All Forum Posts by: Paul Jamgotch

Hi @Joshua McGinnis

The HML is in name of only rehabber and he is getting 50% of projected net profits of $44K ($22K).

I will make 8% on $27,500 investment ($2,200) plus 1/2 of remaining net profit (works out to about 20% of net project profit, or hopefully $8800). So, hoping for $11K net profit to me and $11K to another investor within 3-4 months.

We will split additional profits/shortfalls proportionately. I had the option to fund the entire 25% myself and split profits 50/50 but this is our first project together and was happy to add a third person to the mix.

Not sure if this helps... I've found a retired contractor through BP that gets a HML for 75% of project and uses the cash from myself and another investor for the other 25%. While I won't have a 1st position loan I will be on title along with a partnership agreement spelling out funding, decision-making, responsibilities, equity dispersal/shortfalls, etc. We don't expect to close for a couple weeks so cannot comment on how it is going. Anyways, this is how this rehabber got into the $250k-300k neighborhood with nothing down. His first few projects were smaller to get to this point.

Congrats on having the equity that you do.

Let me try to explain my position: Because of the economic climate in my (and other) areas I can likely get $1695 out of a home in an 'B+' neighborhood for $150K ($300/mo net income if fully rented). Even that is not a great return on capital. Of course, that SFH might not appreciate at the same rate of yours

My point is that perhaps you could do better by investing in a different market if you cannot get income & appreciation in DC. Hopefully someone from that area will come into your post to shed some light on buy & hold there.

Also, please consider introducing yourself in "New Member Introduction" forum.

$40/mo doesn't seem like a lot of money for the $50K-60K you have into this. Is DC considered a good buy-and-hold investment area or is it hard to squeak out income there? Perhaps you should evaluate a different market where you can get some income while hoping for appreciation?

Im not sure I understand. Are you asking someone to plop down $30k+ to split $200/month? That is less than 5% CoC.

Hi Randy, welcome to BP from icy Rockford.

I'm trying to structure an out-of-state (for me) JV and running into issues determining how we can best structure to protect my investment as well as GC's time. In this scenario I will be financing the difference between total project cost (tpc) and HM loan; so, roughly 25% of tpc.

I'm hoping for a definitive guide on pro/cons for each step of structure (legal, title, mortgage, co-ownership, setting up rehab draws through escrow, project agreement, etc.) if one exists. Anyone know of an informative resource/ link that I could purchase/ visit?

Looking at ITB which trades @ $24.50. How many puts would you have to buy to cover every $100K of your project? Say you are worried about a 10% r/e decline ($10K or 4,100 etf shares).

Your choice is July 2014 or Jan. 2015 expirations for your nine-month project.

The July 25 Puts are $2.35 (cost you $9,600).

- If ITB closes at $22 on July expiration your options are worth $3.00 ($12,300). You net only $2,700 and you are assuming your project is worth $10K less. Net loss $7300.

- If ITB is at $25 your options are worthless costing you net loss $9,600.

- if ITB is at $27 your options are worthless and hopefully your project is worth 10% more than expected (wash). Net break even.

What about deeper in-the-money puts? Let's go up to July 28 puts at $4.35 ($17,835).

- If ITB closes at $22 in July those puts would be worth $6 (24,600) netting you only $6765. Property woth $10K less. Net loss $3,235.

- If ITB is still at $25 those puts are worth $3 (12,300) costing you $5,535. property still at @ $100k. Net loss $5,535.

- If ITB closes at $27 (10% higher) they are worth $1 ($4100) costing you $13,735. Property worth $110k. Net loss $3,735.

As you can see in my examples the cost of the insurance is expensive but deeper might be the way to go.

The last scenario I can think of is a ratio:

Sell 4,000 July 25 Calls for $1.85 ($7,400); Buy 4,900July 23 puts for 1.50 ($7,350) (costing you nothing)

- If ITB closes at $22 in July those puts would be worth $1 ($4,900). Property worth $10k less. Net loss $5,100.

-If ITB closes at $23-25 those puts & calls are worthless.

- If ITB closes at $27 in July those calls would be worth $2 costing you $8K to buy back, however, your project is hopefully worth $10k more. Net gain $2K.

- If ITB closes at $30 in July those calls would be worth $5 costing you $20K to buy back, however, your project is hopefully worth $20k more.

We've also made some HUGE assumptions here incl. @4000 shares being adequate protection, that ITB will move in step with your r/e market, that you don't cover the options early, that July strikes are best way to go (Jan. 2015 might be better), etc. As you can see, the strikes you use will depend on where you think the market is likely to land. However, I think you have to assume market will stay about the same or go up; otherwise, why would you take on the project to begin with? In the end, I think its too expensive and presumptuous to offset market risk like this. You also cap/hinder upside which is the reason we do real estate, no?

I think its an interesting topic. If you buy puts on a stock or ETF as a r/e hedge you are making the assumption that equities (more specifically the stock you own puts on) move in the same direction as the real estate market the home is in; This may or may not be the case. Also, one would have to buy so many puts to be hedged 1:1 that it could become cost prohibitive.

I think the best hedge would be buying low enough to withstand a 10-15% r/e market decline.

Nice!

@Dawn Anastasi May I ask if you formed an LLC together, placing ownership on title in the name of the LLC? Can you share some points in the operating agreement if so?

The reason I ask is that I have been discussing a similar situation with someone in another state and am struggling over how to set up with proper protection for both parties.