units).

So, depending on your ability to fund a deal, you might want to start with a MFR or you might find a 1-4 unit property lines up better fo a first purchase. Your access to credit, your cash and if there is any seller financing can tip things one way or the other.

And technically, a 4plex is still a residential property so not MFR. 5 units and above for MFR. Why? Because you can not obtain owner occupied financing at 5 or more units. Only commercial financing then.

Build a team if you need a track record and you do not personally have it. Then you can say the team or the company has X years of collective experience.

As others have pointed out, skip any BS or excessive spin. Be honest. Focus on what you can back up. If you are a newbie, it will show really early. Telling them you are experienced when you are not will be quickly discovered. At that point you are branded as a fool or worse. Everybody, including the broker, was a newbie at some point in the past.

I loved how you summarised the thread. Well done and good luck.