All Forum Posts by: Patrick Forelli

I have a sub to like question along the same lines.

I own a STR that is performing well (30% COCR) and I want to scale my business.

My parents own a few properties in cash. I was looking into partnering them leveraging their capital and getting a loan. However, they dont want to be anywhere near the loan or title because they dont want any lawsuit liability from my STR.

With my income and credit score, the terms for DSCR loans or conventional investment are not good.

They own their primary residence in cash and its value is around 2 million. We were exploring taking out a primary mortgage on their home to take out 350k in cash at about a 6% interest rate, and I take out a loan from them at an equal rate or slightly higher (maybe 6.5%). Id purchase my investment property in cash with the 350 k loan. They are cutting me a good deal and I am grateful. 

How does the mortgage interest work here? I assume I can deduct it, they cant and they pay tax on the difference in interest between the primary mortgage and my personal loan with them?

Hello,

I currently make a solid income and own a STR that is doing extremely well (30% COCR). I am looking to scale my business and am leveraging an investor (my parents) to fund my down payment for 5 % interest on a 10 year loan.

The loan will be a conventional investment loan that will require 20% down and about a 8.5% interest rate. 

My biggest issue is that my credit most recently took a hit, dropped 100 points from 740-640. I rented an apartment and the property management company added 6 k in move out charges to repaint the entire interior of the home due to minor marks (didnt give back 4 k security deposit and charged 2 k on top). I attempted to file a small claims case but the local property management address was unservable and I would have needed to travel all the way to arizona to attend court. During this process the late payment got reported to collections and I shortly after completed the payment. However, I did not know that this minor 2 k late collections payment would have a lasting impact on my credit report. It dropped 100 points form 740 to 640 and it has not come back up in 3 months.

My parents are more than happy to take out the loan as they are very financially well off, own a few homes in cash, and have no interest in ever taking out another loan for themselves. However, they are weary of being on the title in the case of a lawsuit for asset protection.

Here is my proposition and I would love to know what the BP community thinks.

We create a LLC between myself and my parents and the LLC goes on the mortgage and the title of the house. This in theory should separate my parents assets from the LLC's assets in the case of a lawsuit. My parents guarantee the loan so it goes on their debt to income ratio and their very high income and over 800 credit score qualify the loan for better terms. (is this how it works or does my low credit hurt this deal as a member of the LLC even if I don't guarantee the loan????????).

Please hold the advice about investing with family members. I understand everyone has their own opinions and preferences but please hold off judgement. My parents have plenty of money and most of it is sitting in low risk investments such as money market accounts getting 4.5% interest. My father's justification is that he has no problem lending 50-80 k to me for a 5 % interest. Why would I not take advantage of this opportunity as opposed to getting charged 10-14% from a hard money lender?

Yes, I understand the risk of the 2nd lein but I am extremely confident I can find a STR for 350 k that will gross 80 k in revenue. Total monthly payment with the 2nd lien will be around 3200-3500/month. In fact I own an STR in the same market at a 350 k purchase price that will exceed 90 k in revenue its first year.

Does anyone have any general advice around the asset protection of an LLC for multiple members as well as how loan financing works around an LLC. Can one member guarantee the loan to leverage their higher credit and income, or does the lowest get taken?

Hi BP community.

I am a real estate investor and I bought an STR last year thats going really well. I want to buy another one but my credit score recently tanked due to a collections filing from a property I rented. I have since paid the collections.

Prior I had a 740 credit score. After the collections I have a 640 credit score and it hasn't moved for a few months.

I rented a property with a few friends for a year and after move out we were charged with over 6000 $ in B.S damages including 5k to repaint all the interior walls of the home due to a few minor marks. After doing some research it was clear that this management company makes a habit of doing this and that these were unfair charges. We decided to fight the charges and file a case in small claims court (not knowing the future impact of a dinged credit). We got our case dismissed because the property management company had an un-servable address and the only way to file a case was to do it across the country in Arizona which we were not willing to do. Taking off of work and having over a thousand in travel expenses without a guaranteed win did not seem worth it.

I talked to the credit agency and it turns out this will ding my credit for the next 7 years even though the debt is fully paid off. This is really disappointing because I am ready to purchase another property today but will not get approved or have horrible loan terms due to a 640 credit score.

Does anyone have any recommendations on how to remediate this issue? Is there anything I can do? Does filing a case in small claims court excuse my collections filing?

Thanks,

Patrick Forelli 

Hello BP community.

I currently make 125 k a year and I own 1 property that is performing well as an STR.

I dont have the upfront cash to purchase another for a down payment but my parents are interested in financing my down payment with a 5% interest rate. 

I should be able to qualify for a DSCR loan or conventional loan, but I see down the road that this could affect my DTI and make it difficult for me to get more mortgages in the future.

I understand I could use a conventional investment loan and my parents could co-sign the loan to give me better terms, but does this remove the loan from my DTI? I assume not.

If the property was purchased under an LLC and my parents get a 5 % preferred return and they personally guarantee the loan, but I take the majority of the income, does this remove the loan from my DTI?

My parents are interested in supporting me and they are at a stage where they have a comfortable amount of money, they have excellent credit and they have no plans of taking out a loan in their lifetime. 

Are there any creative strategies for them to secure the loan without it affecting my DTI?

They also want to avoid any liability at all cost which is why I suggested an LLC structure. Is an LLC a secure, 100 % fool proof method to protect my parents assets?

@Chris Seveney I have 7 k a month in revenue and 5 k total in expenses so its netting about 20 k a year in profit. Still an awesome investment but will take about another year or longer to go all in with myself because 20 % down on a property + 20 k in furnishing I'd need about 90 k total for a 350 k house.

I am leveraging a partner because I don’t have the capital to go in by myself. I was able to leverage a 2nd home loan for the first rental property and put 10 % down, but now with an investment property I need to put 20 % down which is about 100 k in total after furnishing. 

Hello BP community,

I recently invested in a STR last year and its going great! Projecting revenue of 84 k with a return of 25 to 30 % on my upfront investment. I am looking to invest in more STR's this year with partners and scale the business.

I am looking for a LP and GP deal structure where I am the GP that provides the labor and investment skill. I will perform market research and find the deal, I will put about 20-30 % of the upfront investment, I will perform the labor of furnishing the property and the ongoing management of the property. My LP will simply provide the majority of the investment up front (approximately 70-80% of upfront cash).

We both agree on a 50/50 split of earned equity from the mortgage. We agree we have 50/50 liability for expenses in the case of a loss.

We differ in terms of cash flow breakdown. My partner wants a 75/25 LP/GP breakdown until the initial investment is regained. After that, we split the revenue 50/50.

I was interested in a preferred return of 8% for the LP and then a 50/50 split if not 60/40 split favoring the GP for all additional income.

Here is my reasoning. I am providing the industry knowledge and skill behind the investment. If the investment under performs, I am at fault, and if the investment over performs, I deserve the credit. So with that logic, I want the LP to be protected and get paid out a baseline return first, but if the property exceeds expectations I believe the GP should capture  higher returns.

With the proposed 75/25 waterfall breakdown suggested by the LP, I feel that I would be under compensated the first 4 or so years and it may not be worth it for me considering the month of labor it takes to furnish the property and the approximately 100-150 hours a year it takes for me to manage the property. It may be worth it for me to just save up the cash to go all in on a deal myself or seek investors to simply get a hard money loan for for the initial investment.

What does everyone think about my perspective here? Are my expectations unreasonable for a GP in a short term rental agreement or are they justified? Do you have an alternative deal structure that might work better here?

I'm looking to gather market research and get feedback here so I understand what a normal structure looks like. I am sure there have been many deals between a GP and LP in short term rentals and I want to understand what I should expect to get and what is unreasonable for either side.

Thanks,

Patrick Forelli

Hi BP community,

I live in charlotte NC, and I am a W2 employee. I just purchased my first property with a 2nd home loan in Savannah Georgia that I am running as a short term rental. I believe this is considered active income. I am looking for a CPA that specializes in short term rentals that can help me navigate this process. I may want to do a cost segregation study and look into tax benefits. Does anyone have any recommendations? Does the location matter? If so does it need to be local to savannah or charlotte? 

Thanks,

Patrick Forelli

@Luke Carl

So the path I layed out is illegal or would you just not recommend? If you wouldn't mind elaborating, I'd appreciate. Just trying to understand my options.

Thanks,

Patrick

I'm looking to purchase an airbnb with a 2nd home loan. I have enough funds for a down payment and to furnish it, but funds are a little tight.  I understand an LLC cannot be on the title because that would violate my mortgage, but I am interested in establishing an LLC for liability reasons and to leverage business credit. I see business credit cards such as with US Bank offer 18 months 0 % APR.

I have enough funds in reserve to furnish and cover costs on my own, but I figured it would be valuable to have a 10-15 k cushion while building up business credit for future investments down the line.

Is it feasible/ legal to buy the property with a 2nd home loan, occupy the residence for 14 days, create an LLC management company to manage my property on airbnb, and leverage 15k in 0 % interest through business credit cards. Would there be restrictions on how I use these cards? Would leveraging the business cards in the management company's name be ok to furnish the property?

Would love to know what people think.