No Money? No Problem! How to Use Seller Financing to Invest

this is real estate rookie episode 318 we all love seller financing makes things way easier most of the time than going to a bank and doing conventional financing say the house is worth $300,000 say I agree to buy her property and it's like a $2,000 month payment now she's only paying taxes on $24,000 a year versus the $300,000 per year that she get if she sold the property my name is Ashley K and I'm here with my co-host Tony J Robinson and Welcome to the Real Estate Ricky podcast where every week twice a week we give you the inspiration motivation and stories you need to hear to Kickstart your investing journey and uh today we are back with another rookie reply uh as always we're we're happy to answer questions from the the rookie audience and if you want to get your question featured on the show head over to biggerpockets.com slrep and we just might choose your question for an episode uh so Ash uh I guess really quick give me give me an update what's going on in in Ashley Ashley car's uh world today well for the first time ever one of my real estate friends that I have met across the country I've met a lot of real estate people someone is coming to visit me in Buffalo New York going all the way to Canada to come hang out with as for a couple of days had to get his passport you know yeah literally only for two days but I'll take it so yeah super excited about that um it's coming in this week and I'm going to show them some of my properties and hopefully do some fun stuff yeah and you just had your baby shower we did we had the baby shower so uh Sarah's due here just in a in a few short weeks now I think we're about seven weeks away wow uh so so time is time is ticking so uh we we had a house full of gifts the day after the baby shower so we're we're like starting to build stuff and we got to get the the nursery painted so you got to build an aition on just to fit off yeah just to fit all the stuff um and then my my son actually started his sophomore year of high school today also so just lots of go lots of stuff going on in the in the Robinson household uh this week when it comes to the the kiddos but yeah exciting times we're happy for it yeah awesome well on this week's rookie reply we have five great questions we're going to go through a couple of them even pertain to Partnerships so if you guys haven't already check out our new book real estate Partnerships you can go to biggerpockets.com Partnerships and you guys can even get a discount if you use the code Tony or Ashley okay so one of the questions that we talk about is seller financing so if you've been wondering how to structure seller financing what are some of the pros and cons and what you should do as far as approaching a seller about seller financing we kind of do a little mini breakdown of the tax advantages for a seller also how to present the seller financing to the seller too yeah we also talk a little bit about like closing costs like hey what are typical closing costs in a real estate transaction who pays for what between the buyer and the seller and we also talk about like hey just if I want to invest in real estate what is kind of my road map of steps what should I do first what should I do second and we break that down so overall uh lots of good questions excited to get into those before we jump over to the questions though I would love to get a shout out to someone that left us say five star review on Apple podcast uh this person goes by the name of Scotty dude 2314 uh but Scotty says every time I run into a situation I come back here look for the episode that relates to that situation listed take notes and execute thanks so much for y'all's help closing on my first 12 Plex this month and he says constantly coming back for more knowledge uh so Scotty dude appreciate you and kudos to you on on getting that first 12 unit under contract and just just last piece Scotty makes an incredibly important point we have hundreds of episodes of the Ricky podcast and I can almost guarantee that most situations you might find yourself in has probably been solved and thoroughly discussed on some episode of the Ricky podcast so if you ever find yourself stuck you've obviously got the bigger Pockets forums the Facebook groups but don't sleep on the 317 episodes that came before this one that have tons of information about your real estate Journey so be sure to check them out use them as a resource and uh share with someone that might benefit from it as well okay so today we have an Instagram shout out to artina Marie so artina a r t i n a Marie m a r i e you can follow her on Instagram at her name and she is a Serial entrepreneur obsessed with passive income and sharing her real estate Journey so go and give her a follow and check out her Instagram and follow along her journey okay today's question is asked by Nicole Marie remember if you would like to submit a rookie reply question you can go to biggerpockets.com slrep so Nicole's question is what is the first step my credit score is good I have about $40,000 to put down I want to bur a rental property but I'm stuck trying to figure out if I look for properties beet with a real estate agent or get financing first but then it's like how do you get financing without a property to give them numbers for I also can't elock do a home equity line of credit or live in it for FHA so that limits me to Conventional or some type of financing that allows the rehab budget in the loan I've been reading a lot and I'm just confused how you start and take the first step okay so the first thing awesome you have a great credit score and that you have some cash $40,000 to put down that definitely opens up the doors for you to have available then you want to do a bur a rental property so remember Burr is buy rehab rent refinance it and repeat um so the question is do I start looking for properties meet with the real estate agent or get the financing lined up first so these are actually two things you can do simultaneously uh if you do have your financing and your funding lined up when you find a property and you're ready to make an offer it definitely makes it a lot smoother easier process because especially if you're in a hot market and you put in an offer you're going to have to put in your proof of funds or your proof of financing how you are going to fund the purchase of this property and sometimes times those offers have to go in quick and being able to go through the pre-approval process may not be quick enough to actually get that for your um offer letter so uh Tony let's kind of break down um as far as her options for doing a loan so she can't live in it for and get FHA or she had mentioned a home equity lineup credit but you have to actually already own the property and to be able to get the line of credit on the property you can't get a line of credit to use it um to purchase unless that line of credit is on another property so in her current primary residence if she was able to go and get a HELOC she could take that money to go and purchase the property but she's going to say she can't do that and she can't get an FHA loan so conventional or some other type of financing but she wants to do uh the rehab budget in the loan yeah I mean there's there's tons of options out there I mean we've uh we've used a lot of private money to fund our our um rehabs Ash I know you you've used similar and hard money so those are always good options uh Nicole as well in terms of how to kind of make that piece work but Ash you mind if I I just want to even take it like one step back a little bit and uh just kind of give for all of our rookies kind of the the framework of you know yeah what just in general kind of what is what are those sequence of steps look like because obviously we give a lot of content on the podcast and you know there's tons of information on YouTube and social but sometimes it's hard to kind of sequence those different pieces of content correctly so you know what to do first and what to do next so when I think about a brand new investor someone that that's you know hasn't done anything yet but they're in that that kind of Early Education phase I think the first thing that you need to do is identify your investing strategy now Nicole you've already seems like decided on that you know that you want to borrow property so that's a good first step but for everyone that's listening the first step is do I want to do uh long-term Buy and Hold do I want to do short-term rentals do I want to flip do I want to wholesale uh do I want to do you know large syndications do I want to do Self Storage like decide on your your type of investing in your asset class first once you've got that piece nailed down the second step in my mind is to identify what your purchasing power is so again Nicole you you've kind of alluded to this a little bit already but generally speaking your purchasing power is made up of two things it's the Capital that you have available or at least access to invest uh and then it's what kind of loan product can you get approved for so when you combine how much Capital you have to put into an investment with the amount of debt you can get that lets you know what type of property you can afford buying I think a mistake uh Ash I see a lot of new investors make is they get all enamored with this certain type of investing strategy with the certain market then comes out you know comes to find out they can only afford you know a fraction of what it costs to invest with that in that market so I think identifying what your purchasing power is first before you do anything uh can save you some Wast of time because then if you're you know say say that you look at your purchasing power and you've got you know half a million dollars in the bank and you've got the ability to get approve for a $5 million loan that gives you a lot of options on the flip side if you've got you know $40,000 to invest and you can get approved for a $250,000 loan okay that's going to dictate what kind of markets you can you can look at while you're looking to invest so Nicole you you've already kind of taken that first step of identifying the 40K but yes I would 100% say understand the financing piece so you don't waste your time looking at properties that you can't necessarily get get approved for once you've gotten your purchasing power the third step is Market selection and I don't think that Nicole on this uh in this post here in this question specifically talked about which Market she's looking to invest into but I think that's an incredibly important piece is the the market selection um to to to to really be able to get good at finding deals in that specific Market because another mistake that we see a lot of investors make Ash is that when they first get started they kind of have this shotgun approach where they're just looking any and everywhere for properties when ideally uh you want to be able to narrow it down to as small of a I guess like a radius as you can so your Market selection and then you can go and select the due the the deal flow and the the due diligence piece but I just want to give that overview I mean Ash I don't know is that in line with kind of what you you typically feel makes sense for for Ricky also yeah definitely um I think we can kind of go into as to how she's going to fund the rehab now that was the the next part of the question and looking for different ways and going through a bang to actually fund the rehab so Tony you did do this correct on one of your Louisiana houses yeah so my first uh my first two or three long-term rentals out in Louisiana uh we had a bank it was a local credit union that funded both the purchase and the re AB of those properties now there were stipulations or I guess you know uh boxes we have to check to be able to get approved for that kind of uh mortgage specifically the purchase price in the rehab had to be no more than like 72% of the after repair value uh but I was able to get funding for both the purchase and the rehab so Nicole there are banks out there that will give you uh that type of loan product I think it's just a matter of picking up the phone and and calling as many small and local banks and credit unions in your chosen Market to see which ones have an option that might be able to work for you so one thing that I was thinking of when I saw that there was $40,000 to put available in this would obviously depend on the market that you're into as far as how much would $40,000 get you but you could use some of that money for the down payment so that means you are going to be able to afford less property since you now have a smaller down payment and then use um you know maybe the other half or a portion of that 40,000 to fund the rehab uh with the rehab you can also structure it with your contractors or if you're doing the work yourself that you will cover materials yourself that you will purchase them instead of having the contractor go and purchase and then bill you for the materials and one of the advantages of doing that is that you're able to get 0% interest rate credit cards so this is usually over a period of time you have to be super diligent about you know credit card usage and maybe not have a history of collecting debt on your credit cards but in this scenario you want to be able to go and get a credit card uh we did this recently for property and we did a credit card that was 12 months 0% interest over those 12 months if you made the minimum payment on time for the 12 months they actually extended it to a 0% for 18 months uh we didn't end up needing the 18 months anyways because the the project had completed we paid it off but having a long time just in case something does go wrong with your project you're not you know racking up this debt of material costs and then all of a sudden you have a 22% interest rate that you're paying on the credit cards but going through and P putting those on and and then you would go and refinance the property and then pay off the credit cards would be that that last step to get rid of it but it can be a huge advantage that you are getting your materials paid for at 0% and not borrowing any money from anyone and that can be a huge chunk of your actual construction cost your rehab cost and then you would just have to come up the cash to pay your contractors unless some of them do take credit card we do work with some vendors like plumbing companies and stuff that they do actually they'll send an invoice to email which is through QuickBooks and they actually have an option to pay by credit card too if we wanted to so it really depends on the contractor and vendors you're using but that is definitely a tool you can use is the 0% credit cards to cover a portion of that uh rehab cost too yeah I I think the other option uh is to you know if you did want to bring someone else into the fold like Nicole let's say that you have someone in your life that maybe has you know whatever your say your rehab budget is 50,000 bucks someone in your life that has $50,000 uh that's just sitting in the bank account you know earning whatever single digit percentage and you say that to this person you know hey John Doe I'm going to give you 12% you know annualized returns if you let me use this money um then you go out you fund your rehab with that person's capital and then at the end of the deal you refinance and you pay that person off so similar to the credit cards uh but the benefit I think of the private money is that it is a little bit easier to use in all situations so like most vendors you know if you've got cash you know from your your private money leer then you're going to be able to pay that person um so again we've used private money pretty extensively uh actually exclusively for all of our rehab projects and it's worked out I think well for both parties okay so our next question is from Rob mooy okay so Rob's question is I just read Ashley K's article on finding a partner and I had a couple questions about method number one Ashley got a partner to purchase the duplex in cash they split the cash flow 5050 and she pays them 5 and a half% interest over a 15E for the purchase price without buy option at any time why go this way is this more beneficial than financing through a bank to begin with reason I asked is that I'm looking at a duplex both sides already rented and the numbers seem to work if I go with 15% down and I just manage the property myself what would you do does partner makes sense thanks for taking the time okay so this scenario um that Rob is talking about is my first ever partnership with Evan and I had the limited belief at this point in time that you could not go to a bank to purchase an investment property I just thought that you could only pay cash because the investor that I worked for that's what he did so I didn't even know there was an option to go to the bank I would not do this scenario again now um Tony have I Tony and I have been talking about this a lot lately as to the value of having experience and knowledge and other types of Sweat Equity um that brings so much value to the table rather than just the money and I didn't value myself enough at this point where I gave 5050 50 partnership so they got 50% of the cash flow we eventually sold the property so they got 50% of the profit of that property and then they got 5 a half% interest plus all their money back that they had invested into the purchase price so sweet deal for my partner on that the thing with this is that it got me started so if this is an option for you and this is maybe your only option then yes if that gets you into a deal because me making that 50% of the cash flow was better than making no money off of this property at all so in Rob's situation he's saying he's able to um put 15% down and manage the property himself so he must have found a bank that would allow him to do 15% down um as far as managing the property yourself if you're going to do that make sure when you run the numbers you're still adding in for a property management company so research your areas find out how much it would cost for or property manager in your area so that later on if you do decide you have the option to be able to go and um hire a property management company and it's not going to kill your cash flow I think the only thing I'd add there Ash is that uh you know for Robin for everyone that's listening anytime you enter into a partnership there there should be a reason why uh you know Ash and I talk about in in the partnership book about like you know you're you're missing puzzle piece so ideally you should be entering into a partnership because you're you're partnering with someone that has a complimentary skill set ability resource uh to to yourself but if you have everything you need to do this first deal then yeah maybe it doesn't make sense for you to partner uh so Rob if you in a position where you've already got the financing lined up you've got the capital available then yeah maybe giving up 50% of your deal doesn't make sense um so I think every person should be assessing their own unique kind of personal situation trying to understand where you feel that you have um uh maybe a a shortcoming or or or where you're lacking or whether it's experience money time whatever it is and that's when you want a partner but if you can chuck all those boxes for a deal then yeah it might make sense to move forward by uh by yourself next question is from Rett Miller how common is it as a buyer purchasing a cashon property is expected to pay closing cost isn't the seller supposed to pay closing or is that traditional financing typically so this is a great question because it really can go either way before we even talk about that let's break down what some of the closing costs even are when doing a property yeah you you read my mind I was actually about to pull up my my last uh closing disclosure here to look through what those uh those closing costs were um so there typically are just like you know as a as an aside there typically are more closing costs when you have financing right because lenders are going to require more paperwork and there's more things that they need and they got to get paid um so a lot of times there is more but um I'm just going to kind of read through here and see what some of my my clo my closing costs were on this last flip that we recently sold um so I had taxes so there there taxes that were due uh that I had to pay me as a seller I had to pay those um there was my payoff to my private money lenders right they were I had uh mortgage security documents recorded with the county so before I could get paid I had to make sure that my private money lenders were PID back their principal plus their interest I had my real estate commissions uh typically a seller will cover the commissions for both the uh sellers agent so for their own agent and for the buyer agent so for this flip that I sold that's what it was uh mine was a total of 5% in commission so 2 and a half% went to my agent the other 2 and a half% went to the buyer's agent um there's a bunch of title cost uh I probably spent I don't know somewhere around uh 3,000 bucks maybe a little bit more on everything related to to title and escro um there's some County taxes like just for paperwork and things like that uh some additional kind of inspections for like uh septic and natural Hazard disclosures and things like that um that was actually everything that was on this closing disclosure so some of those things are going to be present no matter if you're going with financing or if you're going with cash um but we actually also gave the Buy a small credit because they had things on their end like like an appraisal they still have to pay for um there are points they might have to pay to their lender to to close this deal um so sometimes as a seller you might also give credits to the buyer which is what we did in this situation as well but I feel like that's a decent idea of what you could expect to see uh for closing costs on a on a property transaction like that yeah one thing too depending on what state you're in you may have to pay attorney fees to a closing so New York State you have to use an attorney to close on a prop property and usually it's you know the sellers paying their own attorney and the buyer is paying their own attorney too and sometimes that would just be added in the closing cost um or your attorney can actually bill you separately but that's still going to cost you and that's still money you need to have to to come up with the closing cost too so I guess to answer the the question in a nutshell for Rett because again he saying how common is it as a buyer um to to play some closing cost so the answer is yes there's still probably some closing costs you'll incur uh definitely not as many as if you have uh a mortgage or a lender that's kind of facilitating that transaction but you can also negotiate with the seller to say you know hey Mr Mrs seller uh I'm super interested in your property but my one condition is that you cover all of my closing costs and you know depending on where we're at in the market cycle they might say yes and like I said the last slope that we sold we covered all of that buyer closing cost because it still makes sense for us um you know to to sell the property that way so don't be afraid to ask R I think to have those cost covered um and you know the worst I can say is no okay we have a seller finance question next and this is by Bill Rogers so once you have a house under contract how long until you are able to refinance I know you don't want to do it right away especially with these rates but isn't that one of the ways you actually get sellers to do seller financing is for tax mitigation reasons is this something that would have to be written in the terms of the contract okay so seller financing we all love seller financing makes things way easier most of the time than going uh to a bank and doing conventional financing but the first question here is how long until you are able to refinance so in Bill's situation we're going to assume he's going and doing seller financing and then going to refinance out of the seller financing so you can set it up however you and the seller agree but you want to to make sure that you have enough time that it's not too short of a time uh so some banks require a seasoning purchase from when you purchase the property a seasoning period so it can be 6 to 12 months from the date of purchase so you don't want to make your you know seller financing doe you know you're only doing it over the course of three or four months you want to make sure that you have enough time to go and do the refinance on the property uh but really you could set it up for you know Pace morie we've had him on the show he talks a lot about seller financing and he's done four toe terms where he doesn't you know he's paying the person for the next 40 years on the property and there is no Rhyme or Reason for him to go and refinance so it's really all about how you set it up you know maybe if you do get a great rate um interest rate with them or you have great terms where your payment is low enough that it works for the property so when you structure the seller finance deal you want to create an amortization schedule so the amortization schedule is going to show you the full amount your borrowing the monthly payments how much of that monthly payment is principal how much of that monthly payment is interest and then what the balance would be due if you were to pay it off so this is one way you can kind of negotiate with the seller too is like hey look over the course of one year I'm going to be paying you an extra $10,000 in interest that you wouldn't get if I went to a bank so Bill had mentioned the the tax mitigation reason reason the tax advantage of doing seller financing for a seller but there's also ways that the seller actually makes more money because they can make the interest off of you too um so he said something in here about how he doesn't know if he would go right away especially with these rates so if you can get a great rate and great terms from the seller yeah there is no reason to go and refinance but you want want to make sure in your contract that you have that so what I do in uh several of the times that I have done seller financing is I will do instead of a balloon payment so a balloon payment is saying that you're going to do seller financing for 12 months and then the balance that is left after you've made payments for 12 months is due in a balloon payment you're paying that whole chunk so that's where you typically typically go and refinance with the bank with I have done is you know I try to push it out as long as possible but I will do a loan callable date so this would be in 3 years the seller has the option to call the loan instead of a mandatory balloon payment this is where the seller can say you know what no keep making payments I'm not going to call the loan but anytime after that year three they can call it but they have to give me 8 months written notice to be able to to call the loan and then I would have eight months to be okay I need to figure out how I'm going to go and refinance this and pay this off but eight months will give me plenty of time to do that so when you are writing up your contract with the seller make sure you are putting in these kind of different exit strategies or things that you know work for you and the seller and that's where I really like to get face Toof face for seller financing sit down and go through everything when I I will send a seller the contract and the amortization schedule and as much information as I can the night before I meeting with them to give them some time to review it and then I will sit down with them the next day and walk through the whole thing so that way I can pick their brain as much as possible as to okay you don't agree to this let's figure out what we can change what we can do and I try to get down to you know figure out what's their real motivation what do they really want and then just try to negotiate and adjust the contract right then and there um to make it work so that's the amazing thing with seller financing is you can set it up so many different ways one thing I would really try to avoid is prepayment penalties and a lot of commercial lenders will do this for banks where they will say okay we're doing this loan but if you pay this loan off within the next 5 years you're going to owe us 2% of whatever the balance is as a fee for paying this loan off early because we're banking on making this money off the interest so if you can avoid that with sellers then you can go and refinance at any time and that keeps your options open especially if you decide you want to go refinance because you want to tap into more Equity to pull that out of the property or maybe rates do go a lot lower than what you're paying in seller refinancing so you can go ahead and you know refinance to the better rate too yeah what a what a real world class breakdown Ash on uh on seller financing um I think the the only part of the question that that's probably still lingering there and I I just want to clarify a little bit is the the tax mitigation piece um so when to to explain what what Bill's talking about here again he says um isn't that one of the ways you actually get sellers to do seller financing as for tax mitigation reasons um what he's referring to here is that when say that I I'll use myself as as an example say that Ashley owns a property and you know whatever say she owns it free and clear and uh say the house is worth $300,000 if Ashley goes out and sells that property uh she'll have a taxable event uh on the net proceeds of that sale right so again say she whatever say she makes $300,000 if she were to sell that property in full uh what some folks now obviously there there are some ways to get around around you could do like a 1031 exchange or some something to that effect but um say she wanted to avoid that big taxable event for selling that property as she still wanted to tap into that Equity the reason that seller financing becomes attractive to folks in ashle situation is because say I come to her and say Ashley look if you sell this property to John Doe you're going to have you know $300,000 you know taxable event that you have to worry about if you seller finance it to me the only money that will be taxable is the is the payments that I'm making to you on a monthly basis so instead of you know say I agree to buy her property and it's like a a $2,000 month payment now she's only paying taxes on $24,000 a year versus the $300,000 per year that she get if she sold the property so for some people there is a tax incentive to um to not you know cash out on day one and instead take those payments over time now I'm not a CPA uh forgive me if I explained some of that incorrectly but it at least it gives you an idea there there's a tax benefit to deferring that big lump some payment and it said taking it in small chunks yeah and there's also some great books on Tax Strategies for specifically Real Estate Investors if you go to the Bigger Pockets bookstore uh Amanda Han has written two really great books for Bigger Pockets about uh Tax Strategies one's just very basic knowledge we recommend for the rookie investors and then there's also um an Advanced Tax Strategies book um I think it's Tax Strategies for The Savvy real estate investor is what it's called but if you go to the Bigger Pockets bookstore you can find it on there okay and our last question today is from Denise bider this question is what's the best way to structure a first time partnership and Tony I know you have our book there if you want to hold it up I do uh so for those of you that don't know hopefully you know by now but Ash and I have co-authored a book uh published by Bigger Pockets called real estate Partnerships how to access more cash acquire bigger deals and Achieve higher profits and the book is available for you to purchase so head over to biggerpockets.com SL Partnerships and you guys can get all the the nitty-gritty about how Ashley and I structure our Partnerships and use Partnerships and avoid partnership pitfalls um but yeah there there's a lot uh about partnership structures um so I I I guess the first thing that I'll say is that there there is no right or wrong way to structure a partnership at the end of the day as as long as you're not breaking any laws um you and your partner can agree to whatever terms uh both are at least make the both of you happy now there there are some things I think to consider when you're putting a partnership together and I'll I'll call out some of those um I think the first thing I'll say though is that there's there's also two types of Partnerships and people kind of I think usually just think of one but you have debt Partnerships uh and you have Equity Partnerships in a debt partnership there's the money person and there's the like Sweat Equity person right so one person is just going to loan the money the other person is going to do all the work and the person who's doing all the work will pay some kind of fixed return back to the person that's that's lending the money uh I'd say the majority of Partnerships that uh we see in that that a lot of the rookie investors do are are actual Equity Partnerships and within an equity partnership there's several ways to um to structure I guess at least like several levers you can kind of look at um so the the first thing you want to think about is the distribution of Labor okay every project that you think about should have some sort of distribution of Labor it could be that one person's going to do all the work it could be that you guys are going to split it down the middle it could be that one person is going to do 75% the other person is going to do 25% but you want to do your best to think about how are we Distributing labor between the both of us and the reason this is important is because if one person is doing more work in that partnership then ideally they should be compensated more for that uh if you guys are splitting everything down the middle and the time commitment on the labor side is equal then it makes sense to you know have your equity and profit distributions kind of match that but I think the first thing to consider is like hey how are we diving up the labor the second thing to consider is the actual Capital are you both bringing capital is one person bringing the capital uh is it you know split down the middle is one person bringing 80% the other person is bringing 20% how are you diving up the capital that you need to purchase this deal the kind of second piece of the capital is the mortgage itself if you're going out and getting debt are both of you going to carry the mortgage is one person going to carry the mortgage like how will will the actual debt be structured so you want you want to start thinking about all the different roles that each person will play inside of that partnership and then try and assign a value to each one of those roles that that that each person is playing and ideally you want to get to some kind of structure that accurately represents the amount of effort and value that each person is is putting towards uh the partnership now I'll say a lot of my deals are just straight 50/50 right uh we have partners that bring the capital they carry the mortgage we do everything else uh and we split it down the middle and it's been a a you know mutually beneficial arrangement for both of us uh we have some deals where we brought a little bit of the capital and uh maybe we charge a property management fee as opposed to taking a bigger Equity stake so there's a bunch of different lovers you can pull um but I think the the most important thing is identifying who's doing what and trying to assign values uh what are your thoughts on that Ash yeah and I think that's actually the hardest thing especially for rookie investors or even going into a different strategy where Maybe it's your first time doing the strategy and you don't know exactly what effort or time it's going to take for the roles that you're going to be performing um for the property so one thing I would suggest is that when you are doing the operating agreement maybe you could put in there some kind of clause where after one year it becomes you know you have that discussion as to okay do we need to actually change things as to you know now you're going to be paid $100 per month mon for bookkeeping or something like that I think leave your options open so that you in your partnership agreement there is room for change um especially if you're going to be doing a buy and hold property where maybe you're both doing a lot of the rules and responsibilities is to you know look at it every year and be like okay this is something I don't want to do anymore what can we do what can we change for this um but definitely sitting down and figuring out what your partner what is fair because there is no as as long as it's legal there is no wrong way to structure your partnership as we just went over um it was a second question that we went over today for rookie reply uh my first partnership and that was like awful for me like I did all the work and I got the least amount of benefit from it but it got me started it got me in that deal and honestly like that property wasn't a ton of cash flow I mean we ended up having you know I had had no money into the deal and I was making you know 100 bucks a month or whatever so it's like okay if I got a little bit more acurity it'd be $2 more doar a month but to have that opportunity to get into that first deal that was what was important to me at the time and I really wanted to prove myself and like show my partner that I knew what I was doing and the way for me to do that is to really like put up more safeguards for him to get his money back um in the property and to have it be an advantage for him opportunity for him so I think just really look and understand what's important to you like what do you really want out of this deal and the partnership that you're going to do and then go and talk to your partner and see what's really important to them and from there you can structure it there's just so many different options you have and if this is your first time partnering with this person make sure that you're setting it up that you're dating them you know maybe you're just doing a joint venture agreement you're not committing to an LLC see we you're you're going to buy 10 properties over the next year you're going to do one property and see how it goes and then you know maybe you can Branch off and add on from there depending how that is but um in the book we do go over some case studies and Tony has talked about before how he actually walked away from a a flip he was doing with a partner or it was a a bur right to be a short-term rental not a flip yeah so he walked away from that long-term commitment with that partner just because it didn't feel right having those kind of exit strategies in place I think are almost more important than the actual structure and the benefits of it yeah super important Point Ashley I'm glad you finished with that I think the the only other thing I'd add is and you talk about this a lot as well but it's like as you as you kind of think through what every person's going to be doing um you know you have some options on how you compensate so for example in one of our Partnerships we took a reduced Equity stake of only 25% but we also charged a property management fee of 15% of gross revenues so uh you know we we're compensating ourselves for the work that we're doing in the property with that 15% management fee which is a slight discount from what you see in that market most Airbnb shortterm hostes charging 205 20 to 25% at least so we gave a slight discount to the to the property um but then we also retained 25% Equity because we put up 25% of the capital um so just just think through like hey you know who's going to be doing Property Management if there's rehab who's going to be managing that bookkeeping and accounting finding the actual deals analyzing those deals um you know managing the the tenants the guests whoever there's a lot of different roles to go into that and you can either say hey I'm going to compens compensate myself for doing this work by uh charging a property management fee or I'm going to pay myself an hourly fee or maybe it's a a a fixed flat uh amount per month for doing the bookkeeping but just you know try and think through what the those look like and and try and work that into into your into your partnership I think the last thing I I'll add is when it comes to the the capital side uh two important things that you want to discuss and this is me assuming because I I I think in in this question uh she said Denny said hopefully finding a partner because they don't have the capital so it sounds like you want some someone to bring all the capital the other questions you you'll want to ask yourself Denise are um what is your method for paying that person back if there is one so we have some Partnerships where there is no payback right it's like hey you're putting in your $50,000 and that's your contribution to the partnership because I'm doing everything else we have one partnership where there is a mechanism for that partner to get paid back um so you know and Ashley's example of her first partnership that partner essentially had like a a loan against their partnership so they got back a fixed amount every single month uh before any profits were distributed so you could do it that way if you wanted to uh in our partnership it only uh the capital recapture is what it's called only kicks in if we refinance or sell the property so just think about like hey are are are we going to want to pay this person back the 50k you don't have to but it is something that's uh that's kind of important to to think through and the last piece on the capital side is uh how would you handle potential shortfalls in Revenue so uh you know one of our our Louisiana properties we had a massive shortfall uh because our you know we had this crazy uh you know you guys probably know the street points but we had this this crazy increase in our our homeowners insurance and then we tried to sell the house and we ended up finding Foundation issues um so when things like that happen is it the partner who contributed the capital that's going to be covering 100% of that cost will you split that 5050 will you split at 7525 so just think about those little details as well to to really kind kind of uh hopefully avoid some of those more difficult conversations before they happen well thank you guys so much for joining us on this week's rookie reply don't forget to check out Tony and I's new book at the BiggerPockets bookstore that's biggerpockets.com Partnerships okay I'm Ashley at wealth from rentals and he's Tony J Robinson tonyj Robinson on Instagram and we will be back on Wednesday with a guest C up your games F don't nobody see all this time

Channel: Real Estate Rookie

Views: 6,984

Keywords: seller financing, real estate, creative financing, amortization schedule, refinancing, real estate investing, investing in real estate, how to invest in real estate, real estate investing strategy, private money lender, hard money lender, conventional loan, mortgage preapproval, rehab costs, brrrr, real estate partnerships, partnership agreement, property manager, property management company, closing costs, biggerpockets, real estate rookie, real estate rookie podcast, podcast

Id: mFsZVCUKXPY

Length: 42min 36sec (2556 seconds)

Published: Sat Sep 02 2023