All Forum Posts by: Josh Collins

@Dmitriy Fomichenko

Correct, I would not provide the personal guarantee.  

I didn't think of the unrelated business tax angle if we set this up as an "adventure company" or something similar.  

Personally, I like the idea that I'm just a lender and if they don't cash me out then I become equity owner.  Frankly, I'm okay with either option.  I'm thinking that acting as just a lender will complicated things with the bank loan.  Obviously the loan from my 401K would be additional debt to service whereas if I'm an owner, the property wouldn't have the loan payment to my 401k to count against the property's financials.  In our opinion, because we're both self employed -which creates other issues with banks - we were thinking we'd want to put as much money down as possible to reduce the mortgage payment as much as possible to make it look as enticing to a bank as possible.  Adding the mortgage payment to my 401K adds additional expense to the loan app. 

@Brian Eastman

Acting as a lender would "complicate the primary loan underwriting and create too much risk for you".  

That was my thought too.  I was under the impression that if I keep my equity under 20% there is a good chance I don't have to provide a personal guarantee.  I'm also under the impression that many banks have done loans where just one person provides the personal guarantee no matter the amount of funds and/or equity in the deal.  Having just said that aloud, it just dawned on me that they probably have to have sufficient financial standing other than just a good credit score to back up the deal and sign off on a personal guarantee.  

I was hoping that I could invest in the property with my 401k funds and be hands off.  If my partner can't buy me out in 5 years, I then just take on an equity stake of which I can sell to a 3rd party or keep until retirement age.  I've been to seminars where the "guru" just says to hit up your friends with old 401Ks and family members with IRAs that aren't doing anything and have them invest in your deal using those funds.  How does that differ from this deal?  Is it because our deal is mostly land speculation?  What am I missing?  They certainly make it seem a lot more straightforward than it is.

I am looking to take checkbook control of my past 401K and other retirement funds.  I am looking to invest $125K with two other partners who plans on investing another $350k into a $800k property.  The property is a secluded cabin on large acreage in the mountains that we want to AirBnB as a backcountry resort.  We think the property can sustain its own payments, maintenance, etc, with the amount we plan on putting down but not much else.  This is a bet on large tracts of alpine property being increasingly hard to come by in the future.   It is almost purely an appreciation play.  

If my other partners manage and take care of the property (and I don't benefit from the property), can I invest with them if I'm not co-signing for the loan? From my research, it feels like a tenant-in-common (TIC) option is really the only option here but that may require that the renters pay each of us with separate checks during each stay (which is not going to happen). Is there any other way to make this deal happen?

My brainstorming has led me to think we can set up an adventure touring company that has the cabin as a rental.  I would buy shares of the company with my SD401k funds.  I'm not sure this is very straightforward (or even do-able).  

Are there simpler ways to make this happen if we're going to have a 50% loan to value on the property?  I'm guessing that the bank will require sign off on the loan from anyone who has over a 20% ownership stake (my stake would be 25% at the current investment levels) which is a no go as I'm assuming the loan can not have recourse on my SD401k.  Would it make a difference if the loan was non-recourse (due to having 50% down)?  If I had a 19% stake in the business/property?  

I went from thinking I'd be able to put my $125k into the deal and get bought out 5 years down the road with a nice little windfall from the other partners but the more I read, the more I think this is even possible.  The partners believe they can buy me out in 5 years but they don't think they have the money to get the deal done at this time.  What if I just offered a loan to the partners and left it at that?  

Thank you for your feedback. 

@Ryne V.  - I like @Shaun Weekes 's suggestion of starting a business asap and starting to pay yourself some sort of regular income (whether it be a W2 or K-1).  I think that will help create legitimacy to your credit/finances going forward.  

For this deal it seems ripe for a hard money loan in the "traditional" Bigger Pockets theme.  Get a hard money loan, use your cash reserves for the rehab, get it rented up and then refinance out your money and the lender's money.   Repeat.  Obviously you're going to have a find a good enough deal that a hard money lender is going to want to partner on, but I think that will serve as a sufficient "guideline" for your first deal anyway.  You don't want your margins too tight on the first deal anyhow.  

Another option is a house hack where your friend buys a 4 plex, lives in it and rents out the other 3 units.  That may seem a little "out there" for this thread but I'm guessing you'll/he'll need to live somewhere and this would allow you to save up for the next deal even faster.  Then after the 2 year seasoning period, you can move out and rent out the whole building.  Onward and upward.  I like this option for the first $50k as you'll need a place to live and you'll probably still need a job.  I don't think you'll "retire" on an investment of $50k into something (but I could be wrong) anyway.  

@Brian H. - I'm with both @Michael Wagner and @Scott Krone on this one.  I would highly recommend buying one already in business.  You can cut your teeth on the business side of things without much risk (if you lose a renter or two, it's not the end of the world).  The trouble with development is that you don't get to make any money for 3-6 months (maybe more) while you build up the property.  Remember, you also have to pay for things like pavement (or gravel) driveways, fences, gates, security, accounting software, website, lights, property taxes, insurance, and other things that don't make you any money while you work on renting it up.  This is not for the faint of heart.  If you have a deepish bankroll and want to give it a go, you could probably do it.  At the end of the day, this isn't brain surgery, but remember, banks and investors want track record.  The good news is that with buying a facility already in business, that serves as a track record.  

I would recommend going the SBA financing route.  It allows for a lot less money down (10-15%) and it reduces the banks obligation on the loan to about 50% of the property so they are a lot more interested in lending.  They pretty much don't have any risk if they hold the first mortgage on 50% of the property value.  There are more closing costs and a few stipulations but it also allows you to get 25 year amortization and the SBA portion of the loan (Bank funds 50%, SBA funds 40% and you fund 10%) is at a fixed rate.  This is good news in a rising rate environment.  

So, with that said, I think one of the best opportunities in Real Estate right now is buying mom and pop self storage facilities, getting them running efficiently and flipping them (or holding them).  

You balked a little bit at the price of a facility near you ($600k).  I will say that price, size, location (well location a little bit), nothing, matters as much as income to a facility's value.  You almost can't do a seat of the pants with a facility because it varies so much.  As long as the market supports it, I would say 85% is a pretty solid occupancy rate.  I think many people use 7 SF/capita in a 3 mile radius as to whether more storage is needed in an area or not.  Remember, that is an average for NY City as well as Green Bay, WI so you have to use some judgement with that number too.  

I want to leave on this note: if you have the land already and you are looking to put up storage, I think this is a slam dunk (assuming the area needs it).  You can put up buildings pretty cheaply and start small.  But once you get into grading out a property to build a facility (I've done two 6 acre parcels now and it's cost me over $200k each just for dirt work and another $250K for paving) the up front pricing can get a little wild.  With that said, if you have the property and you want to put up a bunch of storage, spend the money to talk with an engineer.  They will be able to design the facility in phases and they will also be able to make sure you can handle the rain (and snow).  This should not be taken lightly.  It really needs to be thought through.  

Good luck and feel free to private message me if you have additional questions.  

@Jordan Moorhead - Shucks, I'm going to be out of town.  I would have liked to attend.  I hope you have a good turnout!

@Kate J. - Have you considered real estate other than residential in Austin? My thought would be that you could probably buy a smaller mini or maxi storage facility and self-manage it. Or if you had some serious cash you could invest it in something larger and hire a manager. The returns can be pretty consistent whether the market goes up or down. Also, even facilities with lower CAP rates (5%) can return reasonable cash on cash with leverage (8-9%). If I were in a market as tight as Austin, Southern Cali, Denver, etc., I would be looking for self-storage. If a door or two goes unrented, you're not dead in the water.

Also, other properties that I love in booming cities are maxi-storage or light industrial buildings that contractors or service providers can call home for their businesses.  Again, you probably want something with a few units at a minimum so that if one goes empty you can still cover the mortgage.  The good news is that these units can get rented for many years without anyone moving out and costs for rental turn is pretty much $0.  Maintenance depends on age of the facility (as with pretty much everything in RE).

There is a bit of competition in the mini storage segment but smaller mom and pops can be found for reasonable CAP rates if you are self managing. And competition is much lower.

Maxi storage are hard to find but surprisingly, the returns can be really good if you find the right properties.  And the beauty is the location is less of an issue for these types of properties so you can do some "dumpster diving" as I call it.  The properties can look ugly, but I would shy away from bad parts of town as you'll have break-ins frequently.  Plus, you have some built in protection as most established cities are tearing down industrial to put up housing so I think it's harder and hard to come by these types of properties.  

My final note:  I would stay away from both asset classes (self storage and light industrial) in less populated areas.  It's easy to build mini and maxi storage in smaller towns.  I would probably stay away from these asset classes unless you did your due diligence (need, cost of construction, future development, etc.) .  But....if you can buy in a smaller town for less than the price of construction, you naturally have some built in barriers of entry.  

Good luck!

@Mary James - I find it interesting that most people assume this is going to be a nightmare.  What if having me do the property management was the best possible option (less fees, cheaper repairs, no rent-up fees, better customer service)?  If this was your house, would you try a little harder to figure out a way to hire your friend?  Just a thought.  I notice the pessimists can come out pretty quickly but I think everyone thinks the worst when the worst doesn't happen all that often.  BTW, I'm not knocking your response, I actually really appreciate it.  

This was part of the reason why I presented the question in the first place.  I thought I could do a better job, get more rent for my friend, lower the fees for my friend, and generally help a brother out.  I was in no way, shape, or form trying to skirt the law.  Just looking for direction and options.  In the end, it's all good but I'll also feel horrible if my friend gets taken advantage of by the property management company.  

I've gotten a lot out of this conversation, however.  From the, "yeah, no problems" to the "are you out of your mind?", I love it.  I was just looking for options and this post has been successful in that regard!  Thanks all.

@Jessica Wood

It feels to me like $1M is a lot to manage a bunch of flips or a ton of single family homes without having the processes in place.  Therefore, I'd probably concentrate using 1/2 of the money to actively pursue deals and use the other 1/2 to invest passively and put food on the table.  Even if you don't need your investment to put food on the table, you want those solid assets that will make you solid, worry free returns while you speculate or work on longer-term deals (value add, developments, syndications with rehabs, etc.).  I believe in making progress.  I'd hate to put all my money into one deal and wait 2 years for the first payout.  Even if the payout is very good, the investing environment could change a lot in that timeframe.  It could make your deal better but it could also make your deal worse (or bad).  

I like the "odd property" route that @Steve Vaughan suggests.  Something as simple as an underperforming self-storage facility can give you upside.  Or you can get your feet wet with a well-run self-storage facility, learn the biz and then buy bigger.  These can be somewhat hands off if you have good employees working for you.  

I just like the idea that you can force some appreciation in something.  Even if you don't take full advantage of them from day 1.  You want options for extra cash if things get tough.  I just like buying ordinary assets with upside.  So far so good.  

Lastly, I know you are looking for suggestions but honestly, I think you should invest in what you know best. Otherwise you'll be chasing the shiny object. Plus, you don't want the first time you analyze an asset class to be on a $1M roll of the dice (I'm being a bit dramatic, of course). My point is keep looking where you have the most knowledge and be patient. You may have to do extra networking and self-promotion to find what you're looking for but I'd say that is what you should go after. I had some money burning a hole in my pocket looking for self-storage facilities that would be up my alley. I looked for 6+ months and decided I was going to change to turn-key SFH. Well, after doing that, I decided that wasn't the answer. 9 months in a great deal for land fell into my lap and I was able to stay in my niche. I'm glad that I waited (or was forced to wait).

With that said, I don't think there is anything wrong with dabbling in other areas you want to learn more about, but I wouldn't suggest going all-in before the proper education is acquired (as per @Jay Hinrichs first post).  

In the end, you have a pretty fun situation to be in.  Can't wait to hear what you go after.  

@JD Martin and @Tracy Streich

My friend currently lives in the house.  He took a job in the Netherlands and doesn't want to sell the house because they love it.  They want to make sure that when they come home in 3-4 years that it'll be waiting for them.  It's in a great school district, it's on a lake, in a mature neighborhood, and they've done all updates to make it their forever home.  They know I have experience managing my own properties and preferred to hire someone they knew to oversee their property while they were gone rather than a property management company where they would have to pay lots of fees, be only 1 of many houses under management, and not know whether the management company would do what's in their best interest.  I feel honored that they felt that I would look out for their best interests and therefore was the reason they wanted me to look after it for them.  

With that being said, they also want to be hands off.  They have to pack all of their stuff up into a container, move to Netherlands, find a school for their son, find a short-term rental, start a new job in a new country and culture, find a job for his wife, find and buy a new house in a land they have no idea where they would want to live, and generally figure things out in the next month or two.  Needless to say, they're going to have their hands full and would rather leave the house to someone they trust.  

In the end, I declined to do it (due to the comments and suggestions here) but I really appreciate the creative ideas on here.  The "if it seems illegal, it is" rhetoric is appreciated, but frankly not super helpful.  I clearly wanted to operate within the law, I was hoping that others may have had a similar situation in which they had a realtor handle the lease-up but they figured out the handyman and general tenant management while also collecting a fee.  I also realize that it'd be easy to say, "It's your friend, you shouldn't charge him" but the house is almost an hour away and if I'm going to coordinate lawn care, cleaning, renter turns, and the like, I would like to be compensated to a certain degree.  Not to mention if you do something for free,  it's likely interest will wane for taking utmost care of the property.  It's human nature and frankly, I'm human.  

@JD Martin - Very good response.  Thank you for the common sense approach.