I am not sure if this is an appropriate topic for this board so my apologies in advance.
A friend of mine wants to set me up with some seed money to buy real estate for him. I would create an LLC (or should it be an S-corp?) for this. I would initially use my own credit to set up financing. And eventually this would become my main source of income. I have a number of questions so please bear with me.
- Should he own a piece of the corp or only percentages in the real estate that the corp holds?
- What is fair compensation for my time and work - a straight commission and/or equity in each property, and how much of each?
- Any recommendations on finding an investor “questionnaire” that I can use to make sure his and my goals are clear?
- Any other online resources I should be looking at?
Thanks in advance for your help!
If you are using your own credit to set up financing, why do you need his “seed” money?
I plan to use my own credit for just the first transaction or two. After that, I’ll be using his credit. Ideally, I’d use corporate credit but as I understand it, it takes two years to establish that.
Also, some of the investments will require large outlays of cash, something he has and I unfortunately don’t.
Sounds like a 50/50 deal to me. Your credit and his money. I have structured deals where the investor borrows the money and gets half and the deal finder gets half. You could also get paid a management fee as well for the day to day management of the property.
It may be better to set up several LLC’s or one each for large deal. You do not want 100 houses in the same name. If someone gets a judgement for instance against one house all could be subject to the debt.
Make sure you are both wanting to do the same thing. You may want to buy and sell fast and he may want to hold long term.
Thanks for the reply. Yes, since this is a friend of mine, I really want to make sure that our goals are the same to prevent any future issues. That’s why I’m trying to work up a questionnaire that will clarify these issues for us.
What if my investor puts up the money and the credit while I find the deals and am responsible for the day to day decisions for the properties? (I would not be the one doing the actual prop management, but would hire them, approve expenses, etc.) Would a 50/50 split be equitable? And would this be on cash flow (positive or negative) and/or equity?
I would offer a % return on the cash invested before a split of the cash flow. Usually the money or credit is worth 50% and the ram rod, go getter, deal hustler is worth 50%. Finding a great deal is an art. Anyone can buy a NNN deal and earn 5% on their money without too much effort. If you can do deals that return 12 to 15% plus and appreciation then you should plenty investors willing to back you.
Some LLC’s can be set up to be Member-Managed. In this case you can establish your Money Guy as an Equity Interest Member whereby he would have no leagl say in the day to day affairs, leaving it all up to the Manager, ie David.
The Money Guy’s roi would be based on his level of involvement, in my opinion. I would think of him as a Hard Money Lender and give him a fair market return for his capital upon completion of the deal.
Here’s a question for you though,
If David sets up a Sole Propietor LLC or S-Corp why go through the accounting trouble of bringing in any partners if his Money Guy would accept a Promisary Note, or second postion on the mortgage. You could give him a personal guaruntee if he is worried, but it sounds like David plans to have the deal mostly done before bringing him in.
Just a thought.
That is what I do. I get hard money loans on fix up deals. My rates are high especially for the second money but still better than sharing the profits. After I have rehabbed the property I can get a partner to help me get a market rate long term loan and give them a good deal and still keep 50% of the equity and cash flow or just sell it outright. I also am doing deals where I get a credit partner and buy nicer properties at a discount that will cash flow.
I new to this, please forgive me if I misunderstood. But do you mean that you use an Hml for acquistion and construction costs then use a third party’s credit and the Arv to get a conventional, low-rate mortgage? Thereby paying off the Hml and pulling cash for youself?
I never thought of it that way, would it actually work?
Yes that is right. My HML is only for a year and at 14% interest. I ended up selling my last deal for cash but should have done a partnership. Here is the deal I will probably offer an investor on the Corpus Christi office warehouse when I get it completed:
I bought for $165K and will spend and additional $250K on rehab and carrying and closing costs. I borrowed $405K hard money plus a second mortgage for my cash needed to do the deal. The ARV is $715K. It will rent for $8500 to $9000 per month. I may be willing to take in a partner at $600K which will the the new loan amount or close to it and give them$57,500 equity. I will be able to pay off the liens and put some substantial cash in my pocket and still own 50% of the property. Not bad for all involved.
Holy Cow! How do you find a property for 165k with an ARV 715k?
I’ll understand if you don’t want to post trade secrets, but that sound incredible.
I actually found an even better deal with less work and the same profit potential but a smarter investor beat me to it. They wrote their offer for all cash and close in 30 days. Mine was subject to financing and would have taken 60 days to close. Maybe they will back out and I can get it too but then I will need to find out why they did not perform. They may be just trying to flip it too?
Hello ctguy and Ted,
Thanks for your replies. What you are doing is what I want to get to. The properties that I own are conventional SFR or condos that I am holding for long-term appreciation. My cash flow is currently negative but a few deals I’m working on now should turn that around.
Are there any gurus that you would recommend to learn more about what you are doing?
Its sounds like Tedjr is old hat, but I’m flying blind. I don’t know about Gurus, but the right Attorney can make all the difference.