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Originally Posted by DDDDave
NoSoup,
I've been waiting to respond to see what other good advice you might get. BCD hit the nail on the head (and imagine that, he is a RE attorney that I told you you needed to talk to). The way to make money in this business is OPM. It is not realistic to pay all cash for properties, put more cash in them, and then sell them for a big % profit. It is not worth the risk to do it for a small profit either. You must have the mindset that borrowing money is a good thing. All everyone talks about is how bad debt is but it is how fortunes are made. I know you are in the lending business so you know all this but you need to believe it and do it. As BCD said, most commercial lenders will lend at least 75% LTV. They will want tax returns and such, but you are a good credit risk. They make loans for investment so they are not near as interested in the time at your last job etc. Your current investment property is a good example of your track record. Do not go to the big banks (BofA, Wachovia, etc), go to a local bank and talk to a commercial lending officer. Have your financials ready. Ask right upfront for a credit ap and assure the loan officer that you will sign personally. You have said you are unwilling to 'go all in'. If you are not willing to do this, no loan officer worth his salt will lend you money. Assure the loan officer that you will sweat blood to pay him back. You should be able to get your financing lined up so that when you find the right property, you will be able to jump on it. OK, enough pep talks.
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As far as being under the assumption that "debt is bad" - I'm a loan officer too, and if I believed that I couldn't in good conscience do what I do every day
I certainly believe in the power of leverage, but after doing a number of deals with private investors, I see exactly what mistakes they make and where they could improve. Much of their potential profit is eaten up from the cost of financing, selling, and construction - I am doing all I can do avoid or reduce these fees as much as I can.
I'm gonna have to politely disagree with you, though - I wouldn't feel comfortable "going all in" - I have money set aside specifically for investment purposes, and I'm more than happy to use it - even potentially losing it. I also realize that I may have to dip into savings, and if things get really insane, possibly some equity of my home, but chances of that happening are reduced substantially by having the investor. Ideally, I'll just be using the funds I have set aside - I am not, at least at this point - willing to risk all that I have earned on an investment, I am pretty diversified and would like to keep it that way
Perhaps underwriting guidelines are a bit different where you are, however - I've worked at several different local financial institutions, and as a broker I work with no less than three dozen lending institutions - local and national. I have also done a number of commercial loans, and regardless of what I think of the borrower, or their conviction on paying the loan back, it all comes down to the underwriting policies, and nothing more. However, I appreciate the pep talk
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You have to spend money to make money. Form an S corporation, do all your business through this corp. Have business cards made and be sure they say 'NoSoup - President'. Give your company a professional sounding name. Nothing corny or unprofessional. Think of something that will sound impressive when you read it in the paper. I'm serious here. Trump didn't start off with 'Donny's Duplex Company'. Get a business phone line. Even if it forwards to your cell. People will take advantage of you if they think you are doing this out of the trunk of your car. (Even if you are  ) It will make you feel professional, and people will think of you as a professional.
You may know all this and hopefully you have done it already but it never hurts to reinforce some basic business ideas. There will always be people like eribrav. It is what makes the world go 'round. You have to have confidence in your ability. You said earlier you didn't want to go all in when you have so much to lose. I will argue that at your stage in life, you have very little to lose. You are probably not old enough to remember the old Nike commercials - JUST DO IT .
Some practical things. I guess you cannot get much less than 1% commission but these properties are going to sell themselves. You are going to have a 'For Sale' sign in the yard as soon as you start renovations. You will get lot's of calls. Be sure to spend money on landscaping. Paint the front door and replace the front door lockset with a fancy one. A handleset, not a doorknob. There is only one chance at a first impression and a cheap front doorknob says 'cheap'. The only regret I have ever had in deals I have done is that I sold them too cheap. Send me your pro-forma and I will tell you what I think. At least you won't have to worry about me stealing your deals in Green Bay.
Enough for now. Good Luck.
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I appreciate the insight regarding the S-Corp. I do have a home office/fax line, so all I need at this point would be additional business cards.
As far as putting the property up for sale myself, after some research, I've concluded that FSBO does not get as high as price in this area as having it listed in the MLS and having a licensed broker have open houses and what not. Although the difference isn't huge, it typically runs about 3=5% more with the broker - well worth the 1% comission. Granted, the figures I use do have a delay in them, so it is never exactly up to date (usually lagging 1-1.5 months behind) but it should suit my needs.
Agreed with the landscaping - and the new door should have been obvious to me, but wasn't - again, I appreciate the insight
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Originally Posted by BCD
Terrific advice DDDDave. The only thing I take exception to is that I wouldn't run the business through an S corp, but would use a single-member LLC instead. Single-member LLCs are cheaper to setup, easier to operate, and you are treated for federal income tax purposes as a sole proprietorship - which makes it cheaper and easier to prepare tax returns. The other reason I say LLC is that there are adverse tax consequences if you ever needed to convey the properties back out of the S corp to yourself. Once you have a track record and are consistently making good $, you might then want to incorporate an S corp to handle the rehab / property management side of the business and hold title to the properties in an LLC. This helps to segregate your high-risk activities from your valuable real property.
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Excellent - again, I appreciate the advice.
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Originally Posted by BCD
No Soup,
If you want to purchase propeties with someone else's money and have little or none of your money at risk or in play, you are - in my experience - unlikely to find anyone (short of a wealthy and trusting parent) willing to invest. Whether you like it or not, your unwillingness to put up any significant money (or subject yourself to significant liability by signing a note or guaranteeing the note) sends a message to the investor that you are not that confident in the project and/or your ability to make it a success. The investor will also have the concern that if the project becomes difficult or looks like it might not do well, you will simply walk away and leave the investor holding the bag. After all, the investor will surmise, if you have no risk, why would you continue to work hard to make a faltering project work? It is for this same reason that banks also want to see a borrower have some "skin in the game."
The only way I can see you finding investors and making money with your proposed business plan is to simply take a flat "finder's fee" for delivering the opportunity to the investor (who will purchase the property himself) and a "management fee" for managing the rehab and leasing of the property. Certainly takes the risk away, but not a way to make any REAL money. Depending on your state, you might also need a realtor's license to get the fee.
Don't know what DDDDave's opinion is, but suspect he will have a similar view based on his earlier postings.
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Perhaps this is where my inexperience/age shines through, but in my mind, $35,000.00 - $50,000 isn't exactly "insignificant." Property values in this are vary greatly, but are relatively low compared to say... California or other major metropolitan areas. I'm not looking for five million bucks - although it would depend on the particular properties that I find, I've been tracking and researching properties anywhere from the very, very low end properties $50,000.00 to the median single family homes, running anywhere from 170k-250k. Certainly there are homes that are worth much more around here, but seldom do they move quickly, there just isn't enough demand around here. Of course, there are exceptions to ever rule, but by and large this holds true in the area.
Although it'd be nice for a wealthy parent to invest in me, I've never had any help from anyone - and don't want to start accepting it now. Like I said earlier, I would prefer not to get any friends/family involved to complicate matters, but even on top of that, I've always been quite independant financially, and I would rather enter into a business partnership based on my skills and knowledge as opposed to exploiting a parent's trust in a child - not to mention, of course, that the chances of it happened, even if I asked my father, are incredibly slim
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Originally Posted by Lindy
You keep talking about "paying cash," but whether you find an investor or get a loan, what you are doing, in effect, is "paying cash" with borrowed money. That is no more "paying cash" than buying something with a Visa card. If it is not coming out of your own back pocket, it is not "paying cash."
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Well, I'm going to have to disagree with you here Lindy...
Although there is very little difference to the buyer most of the time as to where the money comes from, paying cash - either from my own pocket or with an investor - if I have the money up front, I can quickly purchase properties that a lender typically would have a long and arduous process to have underwritten, if they decide to finance it at all. Granted, if it were just a single family home or something else very "mainstream" in the lending world, it likely won't take much to get financed, but for more distressed properties or 4+unit properties it would be much easier not to finance it through a lending institution.
Another advantage of actually having the money is the additional negotiating power that I'll have. Again, it may not have that much of a difference if I am purchasing a property from the typical seller, but very well could have a huge impact on a "motivated" seller - like someone that is getting foreclosed upon, transfered, etc. In fact, I have the perfect example - I work with an investment group, and earlier last week they offered cash on a REO from a bank that was $17,000.00 less than another offer. The other offer was contingent on financing, and the investment group's offer was accepted...
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Also, I would think that a potential investor would be given pause by your sig. A person who makes light of getting tossed in the drunk tank doesn't exactly give off an aura of reliability and good judgement. Consider how your ability to turn your real estate investment would change if you suddenly found yourself with several thousand dollars of legal expenses. And no driver's license.
Lindy
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Well, um... I suppose?
I'm not even certain where to begin...
Although I suppose it [i]is[/is] possible for me to stumble across an investor in the TFP, I didn't really consider the possibility. Nevertheless, I imagine it is extraordinarily unlikely.
As far as my "aura of reliability and good judgement" - on the TFP, I like to think I contribute here...
Ask the Loan Officer
NoSoup's Guide to Obtaining and Maintaining Excellent Credit
NoSoup's Guide to Buying a Property: The Basics
In fact, I imagine that most people here on the TFP probably think I am a stuffy financial know-it-all
As far as my signature goes:
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A good friend would drive 30 miles at 2:00 am to bail you out of jail.
A best friend, however, would be sitting in the cell next to you saying "Man, that was F'n Awesome!"
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I'm not really certain that it has anything to do with a drunk tank, I've always looked at is as more of a rather humorous quote regarding the differences between a friend and a best friend. In fact, I had this quote here on the TFP waaaay before I even started drinking.
I imagine losing my license would have an impact not only on my investments, but on my life as a whole. The couple thousand bucks would suck to pay, but I'd still be fine.
However, since I absolutely do not drink and drive, we probably don't have to worry about that now, do we?
**Edit** Meh, I'll just fix my sig...