All Forum Posts by: Lauren Robins

Hi Mehrose. Congrats on getting started! 

Acquiring a business, particularly with SBA loan involvement, requires a meticulous approach. Underwriting these deals differs significantly from real estate transactions, demanding a deep dive into the business's operational and financial health. Start by focusing on the quality of the business's earnings. Scrutinize historical financial statements, looking for consistency and growth. Be wary of one-time revenue spikes or expense reductions that may not be sustainable. Pay close attention to the "seller's discretionary earnings" (SDE), which represents the total financial benefit a single owner-operator derives from the business. Ensure that the SDE is realistic and verifiable.

When navigating SBA loans, understand that these lenders are risk-averse. They will assess not only the business's financials but also your personal creditworthiness and experience. Prepare a comprehensive business plan demonstrating your ability to manage the business and repay the loan. The SBA's 7(a) loan program is the most common for business acquisitions, offering favorable terms, but it comes with stringent requirements. Be prepared to provide detailed documentation, including tax returns, personal financial statements, and a thorough valuation of the business. Due diligence is paramount. Engage experienced professionals, such as business brokers, accountants, and attorneys, to guide you through the process. They can help you identify potential red flags and ensure a smooth transaction. Finally, understand the importance of a well-structured purchase agreement, outlining contingencies and ensuring a clear transition of ownership.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Hi there, Brian! 

Your proposed investment structure is a strong starting point for bringing in passive investors while allowing you to retain majority ownership. The 6% preferred return, coupled with a 75/25 profit split in favor of investors after the hurdle, makes the deal attractive to potential partners. Additionally, keeping 70% equity while leveraging outside capital ensures that you maintain long-term control and benefit from appreciation. Investors may also find comfort in the fact that they are not taking on any debt risk, as your LLC will be solely responsible for financing the property.

However, there are some areas where you may be overcompensating investors. Since they are contributing only 30% of the purchase and renovation costs, yet receiving a preferred return and 75% of profits on their portion, you may be undervaluing your role in securing financing, managing operations, and assuming risk. You might consider adjusting the equity split to 50-60% in favor of investors after the preferred return or increasing your retained equity to 75% or more. This ensures that your expertise and responsibilities are adequately rewarded.

Another consideration is the impact of taking on all the debt in your LLC's name. While this simplifies things for investors, it may limit your ability to scale, as lenders could become cautious if your balance sheet becomes too leveraged. Maintaining a healthy debt-to-equity ratio and strong cash reserves will be critical. You should also anticipate how investors will eventually exit the deal—will they be repaid their initial capital through a sale or refinance? If they remain in indefinitely, you may need a buyout provision allowing your LLC to purchase their shares at a predetermined return.

Additionally, aligning incentives is crucial. If you are actively managing the property, will you charge a management fee? How will you handle situations where cash flow is low? Will unpaid preferred returns accrue over time? Clarifying whether the preferred return is based on simple or compounded interest and outlining how losses are managed will help avoid misalignment with investors.

You may also consider alternative structures to maximize your returns. A tiered equity waterfall could be more beneficial, where profits are split 75/25 until investors achieve a 12-15% internal rate of return (IRR), after which the split shifts to 50/50. Another option is a debt-equity hybrid, where part of the investor contribution is structured as a loan with a fixed return (e.g., 8%), while the remainder receives a smaller equity portion (e.g., 50% instead of 75%). This approach reduces long-term dilution while still providing investors with an attractive return.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Your situation presents an interesting opportunity to explore the benefits and potential pitfalls of a first lien HELOC, particularly given your high income and significant savings rate.

Regarding your first question, whether a first lien HELOC is advisable, it's crucial to weigh the advantages against the risks. The allure of accelerated mortgage payoff through an "all-in-one" approach is undeniable, especially with your substantial cash flow. However, HELOC rates are typically variable, and a 10% rate, while conservative, can fluctuate. This variability introduces uncertainty, particularly in long-term financial planning. The accessibility of capital for renovations and emergencies is a significant advantage, but it's essential to ensure disciplined use of these funds to avoid overextending your financial position. Given that you are planning for a drop in income due to childcare, having access to capital is a significant benefit. Also, the ability to pay off your primary residence in 10 years would be a massive benefit, but you will need to be disciplined in your use of the HELOC.

Addressing your second question regarding tax ramifications, the deductibility of interest on a HELOC used for rental property expenses is complex. Generally, interest expenses are deductible if they are directly attributable to the rental activity. However, commingling funds from a HELOC used for both personal and rental purposes can complicate matters. The IRS scrutinizes such situations closely, and meticulous record-keeping is essential to demonstrate the allocation of funds. For instance, if you use the HELOC to fund kitchen renovations in your rental units, the interest attributable to those funds would likely be deductible. However, interest on funds used for personal expenses, such as groceries or vacations, would not be deductible. It's important to consult with a qualified tax professional to ensure compliance and optimize your tax strategy. They can help you establish clear documentation practices and provide guidance on the allocation of interest expenses.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

You're in an interesting position with this STR deal, especially given the mix of income-producing structures and the potential for significant value-add through rehab. There are several financing strategies you might consider, depending on the lender's risk tolerance and your available capital.

One option is a DSCR loan, which could work well if you can show strong projected STR income, but rural properties often require a higher DSCR (1.25x or more) and may necessitate a larger down payment. Some lenders may allow you to use AirDNA rental projections to justify income, while others might discount STR revenue in their calculations. Expect to put down at least 20-25% if DSCR underwriting is strict.

If a DSCR loan isn't viable, private or hard money lenders could be another route. Given the strong after-repair value of $1.2M post-rehab, a short-term bridge loan or hard money loan might allow you to secure the property and cover the rehab. These typically come with higher interest rates (8-12%), but if you can refinance into a more favorable DSCR or bank loan after the rehab, it could work well. Some hard money lenders offer up to 85-90% loan-to-value (LTV) on the purchase and 100% of rehab costs, reducing the capital you need upfront. If the seller is open to carrying a second-position loan, you could further minimize out-of-pocket costs.

A seller financing + bank loan hybrid could also work. If a traditional lender will finance 50-70% of the purchase price, the seller could carry the remainder in a second position with flexible terms, such as interest-only payments or a balloon structure in 3-5 years. This could allow you to preserve liquidity while still securing financing.

Additionally, local banks and credit unions can be more flexible in financing rural STR properties than national lenders. Some community banks have portfolio loan programs that do not have the same strict DSCR requirements. It's worth reaching out to banks that are already working with STR investors in Douglas County, as they may offer more competitive terms or lower down payment requirements.

If you’re open to bringing in investors, equity partnerships or syndications could help cover the down payment and rehab costs. In exchange for capital, you could offer investors either a fixed return (e.g., 10% annually) or a share of future profits. A joint venture structure could help you avoid loan qualification issues while still moving forward with the deal.

One key consideration is any red tape in Douglas County that might impact the STR operation. While the county isn't as restrictive as some other Colorado areas, it's important to verify zoning laws, permit requirements, and occupancy limits. Some regions impose restrictions on the number of guests or rental days per year, which could affect your projected cash flow.

Ultimately, the best strategy may be a mix of seller financing and a DSCR loan or private money, allowing you to acquire the property with minimal upfront capital and refinance once you've increased cash flow. Given the seller's willingness to carry part of the financing, it would be useful to understand their expectations—are they open to interest-only payments, or do they want a higher rate? Structuring a favorable seller-carry agreement could be the key to making this deal work.

You're getting solid advice regarding your company's name. Many lenders and financial institutions tend to scrutinize businesses with names that include terms like "Capital," "Investments," or "Assets." These words often signal that a company is in the financial services industry, which can lead to unnecessary regulatory scrutiny or even make it harder to secure favorable lending terms. Some banks may also view such companies as potential competitors and, as a result, offer reduced lines of credit or higher interest rates.

To keep your company name broad, professional, and lender-friendly, consider using a suffix like "Holdings," "Ventures," "Group," "Partners," "Enterprises," "Properties," or "Management." These terms suggest a well-structured business while remaining flexible enough for diversification. "Holdings" is a particularly strong option if your goal is to own and manage various assets over time, while "Ventures" conveys an entrepreneurial spirit without tying you to a specific industry. If you want to emphasize real estate without sounding overly financial, "Properties" or "Management" are good alternatives.

On the other hand, it's wise to avoid suffixes that could raise red flags with lenders. Names containing "Capital," "Investments," "Financial," "Funding," "Trust," "Wealth," "Securities," or "Equity" may cause banks to classify your business as high-risk or regulatory-heavy. This could lead to stricter underwriting requirements, making it more difficult or costly to obtain loans and credit lines.

Given your focus on real estate with plans for future diversification, "Holdings" or "Ventures" would likely be the best choices. They provide a professional image, maintain flexibility for growth, and keep the company lender-friendly. Let me know if you need any more ideas. 

In addition to rental property insurance for a fix-and-flip, investors typically carry several other types of insurance to protect their business and mitigate risks. One of the most essential is general liability insurance, which covers claims related to bodily injury, property damage, and personal injury that could occur on the job site. This is particularly important if visitors, contractors, or potential buyers enter the property during renovations. If someone were to get injured, general liability insurance would help cover medical bills, legal costs, and potential settlements.

Another crucial policy is workers' compensation insurance, especially if you hire employees or contractors to work on your fix-and-flip project. This insurance covers medical expenses and lost wages for workers who are injured on the job. Many states require workers' compensation insurance by law, and failing to carry it could lead to fines or legal consequences. Even if you primarily work with independent contractors, you may still be liable for injuries if they don’t have their own coverage.

For projects under construction or undergoing major renovations, builder’s risk insurance is highly recommended. This type of policy covers damage to the property and construction materials caused by fire, vandalism, weather, or theft during the renovation process. Since fix-and-flip properties are often vacant and undergoing extensive work, they are more vulnerable to these risks, making this coverage essential.

To provide an additional layer of financial protection, many investors opt for umbrella insurance. This policy extends liability coverage beyond the limits of your general liability or workers' compensation insurance. If a significant lawsuit arises that exceeds the coverage of your primary policies, an umbrella policy can help protect your personal and business assets from being targeted.

If you or your workers use vehicles for business purposes—such as transporting materials, tools, or employees—you should consider commercial auto insurance. Personal auto policies often don’t cover accidents that occur while using a vehicle for business activities, so having the right commercial coverage ensures you are protected in case of an accident.

For investors who act as general contractors or manage their own construction projects, contractor’s professional liability insurance (also known as errors and omissions insurance) is valuable. This coverage protects against claims of negligence, mistakes, or failure to perform services correctly, which could arise if a construction project has defects or delays that result in financial losses.

If you’re dealing with older properties that may contain hazardous materials such as asbestos, lead paint, or mold, environmental or pollution liability insurance is worth considering. This policy helps cover costs related to contamination cleanup, legal claims, or damages caused by environmental hazards, which can become costly if not properly addressed.

Beyond your active fix-and-flip projects, if you hold additional rental properties or investment real estate, maintaining property insurance is necessary to protect against theft, fire, and other potential damages. If you plan to rent out properties before selling them, making sure you have the right landlord or rental property insurance in place is essential.

In certain cases, you may also need surety bonds, which are often required when working with contractors, subcontractors, or suppliers. These bonds guarantee that financial obligations and contractual commitments are met, helping to protect both you and any business partners from losses due to nonperformance.

Finally, if your real estate business involves handling sensitive financial or client information online, cyber insurance can protect against data breaches, hacking, or cyber fraud. As more transactions and records are managed digitally, this type of coverage is becoming increasingly important for property investors.

By ensuring you have the right combination of these insurance policies, you can safeguard your fix-and-flip business from potential risks and financial losses. The specific coverage you need will depend on the size and scope of your projects, the number of properties you manage, and the potential liabilities involved in each flip.

Since your tenant's Section 8 lease is expiring on May 31 and you do not want to go for a month-to-month arrangement, there are a few options.

One option is to offer a short-term lease extension. Instead of switching to a month-to-month lease, you could offer a lease extension for a limited period, such as one or two months. This gives your tenant additional time to find a new place while maintaining the terms of the original lease. You can specify in the extension agreement that it is a temporary solution with no automatic renewal.

Another option is to allow the lease to expire and require the tenant to vacate by the lease expiration date. If your tenant hasn’t found a new home by then, you can enforce the original lease terms, requiring her to move out by May 31. Make sure to communicate this clearly to the tenant, so she understands the expectations and can plan accordingly.

If you are open to continuing the tenancy under new terms, you could also create a new lease agreement. This would not be a month-to-month arrangement, and you would have the flexibility to adjust the rent or lease duration. Keep in mind that any changes to the lease terms should be communicated well in advance, and the tenant should be fully aware of the new conditions before signing the new lease.

It may also be helpful to coordinate with the local Housing Authority if your tenant is still in the process of securing a new place. Some jurisdictions may offer additional support for tenants who are actively searching for housing, and the local authority may be able to grant a temporary extension. It’s worth checking with them to see if they can assist with the situation.

If you are concerned about your tenant staying beyond the lease expiration, you could negotiate an early termination clause in any short-term lease extension. This would allow either party to terminate the lease early with proper notice, giving your tenant flexibility while ensuring you have control over when she leaves.

Finally, as a last resort, if the tenant does not vacate and you do not want to extend the lease in any way, you may need to pursue eviction after the lease expires. However, eviction is typically a time-consuming and costly process, and it’s usually better to avoid this route if possible.

You're absolutely right that a real estate license is state-specific, and if a wholesaler is working across multiple states, the necessity of getting a license becomes a bit more complicated.

A real estate license is required to perform certain activities like representing a buyer or seller in a transaction, negotiating contracts, or receiving compensation tied to a transaction (commissions, for example). The rules surrounding wholesaling vary by state, and in some states, a wholesaler might not need a real estate license to assign contracts or find buyers for distressed properties. However, in others, they might need a license if they're performing activities that are considered to fall under real estate brokerage.

If a wholesaler is working in multiple states, the license would only be valid in the state in which it was obtained. This means that, if the wholesaler operates in different states, they may need to get licensed in each state where they conduct business, depending on the specific laws and regulations governing wholesaling in those states.

In a virtual wholesaling scenario where the wholesaler never meets buyers or sellers in person but is still facilitating transactions across state lines, the need for a license becomes more nuanced. Some states have reciprocity agreements, allowing a license from one state to be used in another, but this is not universal. Also, even when a wholesaler is not directly involved in a traditional real estate agent role, they still must ensure they are following the letter of the law in each state they are active in.

To answer the question about whether getting licensed would defeat the purpose: In some cases, it might seem counterproductive because obtaining multiple licenses can be time-consuming and costly. However, it ensures that the wholesaler is compliant with state laws, protecting them from legal risks. In some states, working without a license may expose a wholesaler to penalties, fines, or even lawsuits from buyers or sellers who feel they were misrepresented or harmed during the transaction.

First, from a multifamily lender's perspective, these lenders typically look for properties that are considered "multifamily" by local zoning and building codes, regardless of whether the building is part of a larger complex. If the new building with 24 units (after conversion) qualifies as a multifamily structure according to your local zoning, building codes, and the International Building Code (IBC), lenders will likely view it as a separate, income-generating property. Since the auxiliary building will have its own Certificate of Occupancy, lenders may treat it as an independent building under the same property ownership, even if it shares a fire separation with the original structure. To assess the risk, the lender will likely require a clear description of the property’s zoning, intended use, and legal structure.

As for condominization, it can be one mechanism to distinguish ownership between the two buildings if you want to sell the properties separately in the future. However, lenders may be hesitant to lend on a property with condominium ownership unless it's structured in a way that meets their requirements—such as having a fully approved and recorded condominium declaration and bylaws. Condominiums may be seen as more complex or risky by certain multifamily lenders, especially if the two buildings are on a single parcel or under the same ownership entity. In that case, multifamily lenders may not be comfortable providing financing.

There are some alternative approaches to consider. One option is subdivision or creating separate parcels for each building, if local zoning allows for it. This would create clear distinctions between the two buildings and their ownership, which could simplify the refinancing process. Each building could then be refinanced separately as a distinct entity. Another alternative could be structuring the ownership as a master lease or a separate operating agreement between the two buildings. This would allow you to separate the operations and income streams without going through condominiumization, though it could introduce additional complexities for tax purposes or lenders.

Lastly, since the new structure will have its own Certificate of Occupancy and meet the definition of a separate building under the IBC, you may be able to refinance the renovated building separately as a multifamily property. This might be the simplest and most straightforward approach, assuming the lender is comfortable with the legal structure and intended use.

Ultimately, consulting with a lender who specializes in multifamily refinancing, especially those with experience in conversions, is key to clarifying how they view the property and what type of structure or documentation they will require.