All Forum Posts by: Michael Evans

Don't sell property that has equity in it unless you can turn around and move that equity into a position that creates more equity.  Remember, there are only two ways to get equity out of a house, and they have costs: sell it or borrow against it.

I would keep the property, rent it and borrow against the equity.  Borrow an amount to where the next income from the rental covers the payment.  Then use the cash as down payment on your construction loan. If you don't qualify for the construction, then take the equity and fund flips from an equity position and grow your money (faster than renting).

You will have a hard time legally holding a person responsible for a loan that they are not on, even if you have a separate contract. If one person gets the loan, then the partnership needs to be structured such that it is extremely clear the order in which expenses will be paid on an ongoing basis and in case of insolvency. An LLC with a good operating agreement usually accomplishes this. I would have the operating agreement drafted by a local real estate attorney who knows your state's laws and you can explain to the attorney how you plan on funding and operating the business.

My business partner and I have multiple companies that perform different functions:

1. We have an LLC the funds our real estate deals, using either cash from the LLC owners, or raising cash through promissory notes secured by 1st and 2nd position notes and mortgages/trust deeds (Hypothecation).
2. We have an LLLP (Limited Liability Limited Partnership) that we use to purchase properties to flip.
3. We have an LLC owned by a C corp that acts as the holding company for our long term buy and holds.
4. We have an LLC that provides real estate deal management services.

All of the companies are associated with each other, but we use different business entities based on the function of the company and to provide liability coverage (managing and shifting risk).

Using a credit card is perfect for flipping properties that you intend to hold for 6 months or less.  If you have a 0% interest card that allows you take cash advances for free, or even if they charge you 3%, with no interest due and minimum payment amounts, this is a gold mine for flippers.  I would do this all day long in my sleep.  I don't have the credit score to get these cards, but I would partner with anyone who can.  I have a system that uses leverage, while managing and shifting risk in order to generate double digit annual returns.  I say use leverage, just use it wisely.

I would have them invest as a debt investor in the 2nd lien position,  They basically loan you the money for certain period of time (2-5 years let's say) and you negotiate terms (interest rate, interest-only or amortized, points up front, pre-payment penalties, right to collect rents in case of default, etc.

This is much cleaner.

Definitely run the numbers and assume the worst case.  There were many people to took out ARMS in 2006 thinking they would only be in them for a few years.

We do complex real estate deals using leverage, while managing and shifting risk to generate double digit annual returns. We use a 1st and 2nd loans which allows the equity investor to come in around 10% of total costs (purchase, rehab, closing, out of pocket and holding costs). So for $10,000 you can purchase a property with an ARV around $100,000 and earn 25% ROI in six months on your cash investment.

My business partner has not been successful in getting unsecured business lines of credit.  We have evaluated 3-4 of them and he went with Fund and Grow.  He has only received one line of credit and it was an American Express credit card.  He had better luck going to his credit union and getting an unsecured line of credit, but it's at 12%, and he has a 720 FICO.  I have a credit score of 594 and my interest rate on 5-year unsecured loan from my credit union is 14.25% for up to $50,000.

Let us know how it goes, as I haven't heard real success stories from anyone.

Stay Blessed!

Here is how I would do it:

1. ARV of $125,000
2. Rehab cost of $20,000
3. Purchase price of $73,500
4. Ask you uncle to carry the 1st position note for the entire purchase price.  Agree on a 30-year fixed rate amortized note for $73,500 with no points and an interest rate between 6% - 10%.
5. Then ask him to also carry a 2nd position note for the rehab costs and closing costs.  My numbers will put you around $26,000 for a 2nd.  Make the 2nd also a 30-year fixed interest only note for $26,000 with no points and an interest rate between 10%-12%.
6. Your costs will be the out of pocket costs (property inspection and appraisal, if you want) and holding costs (PITI) during the rehab timeframe. I always use a 6-month rehab period, so I estimate your costs will be about $7,500 cash.
7. Your total monthly costs for both loans, insurance and property tax impounds, and property management of $125/month will equal around $1,200 per month. If you pull in $1,400 gross per month deduct 10% for vacancy and maintenance/CAPEX costs, your net monthly rent will be around $1,260. Compare that to your cost of $1,200/month and you will net around $50/month before taxes and depreciation.
8. Based on Marginal Tax rate of 35% and 27.5-year depreciation schedule, you can expect to have net cash of about $1,225 on a cash investment of $7,500.  That's a cash-on-cash return of 16.2%, and not counting the $16,000 in equity that you will have after the rehab.

What are the numbers?

• Property Value
• Annual Net Income
• How large of a Line of Credit are you seeking?
• How long have you owned the property?

We use leverage in our deals. We've developed a deal management system that tells us how much leverage we can use and at what cost for the deal to be profitable. Our minimum leverage on flips is about 10% and 15% on buy and holds. We use 1st and 2nd mortgages to pay 70% of the purchase (1st mortgage) and the 30% down payment, rehab costs and closing costs (2nd mortgage). We then come in as the equity investor to cover out of pocket costs (inspection and appraisal) and holding costs (6 months worth).

Used correctly leverage will boost your returns while allowing you to shift risk to the 1st and 2nd mortgages. it also allows you better money management since can you spread your cash over more deals and have eggs in more baskets. You can either put $100,000 cash into a single deal and make 10% or you can use leverage and put $100,000 into 10 deals at $10,000 each and earn 25% each deal. Which would you rather do?