CategoriesUncategorized

WITH THIS AGREEMENT, I DO PARTNER WITH THEE

We’ve all seen the writing on the wall: Partnerships are a great way to scale your portfolio quickly.  It makes sense. At its most basic description, a partnership helps you bring to the table what you lack.  Where you are deficient you can bring someone in who offsets that deficit.  It doesn’t matter if the deficiency is intangible (a personality trait) or tangible (credit score, money) a partnership can help in both areas.  Yet how do you create a partnership that will solve these issues AND not blow up in your face?

Partnerships are a marriage. 

Entering into a partnership on a real estate deal is like entering into a marriage contract, especially in the cases of buy and hold rentals.  In these instances, you are likely forming an LLC with the person so you are entering into a formal long-term arrangement recognized by a government entity.  So take it seriously.  Just like you (hopefully) wouldn’t tie the knot with someone after meeting them over a weekend, don’t do the same thing with partnerships.  

Partnerships are always best done with people you know on a fairly deep level.  Not necessarily their hopes, dreams, and fears in general but it requires knowing them beyond a casual acquaintance at a networking event. You want to know how they operate their lives, the working style, the demands on the time they have.  Will this mesh with what your vision is for a partnership in real estate?  If someone has a demanding job (60 hours a week) and they travel a lot for that job, does that affect your feelings about entering into a partnership?  If they like to work hard during the week including evenings but rip the town open on Friday and Saturday, are you able to work with that person? I’m not saying any of these particular situations are ones you should avoid.  It’s important to understand if these situations fit into your ideal partner or partnership. 

 

Deciding Roles.

It makes any partnership more efficient and less complicated if there is a clear division of roles and responsibilities.  It avoids duplication, overlap, and in some instances having too many cooks in a kitchen.  There will be some aspects you work jointly on or have equal say in but some areas for the sake of efficiency should belong to one person.  You should always have an equal say in which deals are purchased.  It’s not equally important that you have the same amount of control over flooring decisions.  Having minor items that you are both responsible for ensures that you can work through decisions twice as fast and it gives you the opportunity to “delegate” tasks that don’t feed to your talents.  

Here are some ideas of items that can be divided amongst the partners:  bookkeeping, deal finding, design aesthetics, contractor coordination, day-to-day tenant operations, etc.  There are also a few key items you want to have equal say in property purchases, funding decisions, and changes in purchase criteria.  These are areas I believe partners should always come to agreements on, including each compromising at various points.  Not one partner should control the agenda with these items. 

 

Making It Formal

Whether you do an operating agreement or partnership agreement will likely matter on what type of entity (if any) that you use.  An operating agreement is usually reserved for LLCs.  A partnership could be used in the event you own the real estate in your personal names (which I don’t recommend at all). It’s very rare to enter into a real estate deal with someone and use a limited liability partnership. The most common method is creating an LLC with that partner. 

Obviously, this can become cumbersome if you plan on doing additional investing by yourself or with other partners. You would need another LLC for each of those instances. Having an additional LLC means having more bank accounts, tax ID numbers, and more papers to file with your tax return. 

The Operating Agreement as the Prenup

Once you’ve decided on who does what and what you have equal say in, it’s time to get that in writing. I like to look at this ad the prenuptial agreement in a partnership. It’s where you outline who is responsible for what, what happens if one person wants to leave, and who brought what to the table. (It also should cover in the event of a partner’s death for good measure.)

In the Operating Agreement, you want to include who brought what to the deal. This is mostly used for the purpose of recording in the partnership unequal contributions to down-payment, rehab costs, etc. Mostly the tangible items of a specific monetary value. You may also include if one partner was mostly responsible for securing the financing, especially in the case of traditional funding. (Now you might be thinking, “what if we do multiple transactions and that changes.” Hang on Jose, we’ll get there.) 

You will also include a general description of who does what. You don’t need to go into detail but it should be all-encompassing. Let’s take two partners Henry and Catherine. Henry is responsible for finding the deals, tenant management, and arranging contractors. Catherine is in charge of business bookkeeping (not tenant rent collection), setting up financing for deals, and because Henry hates doing showings Catherine takes care of leasing. The italic items above are what be entered into the roles and responsibilities section of an operating agreement.  This section should include what the partners have equal say in. As mentioned above you want protection from a partner making unilateral decisions on matters with high consequences for the partnership. Here is where you include that both partners have to consent to a property purchase and the funding terms/method. Tip: if you have one partner who is on the mortgage but another is not, it should be included here that refinancing cannot take place for any reason without both partners’ consent. 

It’s also important for documentation purposes that partners are allowed to participate in real estate outside of the LLC but they must never put LLC property up as collateral or use equity for individual purposes. (Any equity in the properties is best left to be used for activities in the LLC. It can become really tricky if you allow otherwise. Especially because the property would be considered collateral on any equity loan.)

Be clear on expectations and goals.

When entering into a partnership it’s important to be clear on what you expect out of your partner and your real estate journey. Potential target markets should be agreed on or certain ones disqualified if a partner feels strongly. What strategy may be employed is an important discussion.  BRRR or turnkey, or both? Are you both looking at the same ultimate goal in real estate? Henry and Catherine may both want 46 units by maybe Henry wants all small multi-family while Catherine wants to get into medium-sized multi-family. 

If you find yourself disagreeing on the ultimate goal, a few markets, or even whether to do other investing it doesn’t mean the partnership isn’t viable. You and your partner must go into it understanding that one or both of you may do some investing on the side or that this is a limited-time event (meaning limited years, not months). 

CategoriesUncategorized

Real Estate Tech Trends You Need To Know

It’s always fun to hear about trends that cutting-edge company or people are using in real estate.  While most of it seems like crazy ideas you may not have to deal with it, everything piece of technology we’ve adapted to started out as someone being trendsetting in this industry.  Online rent payment,  online listings, video footage, etc.  All of these started as trends, but have now become the norm.  By looking at trends, we can get a heads up on what might become the next norm in our industry.  The first 3 are ones you may currently know about or utilize but chances are the last two are completely new to you. 

Online Appointment Scheduling

In today’s world where Millenials and the Generation Z prefer completing tasks without human interaction, the ability to schedule apartment viewings without having to call or send a series of emails is a necessity. The internet is filled with online scheduling software that can be utilized. (Calendly, 10to8, etc.) Most are not tailored to any specific industry and are general appointment schedulers for anyone from hair stylists to personal trainers to business coaches.  They can even be used for real estate. The features that come with free programs vary.  I.e. email or text confirmation, multiple appointments at one time, etc.  If you chose to use a scheduler simply copy and paste the public URL for your calendar into your ad, directing people there to book a showing. 

Remote Keyless Entry/Locbox Entry

Taking the above discussion of less human contact a little but further, imagine not having to leave to do a showing. What if your prospects could give themselves a tour without having you drop your project to meet them? Systems like remote lockboxes with expiring codes are making this a realty.  To schedule the showing a person must validate their identity (the form this takes varies across providers).  When it is one hour before the scheduled appointment, they are texted a unique lockbox code that works for 30-45 minutes from the start time of the showing.  If someone has a 2pm showing they are texted the code at 1pm, but the code doesn’t work until 2pm and is valid until about 3 (depending on the provider).   Most of these services can be streamlined into an automated showing calendar.  

In case you are wondering, there are triggers in place where if a key isn’t returned within a time frame a person on the account is contacted by the lockbox provider letting them know.  That way you can go investigate what’s going on.  

Online Lease Signing

Online lease signing has gained popularity in recent months because of the COVID lockdown we all went through, but also because it frees up a lot of time for self-managing investors. Dochub is one of the services you can utilize to do online lease signing. Simply upload your PDF lease and highlight the sections that require initials or signature then download it to your computer and send it off to the tenant in an email with instructions on how to use Dochub themselves.   

The cherry on the sundae is tenants love doing it this way too! Pair it with a Zoom chat to go over the terms and they will be extremely grateful because it makes it easy for them.  They can do the Zoom call at home or maybe even during lunch from work.  Families love it because they can pop a video on in the other room and be on the Zoom call doing their lease. 

To make it the most convenient, investors with more than 5 properties should consider purchasing a paid plan for DocHub.  A paid plan will not only allow you to send the signature directly from Dochub to the tenant but it also would allow you to sign unlimited documents (you are limited to 5 in the free plan).

Augmented Reality

You are probably wondering…what the heck is augmented reality.   Augmented reality is a concept where someone can take reality and adjust it in a computer program and allow for customization. It’s main purpose is to give customers/clients an idea of if their furniture will fit, how it will look against the flooring, etc. 

Augmented reality photos of an apartment that is uploaded to the program with corresponding room measurements. It creates a to scale model of the property where users can then click and drop furniture in.   Basic items like couches, beds, dresser, dining room tables are all preloaded options that can be added to the rooms. A user can put in their own furniture dimensions for the items rather than using the preloaded “average” dimensions.  The user can also select color options of the furniture. 

Your augmented reality is assigned a web address which can be provided to prospects who want to verify their furniture will fit in a room, or their couch won’t clash with the wall color.  As the product purchaser you have control over how much customization a user (in this case a prospect) can have.  Furniture measurements, color customization, change window dressings, etc.  Whatever you will allow them to change and what you think may help sell the unit. 

They could also layout their entire unit before moving day and be able to download a 2D view of the rooms and where they want items. Making it easier for them to instruct professional movers…or their friends who may have already had a complimentary beer or two when loading up the truck at the old place.   

Virtual Reality

VR has been used in real estate for a few years now, mostly among high end brokerages serving out of state or out of country clients. With the changes in smartphone technology that have made most cell phones capable of VR some trendsetting realty companies have started doing VR tours of units.  The VR companies turn 360° photos of the unit into a VR experience. You are then provided a link or app code that can be placed in your ad allowing the viewer to do the Virtual Reality tour on their own.  Pretty cool!

Now some of these may be pie in the sky ideas regarding your portfolio.  But it’s always fun to hear about the jaw dropping technology that is out there and revolutionizing some of the basic ways we do things. 

CategoriesUncategorized

Our Kingdom For A Payment Plan

Payment plans are something we hope to never use as rental investors.  Yet the reality is that at some point during your career you will have to create one.  Payments plans aren’t something you create on a case by case basis in under 5 minutes. You want a well-thought out payment plan that is easy for the tenant to execute and offers the necessary protections for you both. 

Set A Protocol

Take a few moments to create a “hardship protocol”.  A hardship protocol is what your terms are for accepting a payment plan. 

Under what circumstances are you willing to accept a payment plan?  This isn’t referring to an amount due (yet). Loss of job? Death in the family? Medical emergency?  What types of events can occur in a tenant’s life that you would be willing to create a payment plan in light of it occurring?

Next what kind of documentation do you want? If you are going through the effort of creating this hardship protocol it only makes sense to require documentation from your tenants in support of the circumstance. 

What’s the smallest amount you are willing to make a payment plan for?  Oddly enough I have had people ask to make a payment plan for $55. On the other side of the scale, what amount is too high for a payment plan?  

Write It Down

Believe it or not, payment plans are still sometimes done orally.  This is just bad protocol. For starters in some states it’s not legally binding if it’s not written.  Even if it is legally binding it only becomes a he said she said battle in court. 

You can create a template that you can fill in the blanks when the time comes. Having a template ensures you don’t miss any of the important details when creating the plan with the tenant.  

Clarify Late Fees

Make sure your payment plan covers what happens to late fees during the course of the payment plan.  Are they continued no matter what and included in the payment plan? Are they waived for every month they keep the payment plan current?  Or are they waived (in full or partial) if all payments are made on time? 

I don’t recommend waiving late fees (unless super extraordinary circumstances) because it will only encourage them to make payment plans.  Waiving late fees in full at the end can be cumbersome for your records and also make it confusing for the tenant. This all comes down to your preference however.

Note: Remember to include late fees you know you are keeping when calculating the amount and length of the payment plan. 

Length/Deadline

Every payment plan should have a set length and thus a deadline attached to it. 

If a tenant is paying you back $700, it’s not enough to say “Extra $100 bucks a month until paid off”.  Why? Because you aren’t telling them when it has to be paid. You are assuming that they will interpret it as 7 months but since it’s not expressed explicitly its an expectation on your part that can’t be upheld.

“Jason R. will pay an extra $100 a month for 7 months beginning July 1 until balance is paid off.” Or you could say “Starting July 1, Jason R. will pay an additional $100 per month through January 1.”   

Payment Frequency/Payment Days

Payment frequency is very important in a strong payment plan.  Notice that above we didn’t just say “Jason R. will pay back the $700 owed by January 1.”  If we had worded it that way, it gives Jason the right to take his sweet time and maybe pay you the $700 on December 31st.  We said every month Jason will pay an extra $100.

But let’s take it a step further.  Let’s make an expected payment date for Jason.  Since Jason’s payment frequency is monthly we’d say “Jason R will make payments of $800 on the 1st of every month starting July 1 and ending with January 1 payment.”

Have someone who wants to pay weekly or bi-weekly?  That’s okay too. It requires a little more math on your part.  “Jason R will pay $25 every Friday until January 1 towards his back rent. His monthly rent of $700 is still due on the 1st of the month.” Bi weekly?  “Jason R. will pay $50 every other Friday towards his back rent until January 1. His monthly rent of $700 is still due on the 1st of the month.” Notice that we included the language regarding the future monthly rent payments still being due on 1st?  That is very important language. 

Consequences

Spell out in your payment plan what the consequence is for missing and WHEN it kicks in.  “If Jason R. misses [1, 2…] back balance payments OR fails to pay another month’s rent in full by the 5th [grace period in all] eviction will be filed.”

From My Experience

One of the best things I did in my business was set clear guidelines for myself and my staff about when I wanted certain back balances paid. For instance, a payment plan for between $X-X must be completed in 6 weeks.  A payment plan for $Y-Y must be completed in 10 weeks. With these parameters I am NOT including late fees in the amount that determines the length of the payment plan. The parameters are only figured based on the back rent.   

CategoriesUncategorized

3 Ways Creative Financing Can Accelerate Your Portfolio

Maybe you’ve heard the term…maybe you haven’t.  Creative financing is becoming an increasingly popular means of building a portfolio.  Some rental investors mistakenly think that creative financing is only used for wholesalers or flippers.  Not true! Buy and hold investors can benefit just as much from using creative financing. 

PURCHASING A PROPERTY THAT A BANK WON’T TOUCH

Every once in awhile we find the diamond in the rough…the very rough.  A property that sparks our imagination about “what could be”. Then we go to the bank and they tell us…what can’t be.  

For most investors this is where the thought process stops.  They think “Oh well, I don’t have the cash to buy it.” You may not have the cash to buy it but that doesn’t mean you can’t buy it.  Just because a bank won’t finance it doesn’t mean your dream has to die.  

You can get a private money lender.  Someone who has the cash to fund a real estate deal in full.  (You may be thinking “I don’t know anyone like that”. Truth is most of us do know someone like this, we just don’t know that we know them.)  Another option is hard money lending. Which is a “unregulated” loan from a non-government backed institution. This type of lending isn’t just something you look up in the Yellow Pages (or now days Google).  Your lender should be reputable and hopefully come recommended, especially because the industry is highly unregulated.

FUNDING THE REHAB

Sometimes our diamond in the rough is worthy enough to be financed by a bank…but they only will fund the purchase. You need to find the moola to do the rehab.  You have the funds for the down payment, but you can’t fund your rehab. Enter creative financing.  

You can use the same two methods above to fund your rehab.  Finding someone you know who could fund a $25k rehab is much easier than finding someone to fund a $155K purchase. You’ll have to be a little creative with how the loan is secured but at least your pool of potential lenders is larger.  You can also use a hard money lender. In fact, this is their bread and butter transaction. (Though they don’t issue a loan for the rehab. Its work similar to a reimbursement system.)

USING AN EXISTING LOANS REALLY SWEET TERMS

The idea of an existing loan have significantly better terms than what you can secure now may seem odd in today’s financial climate.  But there was a time when the already established loans had interest rates that were 1.5-2.25% lower than what the market at the time allowed.  Even today we are over 1% higher than the lowest rates in the past 10 years. If you are having trouble following this, in 2012 the residential loan market hit a low of 3.31% on a 30 year loan.  As of writing this, the interest rate is 4.51%. Someone purchasing an investment property with a 2012 mortgage rate would likely prefer that rate and want to secure it if possible. To do this you are entering into a form of seller financing which involves assuming the mortgage (taking over the loan payments).  

Now this does come with its inherent risks.  Since all mortgages have a “Due on Sale” or “Acceleration Clause”.  These clauses give the banks the right to call the loan due in full if there is a change in ownership or they believe any other violation of mortgage terms occurred. Will this happen to you if you assume someone’s mortgage, don’t change title or deed and never miss a payment? Likely not.  After all we’re familiar with the idea of the bank wanting their money more than the property. To many investors the risk is worth even the 1% decrease in the mortgage interest they get by assuming the mortgage.  

Remember 1% isn’t as small as you think. On a principal loan of $200,00 a 1%  jump in the interest equates to an additional $35,900 over the 30 year life of the loan! That’s a game changer for your calculations and profit down the road. 

Creative financing doesn’t need to be scary.  It doesn’t need to seem risky. It’s also not the unicorn that most people on the outside think it is. Situations do arise where creative financing is feasible to be used and feasible to secure.  But don’t think securing it doesn’t involve a little leg work and grit. You will likely need both to get your first creative financing deal done.  

But now you can go out in the investing world knowing that what 90% of investors think is implausible is achievable. Those are 3 real world plausible investing situations where creative financing can be your asset…or tool.  As famed small multi-family investor Brandon Turner says “The more tools you have in your tool belt the more investing you can do.” 

Add to cart