All Forum Posts by: Stuart Udis

Lenders tend to have different requirements.... some look for a required minimum membership interest and others look solely at direct benefit the signer receives which could be membership interest, fee etc. There is well developed  case law that points to a guarantor having to receive a benefit in order for the lender to hold them accountable in the event of a default etc. Therefore start with the min. requirement your lender will accept and see if that matches up with what your partner is willing to accept. It is common for investors to bring in additional signers, often referred to as credit enhancement. It's a great way to expand your real estate business if you can find individuals willing to co-sign. I personally benefited from this when I first started and now provide my signature to partnerships I am not as actively involved with. I find it a great way to earn additional compensation as long as its a deal I like with conservative leverage and strong operators I trust. 

@Shiloh Lundahl Two days ago your hypothetical transaction had a total cost of $197K with an ARV of $245K, but your latest example has a total cost of $210K and ARV of $280K, nearly 2X the equity. It appears you are just making up hypothetical transactions with values to make your system seem more enticing. That in itself is a huge red flag for me.

At the end of the day, you are still buying $250K SFH's, the easiest asset class to finance in the real estate world. I don't find anything you are doing to be unconventional. Plenty of ways to structure financing with earn outs on the construction to permanent loans without even having to refinance or use hard money which would reduce the transactional costs below what you've quoted in your examples.

There's nothing wrong with your strategy other than the partnership component, but don't twist the numbers in your hypotheticals in order to gain traction. 

@Shiloh Lundahl Understood, but I wouldn't refer to buying and renovating $250k SFH's with hard money financing unconventional real estate investing. Seems to be what most most turn to who want to buy real estate beyond their primary residence. Perhaps look into an acquisition strategy that has greater barriers and isn't easily replicated. That will be draw in better capital partners.

@Shiloh Lundahl  No reason to get upset. V.G Jason merely pointed out what you are providing to the hypothetical partnership  can easily be performed through  contracted services with proper vetting and without having to give up 50% of the upside. Most individuals can originate the debt these projects require as well so its not as if your signature is opening the doors to properties these partners couldn't purchase on their own either.  You mention you would also share in losses, but you aren't investing any capital so poor performance would lead to your partner realizing a monetary loss before you.

@Aristotle Kumpis Lots of similar posts to yours where investors are seeking advice on how to buy real estate with little or no money. Most who respond recommend creative financing....seller financing, sub to etc. or using highly levered hard money debt. I recommend focusing your attention on sourcing great real estate rather than allowing the creative financing be the tail that wags the dog.

There is a time and place for highly levered hard money debt but its expensive. Sometimes when examining the entire capital stack, its determined the higher finance charges paired with higher leverage is a winning proposition but only experienced real estate investors should be making that call. 

Meanwhile, the sellers who are most likely to offer creative financing are normally the owners of  real estate that have issues.....condition.....low barrier/over supply market......or perhaps pricing issue, and one of these factors is why its not marketable in a arms length transaction and why creative financing would be accepted. Not always the case but more times than not, this is the reason. 

Focusing on the best quality real estate will allow you secure more favorable financing terms, more likely to achieve favorable exits/refinances, more likely to attract the best capital partners. This is how I grew my real estate business over the past few years. Once I realized it was the quality of the real estate that opened the doors, my business took off. I achieve higher LTC financing because of the strength of the real estate without having to go to hard money lenders. I will still use alt. lenders from time to time depending on the circumstances but I will also achieve similar LTC financing through traditional banks and when I go to my capital partners with a term sheet for 85% LTC through a traditional bank with a fully capitalized interest reserve, healthy contingency funds and soft costs built in and the real estate great, its far easier to raise capital because far less equity is required to fund the deal but this all starts with the quality of the real estate.

@James Wise "Do normal due diligence like appraisal and inspection and you're risk exposure is fairly low. It's real estate in markets with population growth, it's pretty hard to lose money if you get an inspection and appraisal."....Wishful thinking at best when buying C/D properties. Inspection reports and appraisals are helpful but aren't a cure-all. Mechanicals, roofs etc. can be towards the end of their useful life and pass inspection but then the cap ex can't be absorbed in many of these C/D neighborhoods. Tenant issues are more likely to arise and then you have the owner....many aren't qualified expertise wise or financially to weather the storm. Even competent 3rd party management can only mitigate, not necessarily address many of the issues that arise when owning lower tier properties & population growth alone is not a magic pill.

You can also reduce your transactional costs by using a bank construction to permanent loan with an earn out. Should be achievable with the LTC/LTV you are quoting. Will reduce transactional waste significantly.

@Shiloh Lundahl Yes, but I would never underwrite a deal with the assumption the tenant will acquire the property. I would always underwrite as if the property has to be sold in an arms length transaction. Your margins shrink considerably if you you must go to market with these homes. 

It sounds like you are guaranteeing the loan, but besides that the responsibilities don't appear to be that different from when you were coaching for a $5K fee. Under the revised iteration you are still collecting the fee and 50% of the property upside. If I were in the shoes of the LP, I would want to see you invest capital alongside and source true bank debt rather than hard money. It's less expensive and improves upon the properties performance.  Even with those adjustments, 50% seems steep if you are sourcing out construction management and property management to 3rd parties. I could understand a more substantial ownership interest if those services were included as part of your responsibility, so perhaps you look at ways to contribute more services to the partnership that can reduce the partnership costs.

Other component that doesn't excite me is the asset type and transactional fee assumptions. No real barriers associated with buying "under value" sub $250K houses. Also, your transactional fees appear to be too light which only makes the profits more lean....$5k carrying costs between debt service, builder risk, general liability, taxes and insurance.....and $7K for the exit. You should assume arms length sale in the sale/exit assumption and in this price point expect in addition to broker fees to be some repair concessions and likely even a seller assist. 

They 30 year track record firm  may now be using social media to pitch their deals right alongside and perhaps even pursue the same transactions as the new age syndicators but the two groups are likely pursuing entirely different LP investors. Some of these new age syndicators are raising money in incredibly small amounts and I believe are intentionally pursuing these smaller dollar amounts because of the unsophisticated individual behind those dollars. I don't foresee a syndicator with a 30 year track record pursuing $5K investments. On these very forums you hear countless stories of "I lost 5K and can't pay for me medical expenses". This is the target being pursued by many of these new age syndicators. Not saying they all fall within this category, but many do so I don't necessarily agree there will be direct competition shutting them out of the business.