All Forum Posts by: Rabih El-Khoury

Thanks @Sean Morrison, appreciate your input! 

Hi. If you'd to care to contribute, I'd much appreciate it. The following is an actual scenario: 

Partners A, B, and C create an LLC.
Each partner has, say 2,000 shares. Total LLC shares = 6,000.
The LLC buys a property for $110,000.The LLC spends another $10,000 fixing up the property.
Total LLC investment $120,000, paid equally by the members, $40,000 each.

Persons D and E express interest in joining the LLC. The agreement ends up as follows:

1. D and E pay $120,000; A, B, and C each receive $40,000.
2. D and E own 80% of the LLC's shares, split evenly. So 80% x 6,000 = 4,800 shares, 2,400 to each of D and E.
3. A, B, C own 20% of the LLC's shares, also split evenly so 20% x 6,000 = 1,200 shares, 400 to each of A, B, and C.
4. D and E own 80% of that property's equity and cash flow and A, B, and C cumulatively own 20% of the property's equity and its cash flow.

Questions:

• In completing the above induction of new members D and E into the LLC and in A, B, C receiving $120k from D and E, is anything owed to the IRS? If yes, how much, for what, and by whom?

1. In amending the LLC's operating agreement, besides clauses related to the redistribution of shares per LLC member and stipulating details of the 80-20 ownership splits, is there anything else that ought to be mentioned?

Thanks! 

Well done Erin and good luck. I recommend listening to @Charles Carillo podcast, especially regarding legal and tax setup to maximize efficiency and minimize risk. Otherwise, BP is a great source for building your team, mainly realtor and property manager (PM). As some who invest long distance, i've learned to focus my BP attention on connect with a good realtor and PM and then use their connections to complete the crew: insurance broker, title company, contractor, handyman etc--finding all those people will take a lot of your time. 

Thank you all for your relevant feedback. We're heading towards a "current valuation less cost of sale." The back and forth that's on the table relates to an additional amount calculated as Net Income After Tax x 2 Years x 75%. Two years because that's the estimated hold time before property is sold. And 75% vs. 100% to account for unrealized profit / unforseen costs etc. The thinking behind adding that additional amount is that partner's 1/3rd didn't just contribute to an increase in asset value wealth; it created a profit stream. So, at exit, it is both the appreciation + some of those profits that constitute the calculation. Luckily, the three of us are long time buddies and all this is happening in good faith. 

It has been an eye opener though. As you can see from your answers -- all relevant and applicable options -- there are many ways to go about it. One day, I hope to syndicate deals and pool in many investors. That exit clause needs to be not only fair but attractive, particularly on holds of 5-7 years (one never knows what happens), to give investors peace of mind. How do you make something attractive and not shoot yourself in the foot by paying market price? The 100x Rent is real interesting and it is fair because it was agreed to before going into the deal. But is it attractive? I don't think so. The valuation less 8% is fair but it's heavy on the other partners staying in the game as they have to dish out some of their gains and "buy something at market value"... when we're all trying hard to buy something below market price. 

The other way to rationalize 100x rent or valuation less 8% (cost of sale) less an additional say x% (so as not to pay market price) is to look at other industries: if you buy a long term retirement plan and you choose to exit before the "break even" year (usually around the 8th), you pay a penalty. Clients the world over have accepted that. In this spirit, perhaps, it could be a fair cost/fee to charge the person exiting the deal before maturity. 

$126,000 property purchased by three partners, each putting the same amount of $42,000. Each partner holds the same number of shares, therefore. 

All cash inflows and outflows have been split 3-way. 

One of the partner now wants out (wants to sell their shares), the two others don't want to sell the property. 

Property has appreciated to ~$148,000 since purchase. 
Property turns a net profit every year. 

What's fair business practice for determining the value of these shares, i.e. the partner's exit package? 

Thanks!

R.

Hi Jasraj. I am based in Dubai at the moment and have an investment in Dallas and i'm currently exploring the market in Memphis. Depending on whether or not you need a loan, before wasting any of your time, if you do need a loan, secure a lender. Once that's out of the way, setup an LLC (you can do that online and there are several provider who can help). Third, being long distance, you have two options: either you go with a turnkey company or you can put build a "team" that will help you in that market. That "team" would consist of: real estate broker, property management company -- those are the two primary members -- then inspector, and, if you plan on doing fixes, you'll need a contractor. My experience tells me, if you choose a real estate broker who themselves are investors, chances are they are know an inspector and a couple of contractors. Your property manager is an extremely critical member of your team; do your homework. Then, after that, it's all about running the numbers.

@Alma Bagaoisan Hi, please connect with @Jason Hopkins ; he may help you out on GC and with other services. Good luck!

@Paul Bommarito the next step is for you to buy a property. Ten years down the line it won't matter what you started off with as surely things will change along the way. Therefore, do not worry if what you buy now is squarely the first step in your strategy. If you want to syndicate ideally you want to buy a multi-family. I'm saying that's great but if you bought now an SFR it's a good too. Why? Because there is so much to learn from doing not reading (the processes, the fees, the waiting time, the negotiations you go through etc.). Just go man, just go!

The second thing I'd say is be selective about what you read or listen to. For example, don't simply listen to 'how to win with multi family investing' rather listen to 'top underwriting mistakes in MF investmenting.'

Good luck!

I would recommend you work with @Jason Hopkins and @Curt Davis. They both fully understand BRRR and both can help with the contracting and property management. They do this be connecting you with folks they use for their own properties.

The question is will you find BRRRR deals in the first place? That was my plan for Memphis. I haven't given up on it yet but supply is low, unless you want to go into rougher neighborhoods.

I talked with a few brokers who cover towns near Chicago, e.g. Lisle. Their input was there isn't inventory for BRRRR left. Also, investments are more for appreciation vs decent cashflow. That's all I can share.