All Forum Posts by: Rob Nichols

BP Gurus! 

A small developer I know has proposed a partnership that's pretty intriguing but I'd appreciate some opinions on it. 

The developer owns free & clear land within a few miles of a big university.  He's proposing building a 12 unit multifamily (all 1 bed/1 bath).   He would provide the land and $150K in cash toward building the property.  I would provide approximately $350K of financing through a commercial loan.   He's proposing I would receive 20% of net profit from the rental income as well as 20% of the property value (minus land value).  Below are some more details with the rough numbers:

12 (1 bed/1 bath units

Value of Land:  ~$150K

Cost to Build:  ~$500K

Rent is expected to be $700-$750/unit ($8400-9000 month)

Vacancy, management, expenses, CAPEX, etc: ~$4100/month

NOI: $4,300 to $4,900

Monthly Note ($350K, 20 yr AM, 5%):  $2,309

Monthly Profit:  ~ $2,000 to ~2,600

Annual Profit:  ~$24K to ~31K

Value of property (low end estimate on an 8% CAP: $645K to $735K)

Average CAP rate for new builds in local area is ~6% CAP.

My 20% Ownership of Annual Receivables:  $4,800 to $6240

Additionally, I would receive 20% of the property value (minus land) (which would vary depending on CAP rate but in the range of ~$100K to $117K.

The developer has a great reputation, has been in business for 13 years, and has built dozens of SFH's and MFH's in the area. The above numbers are rough and will be fine-tuned but the main question is, assuming the numbers meet our criteria, what's a fair way to split the partnership interest?

He's providing the land, ~$150K in cash, the design, and oversight as the general contractor.  I'm only providing the ability to finance the build and should not be coming out of pocket on much other than the closing costs.  The proposed 20% of annual profit and 20% property value sounds like a good deal, given the limited value I'm bringing to the deal.  Is 20% more than generous?  Or is a different % more appropriate?  What value would you put on my involvement? 

Any suggestions or opinions on this arrangement would be really appreciated! 

Thanks!

Rob

James and Chance,

Thanks for the input.  I'm looking at 4 bed/4 bath properties, possibly up to an 8-plex.  Maybe one day I'll be looking to compete in the $40M resort style apartment complex space! 

Rob

Hello TX investors!

I was hoping to get opinions/input on the rental market in Waco, TX, specifically the student market around Baylor University.  I have family in the area and am contemplating an investment property around Baylor, in which the property would be rented by the room. However, there's a lot of new multiple family construction going on, notably new developments like Haven South (840 bed development) and a new $40M, 702 bed complex that the city just approved.  This is in addition to newly built student buildings that are already on the market, such as 11th St Flats, the View, the Domain, Heritage Quarters, etc.

 It seems most of the new development is priced starting at $500-$600/month per room.  At those prices, there still seems to be room for the smaller investor with a lower rental price point.  Of course with all this rental inventory coming on the market, it could have some downward pressure on rental rates.  

Are any of you Waco investors/realtors seeing a risk with all the new construction or do you think the demand will still exceed the increase in supply?

Thanks for any inputs!

Chuck, 

Congrats on your first four-plex!  What part of town is it in?   It seems a lot of investors are chasing the few multi-families that aren't in a "D" neighborhood, so congrats on finding one that meets your criteria. 

I use John Marple, the owner of Meyer's and Marple Accounting.  I think he's very thorough and reasonably priced.  

Rob

David, good point and my preference is to press with the rehab project as planned. But I think my partner is contemplating making the quick sale and moving on to the next deal with much less work/risk involved than a multi-month rehab.

Real Estate Virtuoso's,

I was hoping someone could help me with a joint venture question. I'm teaming up with a local wholesaler/rehabber to flip a property he found off-market (through probate). He has the lead on the property, will manage the rehab, and market for resale. I am providing the capital. We're going to set up an LLC with each of us as equal owners and the plan is to split the profit 50/50. Here are the details:

Purchase price $16K
Estimated rehab cost: $40K
ARV: $110K

However, my partner might already have a buyer lined up to purchase as is for $30K, before we do any work on it. If this ends up being flipped as a pure wholesale deal, my partner thinks a 50/50 split of the profit between us is excessive since he has done all the work up to this point in finding the deal and, while I'm providing the $16K in purchase capital, I wouldn't be needed to fund the rehab.

If I were in his shoes, I would feel the same way, but I don't know what profit split is appropriate if we end up wholesaling the deal. He has suggested that I just loan him the $16K at hard money rates if we end up wholesaling the property but will fall back on the 50/50 split if we end up rehabing it. Since I have >$60K set aside to fund the project, I would rather not have it sit idle for a month or two ultimately to just make a small interest rate on only $16K.

We have formed the LLC but are working on the operating agreement before we go to contract on the property. Bottom line, does anyone have any suggestions for what would be an appropriate profit split based on the two options of rehabing ourselves or wholesaling to another rehaber?

Thanks for your help!
Rob

Thanks for the advice @Robert Leonard and @David C.  I appreciate it!

Hello everyone!

Bottom Line Up Front: How can a hard money loan be secured on a subject 2 property?

Background:

A local wholesaler is purchasing a duplex that he intends to keep as a rental. He's negotiated a purchase price of $125K for the property and it has an ARV of about $190K. He has also negotiated with the owner to sell it via subject 2. He has approached me about a hard money loan for the closing costs and minor rehab work that will cost between $15-$20K. Since he wants to keep it as a buy-and-hold rental, he plans on refinancing inside of a year to pay off the original owner as well as my loan.

Given the local rental rates, it should cash flow well and I understand his strategy, however, I'm concerned about how to collateralize my loan to him.  I know it's standard for hard money lenders to take out a lien on the property or get a deed of trust, but since this is a subject 2 deal, the bank will be in first position should things go south and the buyer fails to make payment (and the original seller fails to make payment as well).   Am I correct that getting a lien on the property to secure my hard money loan is of little value since I'd be in a position behind the bank?   If so, how do I mitigate my risk with the loan? Is there a way to secure it with the property as collateral given it's a subject 2?   

I intend to consult a real estate attorney next week but thought I'd throw the question out to the community before hand to see what you all thought.

Thanks in advance for the advice!

Rob

Does anyone have any recommendations for a good real estate attorney in Colorado Springs, or CO in general? I'm looking specifically for someone knowledgeable on subject 2's and joint venture agreements.

Thanks!

Rob Nichols