First Time Investing in Multi-Family, please help!

General Real Estate Investing
1

Here is my scenario:

My brother-in-law and I are planning on buying some rental properties usually 2-4 unit properties, where majority of them might end up being 4 unit properties. If everything goes smoothly we might be interested going after 5-10 unit properties in the future.

Here is some info about us.

Myself; married (no kids) live in WA State, own a single family house, have a great job / great income, FICO score over 800.

My brother in-law; lives in IL State (with his mom), has a very weak job history, low income, luck of any credit, most likely low FICO, much less educated, especially in RE investments

Investment area: Chicago Metro

We both have enough cash for down payment (if min. is 25%) for about 4-6 properties which might be purchased within a 2 year period with an average price between $200K-$350K.

Based on this info above, what would your recommend to me?

Would LLC make more sense in our case (I just want to make sure I am protected to a certain degree)?

Or, should we start buying properties in our names and get a good insurance, and then in the future set up LLC if we get bigger.

I am also thinking that he might be able to manage these properties since I live out of state. Or, would it be better to hire a management company?

Last option, skip my brother-in-law and go alone. In this case, I will definitely hire a management company.

Thanks for your advice,
Drew

2

Hi,

2 to 4 unit properties are considered "Residencial Property" (1-4 unit's).

Now if I understand you correctly you have great credit and your brother in law lacks credit? You also say if I understand correctly that you and your brother in law have somewhere between $300k and $350k in cash to invest! (25% down on 4 to 6 properties worth $200k to $350k)

I recommend you always keep 25 to 33% in reserves outside of your actual investment, with that said you will need adiquate income to qualify for multiple 2 to 4 unit purchases and your lenders will only give you about 75% credit for income from other rental properties so having very little or no debt other than real estate is important and if you go the route of 2 to 4 unit properties you can probable apply with your brother in law, help him increase his FICO scores and utilize together all the cash you have minus reserves!

Or you could potentially go directly into a couple of 5 plus unit properties utilizing 66% of your pooled dollars to purchase an agregate of upwards of $800k!

Get good insurance to begin with then you can always create an LLC and move properties into the entity in the future!

Depending on your brother in laws ability to understand rental laws in your state and stay within compliance and keep accurate books will determine whether he could manage and of course the two of you agree to pay him for his time (Up to 10%) to manage these properties for the two of you? (Your Ownership Group)

                               GR
3

Look at how you’ve portrayed your brother here. Are you sure you want to be in business with him with several hundred thousand dollars on the line? I don’t know your brother, but it would be easy to make some not so flattering assumptions about him based on what you’ve posted. It does not appear he has much motivation for work. How do you think that will transfer to managing properties?

4

Hi,

I am a firm believer in second chances, especially when it comes to family, and there is nothing that would keep me from helping out family even in investing as everyone deserves a second chance.

Justin if you pay attention to the posting this gentlemans brother has managed to save a significant amount of cash and in my book that is not the definition of a bum and I would just assume have partners who work smarter, not harder and everyone does not need a conventional job if they can do well creatively!

Justin you have no business telling any man how to deal with there family! Quite frankly it’s none of your business!

                GR
5

GR,
As many business deals with other family involved can go sour and considering what he posted about his brother, I was simply giving him something to think about. No need to be testy with me about this…

6

Justin & GR, thanks for your opinions.

GR, that is correct (info about us) and thanks for supporting the family idea. This is exactly what I am trying to do. Help out my brother so he can invest his money in a right way and build success over a time. I just do not want to see him investing all cash in one property (so he will not have to pay any mortgage, that’s what he wanted to do at first).

Justin, I agree with you that some family partenrships may go wrong.

In my case, I know my brother very well, and he is a very good person. But, the two concerns I have is his luck of credit which will most likely prohoibit us from getting the best interest rates on loans since banks will look at the lowest FICO. The second concern is his luck of knowledge and experience in financial analysis / rental laws, etc. But I would most likely be able to do this part, and teach him over time. The only thing he will be doing, is taking care of renters, property maintenance.

7

Drew, are you looking in Chicago city-limits or in the suburbs?

8

I think my first question is that you live in WA state, and you chose Chicago. Was it more your idea to Choose Chicagoland or your Brother-in-laws?

Because it takes a dedication and commitment to weave through the wonderful TENANT friendly laws we have here in Chicago. Understanding the Chicago Landlord Tenant Ordinance and realizing that is changes almost yearly is important.

SO again whose idea was investing? Who chose the Chicago market? etc.

9
It does not appear he has much motivation for work. How do you think that will transfer to managing properties?

We can’t really judge the brother, maybe this responsibility will make him realized his capabilities and besides he also has a share if ever you’ll gonna pursue it!

10

I have two rules in realestate, no friends, no relatives. investors or renters. Business is business. Also invest where I can drive by and see the property occasionally.

11

Make your brother a silent partner and invest locally. Just give him his percentage of return as it comes along. Forget your brother managing property. That will be an utter disaster.

Your brother’s history of handling money is a fair indicator of how he’ll handle his money in the future. So, don’t involve him in the handling of “your” money, unless you don’t care about having to intervene and take over “his” responsibility in the not-too-distant future.

Meantime, a partnership is very much like a marriage. If one partner is dysfunctional in some way, it impacts the other.

Don’t invest with your brother as a “ministry.” This is all, but the worst reason to get in bed with someone, as it were. Get everything you agree to do on paper.

Again, your brother has zero experience with managing property, and to add insult to injury has difficultly simply managing himself.

So, this partnership agreement exercise alone will immediately expose any chinks in the expectations of what’s supposed to happen; when it’s supposed to happen; how it’s supposed to happen; and finally to whom it’s supposed to happen.

And if you don’t settle these issues now, you’re definitely not going to eliminate them without a nasty fight later. Just saying.

12

What happens to your relationship with your wife if things go sour with her brother? Best to keep your business activities to yourself and keep your relationship with your brother-in-law just social.