All Forum Posts by: Nate McCarthy

My sister-in-law has found a house in their neighborhood that has been vacant for years, and lo and behold, the owner has passed away and the heirs are looking to sell. Lots to be figured out in this deal but let's assume for now that it's priced right for a BRRRR or flip.

My wife and I have been looking to move into a house hack in the area, and friend has just sold their house and has cash they're looking to invest in a flip. My wife's sister--the house-finder--is interested in putting some of her money into this deal, too. 

In general, I'm curious how investments with multiple investors are structured. Are returns just split proportionally according to how much each party invested? What if one party is doing more leg work? These are the scenarios I'm looking at.

Let's say the three parties (Me and my wife, friend, and sister-in-law) invest three ways, say 2:1:1, with the friend being the biggest investor. My wife and I move into the house since we are looking to move to the area anyways, and we all do a lot of the rehab ourselves, probably with my wife and I doing a little more since we would be living there.

In this case, how does the friend with cash get their money out of this deal in a time-efficient manner, since they're primarily looking at this as a flip? My thought is to BRRRR it and refinance, and they get their cut of the equity (which I assume would be split 2:1:1). However, if we paid for the house mostly in cash, does it make sense to refinance and incur a high monthly mortgage payment? This is a fundamental component of the BRRRR strategy that I have yet to understand.

Or, does it not make sense for the friend to invest in this deal if they're primarily looking to flip? I can think of a couple of seemingly great reasons to stay in the deal, which would be 1) they'd get a portion of the rent we'd be paying to live there (again, I assume this would be split 2:1:1), and 2) if we live in the house for a couple of years, couldn't we sell it tax-free, since we would be owner-occupants? Then we'd all split the tax-free profits. Or does this not apply when there are multiple owners, since only 1 of the 3 invested parties is living there?

Is there a better way to structure this deal besides proportionally splitting the profit from refinancing (and/or eventually selling) and the rent (which we'd be paying)? Again, I do not know how multi-party investments are typically structured and I'm very much looking to find out!

I'm really interested to learn how more experienced investors would approach this. Thank you so much for your insight!

 Sean, thank you for the detailed response! You make a lot of good points. I think the property does have great potential, and the biggest challenge is going to be financing. In the event my landlord is interested in selling, I was wondering if I could add value in the short term by, say, converting part of the garage and/or covered porch into a bathroom and maybe a bedroom (currently 3 bed 1 bath). I'd have to do some research on the local market to know if this would meaningfully increase the value and the appeal as a rental in the long-term. Maybe this could improve cashflow and affordability for us?

I appreciate you bringing up all these things to think about. In any case I of course need to actually talk to my landlord, but I'm feeling better about that conversation the more points that are brought up for consideration beforehand.

Hi @Joshua Bautista! Thanks for the ideas!

I do want liquidity to invest elsewhere which is why I'd like the cash back from the reno ASAP, but I don't need liquidity equal to the value of the house--just the basement build-out, if possible.

With option #3--how do you "cash out immediately"? I would plan on paying for the project out of pocket.

 Jon, I like this approach. Getting pre-approved for a conventional loan before having a discussion about buying a house--what a concept! 😆 I think it would be wise not to bombard them with an offer to buy, but rather to put the thought in their mind that we are interested in buying something, and how convenient would it be to not have to find new tenants? Thank you for the rational and well-thought-out input!

This is very practical advice and I agree with the sentiment about not going into a conversation presuming anything about where their headspace is at. Funny, I was hoping to equip myself with some ideas so I could propose some transaction options to them right off the bat--but I agree with you that that is probably not the right move. It seems premature and sort of tacky after hearing your thoughts on it. Thanks for the counsel!

@Jake Andronico, thanks for the input--I agree that any deal I would propose would have to be compelling to the seller, hence this think tank!

As far as benefit to the seller goes, @Matthew Paul I think you are probably right on the money and regardless of whether they would have preferred to stay in this house rather than move, it is likely providing them some excellent cash flow; and I'd be hard-pressed to come up with a deal that serves both parties better than the current situation. 

But I'll never know unless I ask! 

Thank you Sherry! That sounds like a thoroughly reasonable approach 😂

"search online for ideas of how to structure a seller financed offer"... that seems like an excellent idea 👍

My mom lives in a nice house that she has paid off. However to save money when she had the house built, she left the basement unfinished--it is just studs, insulation, and windows/doors, plus plumbing in the foundation. There's obviously opportunity here to build this out and turn it into a basement apartment, which I think would cash flow because of course there's no mortgage. 

What I'm wondering is: is there a way to get the cash invested into this rehab back out of the property in a relatively short timeline, as if it were a BRRRR? If I had just bought this property and could force some appreciation, I could refinance and hopefully extract that equity within a year, for example--but since this house is paid off, refinancing would introduce a new mortgage payment.

What are the options here? Get a new loan only for the equity created by this rehab? Refinance the whole house as long as the rent exceeds the mortgage? Just let the money live in the house and collect rent as the only ROI?

Thanks for the insight!

As tenants, I'm wondering what kind of offer we could present to our landlord to buy the house we are renting. Why would we want to do this, why would we even think that the landlord would be open to such an idea, and what are the obstacles? Here's the situation:

1. Landlord had to move to a different state to have better access to healthcare, i.e. did not move by choice per se. This health issue ultimately led to a close family member passing and now I don't believe they have any family living in our area anymore.

2. Still has lots of belongings (including a boat) in a large shed on the property... could imply intention to move back, or a desire to not have to deal with it and possible interest in having help getting rid of all this stuff

3. Have heard from a neighbor who is still in touch with the landlord that he is talking about buying a sailboat and sailing around the world... not sure if he is serious about this or not but suggests to me a desire to move on from current lifestyle.

4. Home last sold in 2007 for somewhere around $120k, currently could sell for upwards of $400k, so it's probably paid off or has very low interest rate. Would not cash flow, if we were to become landlords and rent it out, with a conventional loan for the current home price at our current lease rate ($2k/mo)

5. Lot is very large and could probably accommodate 1-2 more entire houses, or just some ADUs, which is the appeal to us. However this would obviously require substantial work and we probably wouldn't have the funds for years.

Since I think we'd be losing money to rent it out (if we were to move) at our current rate with a conventional loan, I'm imagining maybe some kind of seller finance situation... which gets back to my question, what kind of deal could we present to our landlord that they might find appealing and gets us the chance to at least break even on rent?

I realize this may be a fantastical scenario with no feasible solution but I thought it would be an interesting exercise. I appreciate insight from landlords, or folks who have done deals like this before.

@Noah Laker, thank you so much for the reply!

As for the areas to target, my goal in getting our feet wet as real estate investors--and since we plan to be living in Sac--is to find a property we can live in while renting out one or more units to help cover our housing expenses, which we can then hold and continue to rent out when we move. So... the definition of a house hack, I guess. We're willing to live almost anywhere in the greater Sacramento area based on what we can afford, provided of course that the property is in a decent neighborhood that has a good chance of attracting responsible tenants.

As for budget, I believe we could get a conventional loan for properties up to $600k, but my strong preference is to find a distressed property (or seller!) for <$400k. In other words, I think we will probably have to be on the hunt for a very good deal or a very distressed property, and will not be investing in million-dollar multifamily properties... yet! Maybe you have some thoughts on if this is feasible.

I will absolutely put a pin in the NorCal Real Estate Mastermind meet-up. We're currently living in Idaho so attendance will be difficult in the near future but we'll have to plan a trip to Sac or make sure to attend a meeting when we move!