All Forum Posts by: Samuel Riehn

Ah! Gotcha. Thank you, that really opens my eyes actually.  Makes sense then, to avoid Dave's debacle be careful not to back yourself into corner by using balloon's, commercial loans, or contingency clauses. I'll be reading my contracts today to ensure there is nothing funny in there.

Thanks for replying, Andrew. I appreciate your perspective and think you're right. However, you say that 3 deca millionairs could get it done faster, and I tend to agree. This group obviously didn't need me, so that also made it fishy. But the same strategy used between me and 2 other peers (BRRRR'ers) would seem to work. See my post above about Yieldco/Devco model. This strategy, to me, is the same thing: where the yieldco gets outside financing to buy the asset and hold for long term yield/dividends (or in this case rents).

I think the deca-millionaire wanted to be the devco, using his LLC and deeper pockets to build/acquire assets, to later drop to me and Mike.

Essentially the devco, (Guy #1 in my illustration) is fine with selling at a discount to keep the asset in house. Because in other words, he knows if he puts the house up for sale, he'd be lucky if buyers or investors offer him 90% of asking price.  Instead, Guy #2 comes in offering 110% asking and he pays Guy #2 the difference.  In the end he gets the same 90% asking price, but he's given 20% to his partners.  But that's no problem with him because its bank money anyway.

I see it as a Yieldco/Devco model. Where your development company (Guy #1) needs to drop down assets into holding companies or "Yield companies (Yieldco's)." To get his cash out and build/acquire the next asset while the subsidiary yieldcos reap the long term benefit. This model combined with the the first three letters of BRRRR seems genius to me. I hate the idea of cash out refinancing personally, I'd much rather get the liability off my books and get my cash out through a sale. Then let the other guys hold for rent income. I think this was their plan, they just factor paying the buyer's down payment for them would be worth it to keep it moving.

Julie, thanks for answering my question. Though I'm not sure I understand.  You mean he had commercial loans that ballooned up several percent in a given year, so he was unable to make the higher payments? What does refi have to do with it? 

That's what I thought, JD. But then how did DR lose his millions if that was the case? Why were his loans called prematurely?

Just so the group knows, I'm passing on this strategy, but I wanted to throw it out there so others can benefit. It has all the elements of a legitimate real estate deal that I've seen on bigger pockets before. Its a partnership to leverage each other's money and credit, its a BRRRR strategy with some differences, but the presentation of it was fishy.

I'm just disappointed that this almost got me, I was sold.  Watching "American greed" makes me wonder how the victims could be so gullible, but here I am almost falling for the same tricks.  I appreciate this forum being a place where anyone can lay out a scenario and give peers a chance to pull you back into reality before its too late.  (My wife hitting me over the head helped too)

Cant help but wonder what would have happened though. And if it is legit, its a very interesting take on partnership REI.

Andrew, I had the same questions of the group, so let me tell you their answers. A) the properties would be worth the higher valuation, though the offer would include a rosy push. Similar to the BRRRR method, the properties would be renovated and based on higher rent incomes worth more, but instead of a cash out refinance, its a sale. The offeror would submit an offer that is say 10% higher than market, chalking it up to competition or hot market. The appraiser would not be "in on it" at all, but of course we would be hoping for the appraiser to do the usual pencil whipping they always do that give a property somehow the exact value of the bid. (we all know that's weird how that works). But of course if the appraiser said no, its actually worth 5K less, then the sale would still occur, just whatever % less the appraiser limits us to.

My thoughts exactly on the, why couldn't I do this on my own? Their answer is, this would be way faster.  Using the above method, the team could acquire properties at accelerated rates using each other.

As far as the REIT goes, it would also include the property our LLC's already own plus the flipped properties using this method so the valuation and asset to debt values would be healthy, not fraudulent.

I just question how this is much different than the BRRRR method? At the heart of it, we are buying properties at distressed values, renovating, raising rents and instead of cash out refinancing, we are selling to each other and then repeating.

The BRRRR method is simply accelerated because we are using 100% OPM (and the sales are backed knowing we will get our down payments returned on the next deal), and keeping the assets in house.

Elizabeth, I agree whole heartedly.  If they had approached me with this in a starbucks, I would probably be questioning it much less.  The hype did get me revved up for it, which is what made me pull back and say whoa, whats wrong with this picture? it sounds crazy, too good be true, but is it?

That's what I thought, JD.  But then how did DR lose his millions if that was the case?  Why were his loans called prematurely?

Hey guys, I want to apologize if a similar strategy has ever been discussed, I've been a floater on the forums for a long time now and haven't seen anything like this, so I decided to actually post for the first time.  Even if this question has been asked before, I think my story is unique enough to be entertaining at least.

About three years ago I was approached by an investor who had done 4-5 deals, all long term holds, I'll call him Mike to protect his identity.  He and I became quasi-friends over time and I actually looked to him as a mentor. He introduced me to real estate investing by telling about his rentals and how he got into it.  He never offered to take any money from me or point me to any specific properties, he only recommended books for me to read and answered general questions for me.  I decided to make the leap into real estate largely thanks to his teachings and bought several properties on my own.   Again, my deals were not linked to him in anyway (you'll see why I'm putting emphasis on this later).

Two years went by and out of the blue he invited me to go to Vegas with him.  It actually lined up with a bachelor party the few days before so I agreed.  Looking back and telling the story now, it sounds like an episode of "American Greed."  He paid for everything, the flight, the food, the hotel and even gave me an apple watch when I showed up.  Then he told me the reason I was there was not just to drink and gamble with him but actually to meet his partner.  I had heard of his unnamed partner several times before, but all I knew was that he was a deca-millionaire and Mike's mentor who owned a lot of real estate.  I showed up to this arranged meeting wearing a suit, and I'm glad I did because they were wearing custom $2K suits in this low lit bar.  At first it was an intense interview of me, and then we ate dinner and I was told to go back up to the hotel room or go back to the gambling floor while they talked.  Later I got a text to return and when I came back things were more relaxed, they said they had discussed it and that I was "in."    So that's when they started telling me their plan, and why I'm here asking if this is legit, because it sounds crazy.

Their plan was to tag team a property, each with our own LLC's. The first guy's LLC would find a great deal, high rent possibility, low price, good area etc. He would buy the property at low cost (preferably at auction) with 20% cash down.

For illustration purposes say its a $100K property, guy #1 finds and buys the property putting down $20K and borrowing the other $80K from a bank. 

Guy #1 would renovate/repair if necessary and put a renter in there with as high rent as possible then put it on the market. Guy #2's LLC would come in and put in an offer at as high valuation as possible, whatever his bank's appraiser would allow. (funny how appraiser's price matches the offer isn't it?)

Illustration: Guy #2 offers $200K.  Guy #2's bank approves with 20% cash down.  Guy #2 pays $40K his bank pays $160K.  The rent is covering the mortgage. 

So now Guy #1 is getting paid $200K, pays off his $80K mortgage and now has $120K cash free and clear. Guy #1 pays Guy #2's LLC $40K after closing and so now Guy #1 has $80K profit, and Guy #2 has a solid cash flowing property for 0 money down.

Guy #3 has spent the whole time saving up his own $20K down payment to buy another property and repeat the process, except that now Guy #1 has the funds to come in and buy Guy #3's property 20% cash down.

Rinse and repeat until all 3 guys have cash flowing properties and a solid $40K in their bank accounts. Then restart the cycle again and again until each guy has 5 cash flowing properties worth $1million and $200K cash, 100% OPM (because the banks shoulder it). At that point stage 2 would commence where we form a trust combining the 3 LLC's (now 15 properties total, book value $3 Million). The trust can do other things such as leverage their portfolio or even REIT and IPO.

My obvious question was how do you transfer large sums of cash between the LLC's? Their plan was to let the process take place over several years and via several methods. The 10K cash/year "gift" rule, employing the other LLC's services for repairs and renovation, and other means of which lowering the tax burden as much as possible, but still being legal.

I thought about it a lot, and risks were that I end up buying a dump at the higher valuation and they cut fence and run without giving me "back" my down payment. But they assured me that, 1) why would they "run" from a machine that is working and generating cash over and over again, and 2) every property would be considered and approved by the group before being put in rotation, so we would each agree that it is worth the higher valuation before giving the go ahead to move forward and so the worst case scenario is that I would be left with the deed to a cash flowing property.

Help me out here, what do you guys think?

I think its important to note HOW Dave lost his millions in Real Estate.  He has told the story several times, and from what I gather it was something that could happen to all of us.  He had 1million net worth from equity across all of his properties, (which if memory serves me was around 4M portfolio, correct me if I'm wrong).  If he made any mistakes he doesn't mention them, in fact he says he never missed a payment.  Instead, he says that his credit union was suddenly bought out.  His new debt owners decided that it was not a good idea to have 3M loaned out to a 26-27 year old and decided to call his loans.  He sold off as much as he could but ended up filing bankruptcy (which he said he didn't really need to, but just gave up).  This was probably because of non-RE related debt and bills rolling in that he accrued using the higher income which had now vanished. 

I have listened to Dave for a very long time, and read a lot on bigger pockets, but this is something that I haven't seen discussed.  I know I'm calling in a hellstorm on myself by asking the question, but isn't this something that could happen to any one of us?  I have about 750K in mortgages (some owner financed) and if someone decided to call those loans I'd be screwed even with 20% equity.  That is the terrifying part about using OPM, for me at least, is that if the lender gets in a pinch, I'm liable.