I have been addicted to this site for quite some time now. I've always been a reader my entire life but never much of a writer. As part of my New Years plan, I wanted to get more involved and actually give back to BiggerPockets which has given so much to me. I thought I would start by describing by current business structure and how it is working for me.
Entity
This year I formed a Series LLC for the purpose of holding long term rental properties. For those unfamiliar with this type of entity, it is a single LLC with holds multiple series under it. If done right, each of these series can have the separate liability of an LLC but is treated as one entity for tax purposes.
Each investment I have purchased is under a separate series, aka 123 Main Street series of Generic Investments, LLC. This provides each of the entities with liability protection from each other. Each series has its own formation papers and bank account.
My entity is also a disregarded entity. This means that all income and deductions are passed through to my personal return every year. While this does mean I have to account for all income including money set aside for repairs, it also means that the depreciation of each of my assets can be used towards my personal return!
Financing
Each of my deals, even the cheapest SFH, is done through investor contributions. I have not put a single dollar into my company. In return, I give my investors a set percentage on their money through an unsecured promissory note. The percentage return is typically equal to the average cashflow out of the property. Since all of my investments fall in the cash-on-cash return of 12%-18%, the average return for the investor is 15%! This is paid to them on a monthly non-compounding basis of interest only payments.
Each of these investor notes are set with a certain time parameter. During initial conversations, we set a number of years the investor would like to be involved. This gives me a set point that I know that I will have to either re-sign with the old investor, find a new investor, use company money to buy out the investor, or refinance the property. I also allow the investor to be able to call the note due with a 6 month written notice. This allows flexibility for the investor and helps them to feel in control instead of trapped.
These investments are then leveraged through a commercial loan in order to purchase the property. My current terms through my regular portfolio lender are: 20% down, 5.1% interest, & 20 year amortization.
As a realtor, I am paid a commission on each of my purchases and also self manage. This provides me with initial income from my property and the ability to pay myself a fee for management. Instead of paying myself the 10% fee, I move the money from the series account to the LLC account to help with future plans. Any excess cashflow after amount alloted for repairs, debts, and management is also transferred to the LLC account.
Legal
For those who know the laws regarding investing, you are probably saying, "Wait, wait wait! You are illegally selling real estate securities! The SEC is going to destroy you!". In every state, we have the oh so wonderful SEC which protects people from dangerous investments but also keeps them from the best investments. There are however exemptions!
Under the Texas SEC documents, if I stay within certain parameters I do not have to file with the SEC. These are as follows:
- Each investor must be secured through private or business relationship and may not be found through advertising.
- The investor must be well informed on the investment.
- You may only acquire 15 investors within a 12 month period.
- You may only have 35 investors.
I don't know about you but there is A LOT I can do with 35 investors!! If each investor was to simply give $20k and you leveraged that at 80% LTV, you could purchase a $3.5M property! This is obviously a simplification as there are closing costs and other expenses but it drives the point across.
If it wasn't a private offerings, the SEC requirements to invest in deals like these are intense. You must have $1 millon dollars of net worth or make $200k/year ($300k for couples). That excludes almost everyone from these deals and the wonderful returns they can bring.
Future plans & Goals
Currently I have acquired 5 properties (6 units) through this method. The next investment lined up for after the holiday season is a 6-plex bought through syndicating the investments of two of my current investors.
As I mentioned earlier, I am a realtor and my wife is an artist. Currently we live solely off the commission from my investments as well as my day to day real estate sales. The money from property management has been slowly stockpiling within the LLC account over this past year and I am happy to say that I am almost ready to repay my lowest cost investor! As the cashflow increases I will be able to pay off each investor quicker and even have my company purchase/syndicate investments.
But I don't want to leave my investors out in the cold! My plan is to pay off each investor the investment amount owed, an additional 6 months of their returns, and present them with a property or syndication that will allow them to put their money back in. Thankfully the 6 months return is about equal to the commission I receive on the sale. I get to purchase another property, my investor is thrilled at their bonus, and my cashflow through property management increases!
There will also reach a point that I will get my brokerage license and leave my current brokerage to form my own. Then I will not only have increased commission but can begin to hire other real estate agents who love investing. I can leverage their abilities and connections to exponentially grow my investment business while taking a back seat and manage the growth.
I hope to use this experience to move towards purchasing larger residential and commercial buildings. By practicing syndication on this low level, I gain the experience needed to handle larger deals as well as give my investors faith in me.
Thank you so much for reading my post. Please feel free to ask any questions and feedback is always appreciated. If you really want to talk in depth about this or anything else, connect with my here. I always can use a good real estate talk!
As a precaution for SEC issues:
*This is in no way a solicitation for investment in my LLC. This post is written to be informative and not in order to seek investors.
